AMBO EXPORTS LTD.,KOLKATA vs. DCIT, CEN, CIR-3(4), KOLKATA, KOLKATA

1 ITA No. 503/Kol/2015 Ambo Exports Ltd., AY 2011-12 IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]

I.T.A No.503/Kol/2015 Assessment Year: 2011-12 Ambo Exports Ltd. (Presently known Vs. Deputy Commissioner of Income-tax, as Ambo Exports Industries Ltd.) Central Circle-3(4), Kolkata. (Appellant) (Respondent)

Date of hearing: 20.06.2016 Date of pronouncement: 01.07.2016

For the Appellant: Shri Soumitra Choudhury, Advocate For the Respondent: Shri Arindam Bhattacharya, JCIT

ORDER Per Shri M. Balaganesh, AM: This appeal by assessee is arising out of order of CIT(A)-21, Kolkata vide appeal No. 465/CC-3(4)/CIT(A)-21/14-15 dated 17.02.2015. Assessment was framed by DCIT, Central Circle-XXV, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2011-12 vide his order dated 05.02.2014.

2.1. The brief facts of this issue is that the assessee company was incorporated in 1992 as a private Limited company and became Public Limited company w.e.f. 19.01. 2006. The company is recognized as Export House by the Govt. of India, and was engaged in export of tea and other products e.g. iron ores, rice bran oil, HDPE etc. The primary activities of the assessee was to export tea to the countries located in Asia, through it's units located in Coimbatore, Tamil Nadu, through it's various units including unit located in SEZ in Coimbatore . During the year under consideration, the assessee disclosed profit of Rs. 146,88,982/- from SEZ unit i.e. 10% Export Oriented unit located in MEPZ Special Economic Zone unit in Coimbatore, vide Green card No. 1257/MEPZ dated 23/08/2004

2 ITA No. 503/Kol/2015 Ambo Exports Ltd., AY 2011-12 and claimed exemption u/s. 10A to the extent of 50% of such profit. The total claim of exemption u/s. 10A was thus Rs. 73,44,491/-. It is pertinent here to mention that this is the seventh and the last year of availability of exemption u/s. 10A. The ld. AO disallowed the said claim of exemption u/s 10A of the Act on the ground that no activity in the nature of processing and manufacture was carried out in the said SEZ unit and that the profit of the said SEZ unit was grossly inflated to claim benefit of exemption u/s 10 A of the Act. This action of the ld. AO was upheld by the ld. CITA. Aggrieved, the assessee is in appeal before us on the following grounds :- “2. For that on the facts of the case, the Ld. C.I.T.(A) was wrong in dittoing the order of the A.O. and confirming the disallowance u/s. 10A of the Income Tax Act amounting to Rs.73,44,491/- for its Special Economic Zone (SEZ) Unit which is completely arbitrary, unjustified and illegal. 3. For that on the facts of the case, the Ld. C.LT.(A) was wrong in not allowing deduction u/s.10A of the I.T. Act amounting to Rs.73,44,491/- against profit of Rs.146,88,982/- arising out of its 100% export business of manufacturing blended tea from its SEZ Unit set up at Coimbatore which is completely arbitrary, unjustified and illegal. 4. For that on the facts of the case, the Ld. C.I.T.(A) should have considered the fact, that in assessee's own case in earlier years exemption u/s. 10A of the I.T. Act was allowed in the same SEZ Unit, therefore, the order passed by the Ld. CIT(A) is completely arbitrary, unjustified and illegal. 5. For that on the facts of the case, the Ld. C.I.T.(A) has arbitrarily acted in confirming the A.O.'s observation that the assessee did not carry out any activity of processing and manufacturing in its SEZ Unit at Coimbatore and the profit in the said unit has grossly been inflated or created to claim benefit of exemption u/s. 10A of the I. T. Act which is based on mere surmise and conjecture.”

2.2. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find that the ld. CITA had only reproduced the version of the ld. AO and had not given any independent finding. We find that one of the main allegations of the ld. AO is that the gross profit margin in SEZ unit was abnormally high as compared to that of non SEZ unit especially when there is no much qualitative difference of products manufactured in both the units and accordingly the assessee had only tried to inflate the profits in SEZ unit in order to get the maximum benefit of exemption u/s 10A of the Act. We find that the ld. AO having made this observation had not resorted to disturb the profits disclosed in the respective units by the

3 ITA No. 503/Kol/2015 Ambo Exports Ltd., AY 2011-12 assessee by shifting of expenses, income, allocation of common expenses etc by applying the provisions of section 80IA(8) and 80IA (10) of the Act as mandated in section 10A(7) of the Act. We hold that in these circumstances, in order to justify his suspicion, the ld. AO ought to have reworked out the profits of the respective units and then accordingly determine the eligibility of exemption u/s 10 A of the Act. He cannot summarily reject the entire claim of exemption u/s 10 A of the Act.

2.2.1. Another reason for rejection of claim of exemption u/s 10 A of the Act was that no manufacturing activity or processing activity was actually carried out by the assessee in SEZ unit according to ld. AO. We find that the ld. AO had categorically recorded in the assessment order that the assessee has made sales to the extent of Rs. 3,45,09,846/- in the SEZ unit comprising of 531593 Kgs . We find from the assessment order wherein the assessee had procured raw tea leaves from India and Vietnam and after blending and processing, it exported such manufactured / processed tea to Afghanistan and Pakistan from its SEZ unit. We also find from the details filed in the paper book (pages 54 to 200 of PB) that the assessee, during the year under consideration, had income from manufacturing activities i.e blending, processing and packing of tea and its export thereafter. The assessee before the ld. AO vide letter dated 2.12.2013 had also explained the manufacturing process undertaken for manufacturing of tea and subsequent export thereof from the said SEZ unit by way of a flowchart which is reflected in page 55 of the Paper book.

We find that the assessee has Central Excise Registration for both its SEZ units and tea is ‘excisable goods’ under the Central Excise Act, 1944, which is a Central Legislation. The company is registered with the Asst. Commissioner of Central Excise, Coimbatore II Division for Manufacturing of Excisable Goods. A copy of Registration Certificate bearing Nos. AACCA5668BXM001 dtd. 24.11.2004 and AACCA5668BXM002 dated 17.05.2004 issued in favour of the assessee was submitted before the Ld. AO. The other certifications and approvals secured by the company are as under:

4 ITA No. 503/Kol/2015 Ambo Exports Ltd., AY 2011-12 (i) Approval letter dated 24.8.2004 from the Ministry of Commerce, Govt. of India for manufacture of licenced product i.e. tea as 100% EOU.

(ii) Green card- dated 23.8.2004 issued by the Development Commissioner, Madras Export Processing Zone, SEZ. In the said Green card the product manufactured has been duly mentioned as "Tea blending of imported and indigenous tea".

(iii) Certificate dated 8th August, 2008 for Recognition of Outstanding Export Performance by MEPZ SEZ Chennai under the Ministry of Commerce & Industry, Govt. of India, as EOU unit in the food/agro & allied sector [for FYs 2005-06 and 2006-07 - copy of the said certificates were enclosed before the Ld. AO. It may be mentioned that in a SEZ only manufacturing units are registered.

(iv) Registration under the Trade Marks Registry which also incorporates the term manufacturers, the Trademark No. being 1468580 dated 10.7.06 issued on 4.3.08. Copy of the Certificate was enclosed before the Ld. AO.

It is seen that the company is not simply engaged in the activity of packing of tea but it involves purchasing of loose tea and processing the same (by way of change in physical and chemical composition which includes use of machines), being an integral and inextricable part of production or manufacture resulting in the "manufactured" or "produced" tea, which is much different in chemical composition, taste, aroma etc. in comparison to raw tea. Because of this very fact, the company is assessed under the Central Excise Act, 1944.

2.2.2. Another reason for the ld. AO rejecting the claim of exemption u/s 10 A of the Act is that the assessee had debited only a sum of Rs. 29,21,000/- towards manufacturing expenses as below:- Item Amount (Rs.) i) Carriage inward -- ii) Clearing & Forwarding expenses Rs. 844518/- iii) Detention charges Rs.152,485/- iv) Electricity Rs.17,998/- v) Freight including freight on import Rs.1101`,708/- vi) Inspection charges & security charges Rs.14300/- vii) Insurance charges Rs. 32549/- viii) Packating and handling charges Rs. 434,212/- ix) Service charges Rs. 36,813/- x) THC and BHF Rs. 286,417/- xi) Weighment expenses ---- Total Rs.29,21,000/-

5 ITA No. 503/Kol/2015 Ambo Exports Ltd., AY 2011-12

According to the ld. AO, none of the above expenses fall under the category of manufacturing expenses and accordingly the claim of assessee that it was engaged in manufacturing of tea has to be rejected. We find from the details of expenses listed above, the same are for the purpose of manufacturing operations only and hence the assessee was engaged in manufacturing operations during the year under appeal. We find that the ld. AO had accepted the sales made from SEZ unit amounting to Rs. 3,45,09,846/- as sales. We find that the assessee had merely stated the exports from SEZ unit had been made to Afghanistan and Pakistan. From the details of sales filed, the ld. AO found that the assessee had also made exports to Afghanistan and Pakistan from its non SEZ unit. Based on this, he rejected the claim of the assessee. In this regard, we hold that the assessee never stated before the ld. AO that no exports were made to Afghanistan and Pakistan from its non SEZ unit, instead it had only stated that exports from SEZ unit were made to Afghanistan and Pakistan. We hold that doubting the veracity of the transactions on this flimsy ground is not warranted. We hold that the assessee indeed had indulged in manufacturing activities in its SEZ unit during the year under appeal and had only continued the same from the earlier years. The previous year relevant to the Assessment Year 2011-12 is the seventh and the last year of availability of exemption u/s. 10A of the Act. The assessee's claim for exemption under section 10A of the Act had been always allowed by the assessing officer in the preceding financial years. It is a settled principle of law that a claim made under section 10A for a particular year cannot be disallowed unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside. When there is no change in the facts which were in existence during the earlier years with that of a subsequent assessment year, then the Income Tax officer cannot withdraw the claim for exemption under section 10A of the Act for subsequent years. Therefore, it is not open to the department to deny the benefit of Section 10A for subsequent assessment years. The reliance in this regard is placed on the decision of the Hon'ble Bombay High Court rendered in the case of CIT V. Western Outdoor Interactive (P.) Ltd reported in (2012) 349 ITR 309 (Bom).

6 ITA No. 503/Kol/2015 Ambo Exports Ltd., AY 2011-12 2.2.3. We also find that the issue as to whether the blending and processing of tea amounts to manufacturing of tea has been settled in favour of the assessee by the Special Bench decision of this Kolkata Tribunal in the case of Madhu Jayanti International Ltd vs DCIT reported in 137 ITD 377 (Kol) (SB) wherein it was held :- “37. Accordingly, we answer the question referred in favour of the assessee by holding that the assessees who are in the business of blending and processing of tea and export thereof, in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemption u/s. 10B of the Act. Further, assessees who are in the business of blending and processing of tea in respect of undertakings in free trade zones are manufacturer/producer of tea for the purpose of claiming exemption u/s. 10A of the Act. We have examined and discussed the facts in the case of Madhu Jayanti International Ltd. and found that there is blending of tea and consequently the assessee is eligible for exemption u/s. 10B of the Act as prayed for. Their appeal for the AY 2004-05 is allowed. As regards other appeals and that of the interveners, the matters are restored back to the Division Bench, with directions to decide those appeals in the light of principle laid down herein, so far as the claim for relief u/s. 10A or 10B of the Act in accordance with law.”

2.2.4. We also find that the total profit as per profit and loss account of the assessee for the year ended 31.3.2011 was Rs. 4,04,55,228.57 (vide page 207 of the Paper Book) and profit of SEZ unit was Rs. 1,46,88,982.31 (vide page 228 of the Paper Book). We also find that the ld. AO himself had granted exemption u/s 10 A of the Act for the Asst Years 2005-06 ; 2006-07 and 2007-08 by following the aforesaid Special Bench decision vide separate orders passed u/s 254 / 143(3) of the act dated 14.1.2015 which are enclosed in pages 2 to 3 ; pages 7 to 8 and pages 12 to 13 of the Paper Book. We find that section 10A of the Act is a special incentive introduced by the legislature in order to promote exports and therefore, the same has to be construed liberally. It has been held by the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd vs CIT reported in (1992) 196 ITR 188 (SC) - “ A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.”

2.2.5. As stated earlier, the ld. AO had not reworked the profits attributable to SEZ and non SEZ unit to justify his suspicion. In any case, there cannot be any outright rejection of the claim of exemption u/s 10 A of the Act. We find that the entire disallowance of

7 ITA No. 503/Kol/2015 Ambo Exports Ltd., AY 2011-12 claim of exemption u/s 10A of the Act which has been consistently claimed by the assessee over the years have been made by the ld. AO only on suspicion , surmise and conjecture and accordingly we have no hesitation to delete the same. Accordingly the grounds raised by the assessee vide ground nos. 2 to 5 are allowed.

3.1. The brief facts of this issue is that the Ld. AO observed that the assessee had made payment of Rs. 5,22,000/- to M/s Sree Balaji Plastics towards job work charges for which no deduction of tax at source u/s 194C of the Act was made. Accordingly, the ld. AO made the disallowance u/s 40(a)(ia) of the Act. The addition was confirmed by the ld. CITA . Aggrieved, the assessee is in appeal before us on the following ground:- “6. For that on the facts of the case, the Ld. CIT(A) was wrong in confirming the addition u/s. 40(a)(ia) of the I. T. Act amounting to Rs.522,000/- as the assessee was not liable to deduct TDS on payment made for job work charges, therefore, the said disallowance u/s. 40(a)(ia) is completely arbitrary, unjustified and illegal.”

3.2. We have heard the rival submissions. The ld. AR prayed for setting aside of this issue to the file of the ld. AO in the light of the decision rendered by the Hon’ble Delhi High Court in the case of CIT vs Ansal Land Mark Township P Ltd reported in 377 ITR 635 (Del) wherein it was held that the second proviso to section 40(a)(ia) of the Act has been held to be retrospective in operation and accordingly no disallowance u/s 40(a)(ia) of the Act could be made in the hands of the payer (assessee herein). In response to this, the Ld. DR fairly agreed for the same. We find that the issue needs to be set aside to the file of the ld.AO to decide the issue afresh in the light of the decision rendered in Ansal Land Mark (supra) and the assessee is directed to produce evidence of the payee records to prove that the said job charges have been duly included in the returns filed by the said job worker. If the same is proved, then we direct the ld. AO not to make any disallowance u/s 40(a)(ia) of the Act in terms of second proviso to section 40(a)(ia) of the Act. Accordingly, the ground no. 6 raised by the assessee is allowed for statistical purposes.

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Order is pronounced in the open court on 01.07.2016

Sd/- Sd/- (S.S. Viswanethra Ravi) (M. Balaganesh) Judicial Member Accountant Member Dated : 1st July, 2016

Jd.(Sr.P.S.) Copy of the order forwarded to:

APPELLANT – Ambo Exports Ltd. (Presently known as Ambo Exports 1. Industries Ltd.), 3, Pretoria Street, 3rd floor, Chandrakunj, Kolkata-700 071. Respondent –DCIT, C.C. 3(4), Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Asstt. Registrar.