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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
1 ITA Nos.1517 to 1519/Kol/2014 Narendra Tea Co. (P) Ltd.. AYs 2009-10 to 2011-12
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
I.T.A. Nos. 1517 to 1519/Kol/2014 Assessment Years: 2009-10 to 2011-12
Deputy Commissioner of Income-tax, Vs. Narendra Tea company (P) Ltd., 2A, Circle-3, Siliguri Ganesh Chandra Avenue, Kolkata-13 PAN: AABCN0123D Appellant Respondent
Date of Hearing 08.05.2017 Date of Pronouncement 24.05.2017 For the Appellant Shri Arindam Bhattacharjee, Addl. CIT, DR For the Respondent Shri Subash Agarwal, Advocate
ORDER Per Shri A.T.Varkey, JM
All these appeals filed by the revenue against the common order of Ld. CIT(A), Jalpaiguri dated 09.05.2014 for AYs 2009-10 to 2011-12. Since all these appeals were heard together and grounds are common, we dispose of all these appeals by this common order. 2. First we take up ITA No. 1517/Kol/2014 for AY 2009-10. At the outset, we find that the appeal of the revenue falls in the ken of the CBDT Circular no. 21/2015 dated 10.12.2015, wherein the CBDT has directed the department to withdraw/not press the appeal if the tax effect is less than Rs. 10 lacs before the ITAT. On perusal of the Circular No. 21 / 2015 dated 10.12.2015 and the materials available on record, Ld. DR could not point out whether this case falls under any of the exception as provided in the circular despite specific opportunity was given, does not fall under any of the exceptions contemplated in the said Circular, as this is covered. We also find that the Circular makes it very clear that the revised monetary limits shall apply retrospectively
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to pending appeals also. We find that the Circular is binding on the tax authorities. This position has been confirmed by the Hon’ble Apex Court in the case of Commissioner of Customs vs Indian Oil Corporation Ltd reported in 267 ITR 272 (SC). Hence, we hold that the appeal of the revenue deserves to be dismissed in terms of low tax effect vide Circular No.21 / 2015 dated 10.12.2015. Accordingly, this being a low tax effect case, we dismiss this appeal of revenue in limine, as unadmitted, without going into the merits of the case. In case the revenue later finds that the tax effect is more than Rs. 10 lakhs then it is at liberty to move appropriate application to recall this order. With this Caveat, we are inclined to dismiss this appeal on the ground that it is below the tax effect of less than Rs.10 lakh.
In the result, this appeal of revenue is dismissed as unadmitted.
Now we are coming to AYs 2010-11 and 2011-12. The ld. Counsel for the assessee has pointed out that the issues raised before us are covered in assessee’s own case in respect to common ground nos. 1 and 2 for both the assessment years. Since the issues are common in both the appeals we dispose of the same together. The ground of appeal i.e. ground nos. 1 and 2 for AY 2010-11 are as under: “1. Whether on the facts and in the circumstances of the case the Ld. CIT(A) was justified in law in allowing exemption u/s. 10A of the I. T. Act, 1961, to the assessee for blending of tea which, the Hon’ble Supreme Court in its decision in CIT Vs. Tara Agencies (2007) 292 ITR 444 (SC), has categorically ruled to be only ‘processing’ and not amounting to ‘production’ manufacture. 2. Whether on the facts and in the circumstances of the case the Ld. CIT(A) was justified in law in importing the scope of the term ‘manufacture’ from the SEZ Act, 2005, being an enactment subsequent to section 10A of the I. T. Act, 1961, regardless of the fact that no proviso has been inserted in section 10A for such widening of scope.”
The Ld. Counsel for the assessee took our attention to page nos. 38, 39 and 40 of the paper book wherein the Special Bench in assessee’s own case in ITA No. 2089/Kol/2007 for AY 2004-05 has taken note of the Hon’ble Kerala High Court’s order in Girnar Industries Vs. CIT (2011) 338 ITR 277 (Ker), and in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285 (Ker) wherein the Hon’ble High Court has taken note
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of the decision of the Hon’ble Supreme Court in Tara Agencies (supra) which the revenue relies on its ground no. 1 (supra) to assail the decision of Ld. CIT(A) and the Special Bench in assessee’s own case held as under: “30. We find that the Hon’ble Kerala High Court considered exactly the same issue in the case of Girnar Industries Vs. CIT – (2011) 338 ITR 277 (Ker.). In that case, the assessee, an industrial unit located in a special economic zone, was engaged in blending and repacking of tea for export. For the assessment year2004-05, it claimed deduction under Section 10A of the Income-tax Act, 1961. The Assessing Officer held that ‘blending’ did not answer the description of manufacture or processing and the assessee was not entitled to deduction under Section 10A of the Act. It was the specific case of the department that blending could be treated as a manufacturing activity only after the definition clause of ‘manufacture’ contained in Section 2(r) of the Special Economic Zones Act, 2005, was incorporated in the provisions of Section 10AA of the Act with effect from February 10, 2006. The CIT(A) held that the subsequent amendment was clarificatory in nature whereas the Tribunal confirmed the disallowance on the ground that blending and export of tea by the assessee qualifies for benefit only after incorporation of the definition clause of ‘manufacture’ from the 2005 Act in Section 10AA of the Act. On appeal, Held “that the provisions of Section 10A and Section 10AA later introduced serve the very same purpose of granting exemption on the profits earned by industrial units in the free trade zone/special economic zone. Though Section 10A did not contain a definition for ‘manufacture’, the definition of the term contained in Section 2(r) of the 2005 Act was incorporated in Section 10AA with effect from February 10, 2006. Admittedly, this definition covers blending also. Therefore, blending and packing of tea done by the assessee qualifies for exemption under Section 10AA from February 10, 2006 onwards. Admittedly, Section 10A also provides for exemption in respect of goods manufactured or produced and sold by units in the free trade zone. The exemption clause had to be considered with reference to the object with which it was enacted. In the EXIM policy ‘manufacture’ was given a very wide definition to take in even processing involving conversion of something to another with distinct name, character and use. Since the purpose of exemption under Section 10A was to give effect to the EXIM Policy of the Government, the definition of ‘manufacture’ contained in the EXIM Policy was applicable for the purpose of the provision. ‘Manufacture’ as defined under the EXIM Policy had a wide and liberal meaning covering tea blending as well and so much so, blending and packing of tea qualifies for exemption under section 10A. Besides this, the assessee-industry in the special economic zone engaged in the same process of blending and packing of tea was specifically brought under the exemption clause through incorporation of Section 2(r) of the 2005 Act, in the provisions of Section 10AA of the Act. Therefore, the later amendment was only clarificatory and the definition of ‘manufacture’ contained in Section 2(r) of the 2005 Act, incorporated in Section 10AA of the Act with effect from February 10, 2006, which was essentially the same as the definition contained in the EXIM Policy, applies to Section 10A also. Therefore, blending of tea was a manufacturing activity which entitles the assessee for exemption under Section 10A of the act for the assessment year 2004-05.” That the ratio of the above decision would be squarely applicable in the case of the assessee because the facts are identical.
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The Hon’ble Kerala High Court reiterated the same view in the case of Tata Tea Ltd. Vs. ACIT – (2011) 338 ITR 285 (Ker). In that case, the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee’s division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce & Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for the AYs 1996-97 onwards, which was granted upto the AY 2000-01. However, for the AYs 2001-02 and 2002-03, exemption was declined for the reasons that by the Finance Act 2000, the definition of ‘manufacture’ which included ‘processing’ contained in section 10B of the Act was deleted w.e.f. 01.04.2001. Hon’ble High Court noted that the department’s stand is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending and packaging of tea for export was treated as ‘manufacture’ or ‘production’ of an article qualifying for exemption. Hon’ble Kerala High Court considered the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. 10A of the Act and units in the free trade zone provided u/s. 10AA of the Act and the exemption available to 100% EOU u/s. 10B of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature. Hon’ble Kerala High Court also considered the judgment in the decision of Supreme Court in Tara Agencies, supra relied on by the Sr. Standing Counsel for the revenue, wherein Hon’ble Supreme Court clearly held that blending of tea does not amount to ‘manufacture’ or ‘production’ of an article, but is only processing. Hon’ble High Court allowing the appeal of the assessee held that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division and the Department had no case that the assessee's unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial unit of the assessee's 100% EOU, it would defeat the very object of section 10B of the Act. Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, would continue to enjoy tax exemption under section 10A of the Act and section 10AA of the Act respectively. The assessee was entitled to exemption on the profit derived by its 100% EOU engaged in blending, packing and export of tea bags and tea packets. Hon’ble High Court held as under:
The finding of this court is that the purpose of incorporation of section 2(r) of the Special Economic Zones Act, 2005, into section 10AA of the Income-tax Act is to provide a liberal meaning to the word "manufacture" which takes in even blending, refrigeration, etc. It was noticed by this court that the definitions of "manufacture" contained in the above definition clauses are very liberal which takes in even processing like blending. The contention of counsel for the assessee is that the purpose of removal of the definition of "manufacture" from section 10B was not to provide a restricted meaning for that term contained in the main section because if that was so, then the Legislature would have only modified the definition clause. Further, the definition of 100 per cent. export oriented unit even after the amendment is retained in the said section, which defines it as an undertaking which has been approved as a 100 per cent. export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of powers conferred by section 40 of the Industries (Development and Regulation) Act, 1951, and the Rules made under that Act. It is pertinent to note that the products for which the assessee's unit is recognised as a 100 per cent. export oriented unit are tea bags, tea in packets and tea in bulk packs. In fact, the assessee is exclusively engaged in blending and packing of tea for export and
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is not manufacturing or producing any other article or thing. Still it is recognised as a 100 per cent. export oriented unit by the concerned authority within the meaning of that term contained in the definition clause of section 10B of the Income-tax Act and the Department has no case that the assessee's unit engaged in export of tea bags and tea packets is not a 100 per cent. export oriented unit. So much so, in our view, if exemption is denied on the ground that products exported are not produced or manufactured in the industrial unit of the assessee's 100 per cent. export oriented unit, the same would defeat the very object of section 10B. Further, industrial units engaged in the very same activity ; i.e., blending, packing and export of tea in the special economic zones and free trade zones, will continue to enjoy tax exemption under section 10A and section 10AA respectively. The still worse position is that the appellant would be denied of export exemption available under section 80HHC even to a merchant exporter. In our view, the decision of the Supreme Court in Tara Agencies' case [2007] 292 ITR 444 (SC) is not applicable for the purpose of considering exemption for industries in the export processing zones, free trade zones and to 100 percent export oriented units covered by sections 10, 10AA and 10B of the Income-tax Act. Therefore, following the judgment of this court abovereferred to we hold that the assessee is entitled to exemption on the profit derived by its 100 per cent. export oriented unit engaged in blending, packing and export of tea bags and tea packets. Consequently, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders of the first appellate authority declaring the appellant's entitlement for exemption.” 32. The provisions of section 10AA of the Act was inserted on the statute book by the Special Economic Zones Act, 2005 w.e.f. l0.02.2006. Even prior to the enactment of the said SEZ Act, Special Economic Zones (including units therein) were all along treated like EQU / FTZ / EPZ for all purposes whatsoever and were dealt within the Exim Policy accordingly. Section 2(k) of the Special Economic Zone Act, 2005 defines the expression “Existing Special Economic Zone” to mean every Special Economic Zone which is in existence on or before the commencement of the said Act. Section 2(e) defines the expression “existing unit” to mean every unit which has been set up on or before the commencement of the said Act in an existing Special Economic Zone. In other words, admittedly all Special Economic Zones were also being governed by the Exim Policy prior to the enactment of SEZ Act, 2005. Clause (iii) of Explanation 1 to section 1OAA lays down that the expression “manufacture” shall have the same meaning as assigned to it in section 2(r) of the Special Economic Zones Act, 2005, which definition is as under:
“Manufacture” means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandiy, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining”
In Exim Policy, the expression “manufacture” is defined, in paragraph 9.30 & 9.31 thereof almost in the same manner as in the Special Economic Zone Act, 2005, which is as under:
“Manufacture” means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, repacking, polishing and labeling. Manufacture, for the purpose of this Policy, shall also include agriculture,
6 ITA Nos.1517 to 1519/Kol/2014 Narendra Tea Co. (P) Ltd.. AYs 2009-10 to 2011-12
aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining.”
But the only difference between the Exim Policy of 2002-07 and of 2000 is that words “and segregation” which were appearing in the definition of the expression ‘manufacture” in the Exim Policy of 2000 was deleted in the Exim Policy of 2002-07. Further, even in Prevention of Food Alternation Rules, 1955, it has been inter alia stated that “Tea used in the manufacture of flavoured tea shall conform to the standards of tea. The flavoured tea manufacturers shall register themselves with the Tea Board before making flavour tea In The Tea (Distribution & Export) Control Order, 1957 issued by the Government of India, Ministry of Commerce & Industry (Department of Commerce) the expressions “flavour tea”, “green tea”, “instant tea”, “packet tea”, “quick brewing black tea”, “tea” and “tea bag” have been separately defined as distinct product. In Tea (Marketing) Control Order, 2003 issued by the Central Government, in exercise of the powers conferred by section 30(5)(3) of The Tea Act, 1953, the expressions “manufacturer”, “Buyer”, “Packet Tea”, “Tea Bag”, “Green Tea”, “Quick Brewing Black Tea”, “Instant Tea” and “Made Tea” have also been distinctly and separately defined. Clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 w.e.f. 01.04.2009 to define the expression “manufacture” as under:
“manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing, - (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; The aforesaid definition of the expression “manufacture”, although brought into the statute book w.e.f. 01.04.2009, was applied by the Hon’ble Supreme Court even for the assessment year 2001-02 in ITO v. Arihant Tiles and Marbles Pvt. Ltd. (2010) 320 ITR 79, 82 (SC) on the ground that Parliament had taken note of ground reality in inserting section 2(29BA) in the Income Tax Law. The said definition was again applied by the Hon’ble Supreme Court in CIT V. Emptee Poly-Yarn Pvt. Ltd. (2010) “Green Tea” means the variety of manufactured tea commercially known as green tea; 320 ITR 665, 667 (SC).
The Assessee Company carries out its operations of blending, packaging and export of tea bags, tea packets and bulk tea packs in its modern factory, well equipped with all imported and sophisticated automatic plant and machineries with the help of over 100 workmen engaged on contract basis through M/s. Trot Pvt. Ltd. The manufacturing operations are carried in its said factory situated at I 9/4A, Munshiganj Road (under Falta Export Processing Zone), Kolkata. We find from facts of the case that the details of turnover of the assessee shows Bulk Tea (0.94%), Packet Tea and Tea Bags (99.06%), as per different descriptions, brand names and varieties, as listed APB. Assessee Company is duly registered as a 100% EOU by the Government of India, Ministry of Industry, Department of Industrial Policy and Promotion Secretarial for Industrial Approvals, ECU Section in the state of West Bengal for manufacture of Packet Tea, Tea Bags/Bulk Tea with annual capacity of 3110 Mt. in terms of Registration Certificate dated 26th December, 1995, inter alia, with the condition that its 100% production (excluding rejects not exceeding 5%) would have to be exported and that its registered EOU Unit shall make value addition to a minimum extent of 79%. Undisputedly, the exported consumer products, blended by Assessee in its said factory premises is a case of substantial
7 ITA Nos.1517 to 1519/Kol/2014 Narendra Tea Co. (P) Ltd.. AYs 2009-10 to 2011-12
value addition, as compared to the unblended black tea in granule and dust form normally available for sale in the open retail market throughout India.
The subject for consideration under sections 10A and/ or 10B of the said Act is manufacture / production of tea ; the object being grant of benefits of tax exemption to exporters carrying out their operations in FTZ, EOU, EPZ & SEZ areas in accordance with the Exim Policy declared by the Government of India in Parliament and in the light of allied and governing laws; in the light of allied laws e.g. The Tea Act, 1953, The Prevention of Food Adulteration Act, 1953 read with Prevention of Food Adulteration Rules, 1955. The Tea (Marketing) Control Order, 2003, The tea (Distribution & Export) Control Order, 2005 as well as the Rules and Regulations framed by the Tea Board and also Calcutta Tea Traders Association from time to time as discussed above.
We find from the above facts and circumstances and case laws relied on by both the sides that the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee’s division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce & Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for AYs 2000-01 onwards, which was granted upto the AY 2003-04. However, for the AY 2004-05, exemption was declined for the reasons that by the Finance Act 2000, the definition of ‘manufacture’ which included ‘processing’ contained in section 10B of the Act was deleted w.e.f. 01.04.2001. The argument of the department is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending and packaging of tea for export was treated as ‘manufacture’ or ‘production’ of an article qualifying for exemption. We are of the considered view that the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. 10A of the Act and units in the free trade zone provided u/s. 10AA of the Act and the exemption available to 100% EOU u/s. 10B of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature is correct. We find that Hon’ble Kerala High Court also considered the judgment in the decision of Supreme Court in Tara Agencies, supra relied on by the Ld. CIT, DR, wherein Hon’ble Supreme Court clearly held that blending of tea does not amount to ‘manufacture’ or ‘production’ of an article, but is only processing. We find that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division and the Department had no case that the assessee's unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial unit of the assessee's 100% EOU, it would defeat the very object of sections 10B of the Act.
We, in view of the above, hold that when the products for which the assessee’s unit is recognized as a 100% EOU are tea bags, tea in packets and tea in bulk packs and the assessee is exclusively engaged in blending and packing of tea for export may not be manufacturer or producer of any other article or thing in common parlance. However, for the purpose of Section 10A, 10AA and 10B, we have to consider the definition of the word “manufacture” as defined in Section 2(r) of SEZ Act, Exim Policy, Food Adulteration Rules, 1955, Tea (Marketing) Control Order, 2003, etc. We also find that the definition of ‘manufacture’ as per Section 2(r) of the SEZ Act, 2005 is incorporated in Section 10AA of the Income-tax act with effect from 10.02.2006. Hon’ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in Section 10AA to be of clarificatory in nature. The definition of ‘manufacture’ under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term ‘manufacture’ under the
8 ITA Nos.1517 to 1519/Kol/2014 Narendra Tea Co. (P) Ltd.. AYs 2009-10 to 2011-12
common parlance, and it includes processing, blending, packaging etc. In view of the above and respectfully following the decision of Hon’ble Kerala High Court in the case of Girnar Industries (supra) and Tata Tea Limited (supra), we hold that the assessee is entitled for exemption under Section 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under Section 10A of the Act.”
Based on the aforesaid order of the Special bench, the Tribunal in assessee’s own case for AYs 2004-05 to 2007-08 has upheld the claim of the assessee as under: “8. We find from the above that assessee is engaged in the business of purchase of different varieties of bulk tea from tea gardens / auction house / market and blend the same and exported. The assessee has also set up a new industrial undertaking for the purpose of manufacturing blending of tea under Special Economic Zone (SEZ for short) scheme of the Government of India in terms of Export-Import Policy of 2002 to 2007. This unit is set up in Falta SEZ at Falta, District South 24-Parganas in the State of West Bengal. This unit was granted permission by Govt. of India, Ministry of Commerce and Industry, SEZ Scheme for the manufacture of bulk tea / packet tea vide letter of Permission No. 11299 dated 21-03-2003, whereby “All the facilities and privileges admissible and subject to the provisions of the SEZ Scheme as envisaged in Export Import Policy /Handbook of Produces (Vol I), 2002-2007”.This is also certified by Development Commissioner, Falta SEZ as on 27-05-2005. We find that AO in AY 2004-05 has admitted that the activity of the assessee is that of blending of tea and merely blending of tea amounts to processing of tea and it thus fall short of manufacturing or producing of thing within the meaning of Section 10A of the Act. We find that this issue is answered by the Special Bench of this Tribunal in the case of Madhu Jayanti International Ltd. (supra). Further, the AO in AY 2004-05 has admitted the blending of tea after verifying the details. Similarly in AY 2005-06 also noted the fact in assessment order that the unit is buying different varieties of tea from the market and after blended the same export the blended tea. Further, in AY 2006-07 also the AO from the details noted that the assessee is engaged in blending different types of tea and then exporting it. This issue of the assessee is occurring in earlier years also and the CIT(A) has confirmed the disallowance made by AO in earlier years. The issue is now pending with the Tribunal, thus, to maintain judicial consistency, the claim of the assessee is rejected as all the facts and circumstances are same as in earlier years. Further, in AY 2007-08, the Assessing Officer noted that assessee’s claim of exemption u/s. 10A of the Act has been the subject-matter of all the assessment orders passed since AYs 2004- 05 to 2006-07 in respect of the assessee and their actions were also subsequently upheld by CIT(A). The matter however, remains pending before the Tribunal. In view of the above position admitted by AO, that assessee is carrying on the activity of blending of tea consistently, on factual aspects, which Revenue has not objected. It is not the case of the Revenue that there is no blending. In such circumstances, respectfully following the Special Bench decision cited in the case of Madhu Jayanti International Ltd. (supra), we allow the claim of assessee for all the years.”
Therefore, we do not find any merit in the appeal preferred by the revenue and respectfully following the order of the Coordinate bench in assessee’s own case, we dismiss these two grounds of appeal of revenue for AYs. 2010-11 and 2011-12. Before
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we part, the Ld. Counsel for the assessee pointed out that in the assessment order the AO at page 10 has stated as under: “1. There is a clear cut judgment in the case of CIT Vs. Tara Agency 292 ITR 444 (SC), where the Apex Court has clearly held that blending cannot be construed as a manufacturing activity. It states that therefore, the tea is finally fit for sale; it passes through three main stages of production, manufacturing and processing. Relevant to the assessee’s case it further states that: “the assessee is carrying on the third stage activity alone i.e. blending. Therefore, what is done is processing and not manufacturing or production. The term ‘processing’ was present in the definition of ‘manufacture’ for some period in Section 10A. However, it was omitted by Finance Act, 2000 to phase out the exemption, stage by stage by the end of the Asstt. Year 2009-10 with a view to rationalize the concession and to phase these out. Sections 10A and 10B have been substituted by new provisions. This is made clear in para 5.2 of Explanatory Note on Finance Act, 2000.”
According to Ld. Counsel, when he went through the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Tara Agencies (2007) 292 ITR 444 (SC) he could not find the passage quoted by the AO as above (quoting the Hon’ble Supreme Court). According to Ld. Counsel, the AO has erred in making such quote from the Hon’ble Supreme Court’s order in his order which is quite misleading. The Ld. DR pointed out that it may be a typographical mistake wherein the inverted commas have been inadvertently put by the AO. We note that the AO has not made the aforesaid quote from the order of the Hon’ble Supreme Court. This may be AO’s view after reading the judgment of the Hon’ble Supreme Court and when the order was typed, inadvertently may have put the inverted commas which has created the confusion and therefore, no credence need to be given to the aforesaid passage quoted by the AO became it is not the view of the Hon’ble Supreme Court but is that of the view of AO. With the aforesaid observation we dismiss these grounds of appeal of revenue for both the assessment years.
Ground no. 3 for AY 2011-12 reads as under: “3. Whether on the facts and in the circumstances of the case, the Ld. CIT(A), Siliguri was justified in law, in treating the profit from sale of DEPB license as income from regular business and eligible for exemption u/s. 10A/10AA.”
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The facts as noted by the Ld. CIT(A) is as under: “4. Sale of DEPB Licences- In the AY 2011-12, the assessee had sold DEPB licences for Rs.60,75,499. The AO held that the income from sale of DEPB licences is not the income from the regular business and hence, not eligible for exemption U/S 10A/10AA. The assessee submitted that the DEPB licences are an incentive given to exporters to neutralize the incidents of custom duty on the import. Since the assessee does not import any raw material/equipment for his business of export, the DEPB licenses were sold to importers to earn profit. If the assessee had used these DEPB licences for import of certain goods, benefit would have accrued to the assessee by way of reduction in the custom duty payment. In both situations there is an increase in the Trading profit. There is no difference in situations when DEPB license is used for import or sold in the open market. Therefore, the assessee submitted that the income from the sale of DEPB licences is an integral part of the business of the assessee and the income therefrom is the regular business income of the assessee. The assessee cited the judgement of Honourable Supreme Court in the case of Topman Exports vs CIT (2012) 342 ITR 49 (Se) wherein it has been held by the Honourable Supreme Court that the income from sale of DEPB licences is the income from regular business and is eligible for exemption U/S 80HHC. Conclusion- 5.1 Exemption U/S 10A/10AA- The Honourable ITAT has decided in the case of the assessee for the AY 2004-05 to 2007-08 that the business of blending of tea for export is eligible for exemption U/S 10A/10AA. As there are no changes in the facts of the case and legal provisions, the AO is directed to allow exemption U/S 10A/10AA for the AYs 2009-10, 2010-11 and 2011-12. 5.2 Disallowances U/S 14A- For AYs 2009-10 & 2010-11, the AO had made disallowance U/S 14A and the assessee has not agitated these disallowances. However, for AY 2011-12, the assessee has taken it as a ground of appeal. The assessee did not press this ground in the appellate proceedings. These disallowances are, therefore, confirmed and the grounds dealing with these are dismissed. 5.3. Sale of DEPB licenses- DEPB licenses are issued to the exporters as incentive to them for import of goods by reducing custom duty to certain extent. In this case, the assessee is procuring all raw materials domestically; so he sold the licences to others to earn a profit. If these licences were utilized for import of goods by the assessee then the profit of the assessee would have increased. In that case the income would have been directly attributable to the regular business of the assessee. Therefore, the income from the sale of the DEPB licences is also essentially the income from regular business. This has been upheld by the Honourable Supreme Court also in the case cited by the assessee. The AO is directed to treat the income from sale of DEPB licences as income from regular business for calculation of exemption U/S 10A/10AA.”
Aggrieved by the aforesaid order of the Ld. CIT(A), the revenue is before us.
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We have heard rival submissions and gone through the facts and circumstances of the case. We note that the issue in respect to the sale of DEPB licence is no longer res integra. We note that the Special Bench in the case of M/s. Maral Overseas Ltd. reported in 136 ITD 177 (Ind) (SB) has dealt with the similar issue. The Ld. AR took our attention to page 63 of the paper book wherein we note that the Special bench has answered the question raised before it in favour of the assessee. We note that in the said case the eligibility of deduction in respect of export incentive received by the assessee in terms of the provision of section 10B(1) r.w.s. 10B(4) of the Act was under challenge. The facts in brief in that case was that during the year the assessee was in receipt of export entitlement of Rs.1.65 cr. and special import licence of Rs.4.47 lacs. The AO declined the claim of deduction by holding that such income was not derived from 100% export oriented undertaking, and therefore not eligible for claim of deduction u/s. 10B(1) r.w.s. 10B(4) of the Act. The Ld. CIT(A) following the Tribunal’s order in the assessee’s own case held that the assessee was eligible for exemption in respect of export entitlement and special import licence as the income of EOU is eligible for exemption u/s. 10B of the Act. The Special Bench took note of the fact that export entitlement was allotted by the competent authority in respect of export undertaken by the assessee during the year. The Special Bench was of the view that the assessee off loaded the entitlement which was unusable and bought quota/entitlements which was required for procuring the required material necessary for its production purpose. The Special Bench also noted that special import licence was allotted to the assessee by the designated authority as per Export Import Policy and Procedure 1997- 2002 and income arising out of sale of export entitlement and special import licence was assessed as income from business. The question before the Special Bench was that whether on such business income , the assessee is entitled to claim of deduction u/s. 10B of the Act. The relevant provisions of section 10B(4) reads as under: “(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.”
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We take note that the words used in 10B(4) and 10A(4) of the Act are pari materia, which we are concerned in the present case before us so the issue is identical. The Special Bench answered the aforesaid question as under: “It is clear from the plain reading of section 10B(1) of the Act that the said section allows deduction in respect of profits and gains as are derived by a 100% EOU. Further, section 10B(4) of the Act stipulates specific formula for computing the profit derived by the undertaking from export. Thus, the provisions of sub-section (4) of section 10B of the Act mandate that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section (1) of section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in, sub- section (4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction U/S 10B of the Act. We cannot ignore sub-section (4) of section 10B which provides specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India, the Hon'ble Supreme Court has dealt with the provisions of section 80IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub-section (4) of section 10B while computing the profits derived by the undertaking from the export. Thus, the decision of the Hon'ble Supreme Court is of no help to the revenue in determining the claim of deduction u/s 10B in respect of export incentives. 78. Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100% EOU Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. The formula is as under :- Profit of the business of the Undertaking X Export turnover Total turnover of business carried out by The undertaking 79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, not-with-standing the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction U/S 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the ''profits of the business 11 which is, however, conspicuous by its
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absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10A/10B of the Act is a complete code providing the mechanism for computing the “profits of the business” eligible for deduction u/s. 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. 1 T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar; 284 ITR 584 had approved the principle laid down in the Special Bench decision in International Research Park Laboratories v. ACIT (supra). In the assessee's own case the I.T.A.T in the preceding years, after considering the decision in the case of Liberty India held that provisions of section 10B are different from the provisions of section 80lA wherein no formula has been laid down for computing the eligible business profit. 80. In view of the above discussion, question no. 2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1) read with section 10B(4) of the Act."
We note that the Special Bench observed that sub-section (4) of section 10A/10B of the Act is a complete code providing mechanism for computing the “profit of the business” eligible for deduction u/s. 10B of the Act. The Ld. DR could not point out any difference in the law or facts so we are inclined to uphold the order of the Ld. CIT(A) on the reasoning given by the Special Bench, (supra). Therefore, we do not find any merit in the appeal of the revenue and the same stands dismissed.
In the result, all the appeals of revenue are dismissed.
Order is pronounced in the open court on 24.05.2017.
Sd/- Sd/- (A. L. Saini) (Aby. T. Varkey) Accountant Member Judicial Member
Dated : 24th May, 2017
Jd.(Sr.P.S.)
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Copy of the order forwarded to:
Appellant – DCIT, Circle-3, Siliguri. Respondent – Narendra Tea Company (P) Ltd., 2A, Ganesh Chandra 2 Avenue, Kolkata-13. The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.