DCIT, CIRCLE - 4, KOLKATA vs. M/S. NEPTUNE EXPORTS LTD., KOLKATA

ORDER Per Bench: These four cross appeals – two by assessee and two by Revenue, are arising out of separate orders of CIT(A)-IV Kolkata in appeal Nos.185, 188/CIT(A)-IV/07- 08 dated 03.03.2009. Assessments were framed by ACIT, Circle-4, Kolkata u/s 143(3)/147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide separate orders dated 20.12.2007 for assessment years 2002-03 and 2003-04 respectively.

2 & ITA Nos.1384-1385/K/2009 Neptune Exports Ltd.. AYs 02-03& 03-04 Assessee’s ground in AY 2002-03 “2. a) For that the Ld. CIT(A) erred in rejecting the grounds Nos. 4, 5, 6 & 7 taken before him against denial of exemption of Rs.37,80,468/- u/s. 10B of the I. T. Act on the basis of the view taken in the order in the appeal of a group Company M/s. Northern Projects Ltd. for the Asst. Year 2003-04. b) For that the Ld. CIT(A) failed to notice that the said assessee M/s. Northern Projects Ltd. had filed appeal against the order of the Ld. CIT(A) on the issue of the denial of the exemption u/s. 10B in the Asst. Year 2003-04 and the said issue in the Asst. Year 2003-04 was still subjudice before the Appellate Tribunal.”

Revenue’s ground in AY 2002-03: “2. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts in allowing the claim of deduction to the tune of Rs.26,96,282/- made by the assessee u/s. 80HHC as an alternative claim in case of denial of exemption u/s. 10B, without appreciating the fact that the assessee did not claim such deduction in the original Return or even by filling a revised Return and also no statutory Audit Report in Form No. 10CCAC was submitted by the assessee.”

Aggrieved, now assessee is in appeal before.

“35. 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.

wider than what is the meaning of the term ‘manufacture’ under the 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.

When a query was put to Ld. Senior advocate in term of the decision of SB of ITAT Kolkata in the case of Madhu Jayanti International Ltd.(supra), as to, whether there is a blending or not and blend sheets were produced before the AO or not, he replied by referring to AO’s remand report No. ACIT, Circle-4/MISC/06- 07/Kol/1227 dated 06/03/2007, which is given in assessee’s paper book at pages 255 to 263 and particularly he drew our attention to following para of the remand report, wherein the AO has discussed the fact as under:- “The facts of the case – as they emerge from the records as well as the assessee’s submission in the form of a paper book – are that the appellant company purchases tea from auction centres located in various parts of the country and then the teas of different qualities / grades as selected are laid down on the floor of the Warehouse. Thereafter, the tea of one type/grade are mixed/blended with another type/grade of tea to achieve the required standard of tea – on the basis of Blendsheets as selected by experts. Subsequently, after completion of each blend the tea is then packed, as per buyers’ requirement in the packing materials procured from different suppliers and even imported and then stuffed in containers for onward transmission to port for shipment to overseas buyers.

In the background of these facts, the assessee has pleaded that such mixing / blending /packing amounts to processing of goods. Mentioning further that the expressions ‘manufacture’ and / or ‘produce’ have not been defined in the Income Tax Act 1961 in an exhaustive manner, the assessee has argued in its paper book hat for the purposes of section 100B of the Income Tax Act 1961 an exclusive definition has been given in respect of the said two words and that the expression ‘manufacture’ has been defined to include inter alia any ‘process’ for the purposes of section 10B of the Income Tax Act 1961. Placing reliance on various

5 & ITA Nos.1384-1385/K/2009 Neptune Exports Ltd.. AYs 02-03& 03-04 judicial pronouncements, the assessee has pleaded that the activity of blending carried out by it leads to ‘production’ of tea and is, therefore, eligible for benefit of deduction u/s. 10B of the Income Tax Act 1961.”

In view of the above remand report of AO, Ld. counsel for assessee argued that assessee has submitted complete procedure of blending of tea along with blend sheets during the remand proceedings and once the AO has admitted that there is blending and this is exactly in line with order of ITAT Kolkata Special Bench in the case of Madhu Jayanti International Ltd. (supra). On query from the Bench, Ld. CIT-DR Shri Adhir Kumar Bar relied on the order of AO.

“Aggrieved by the order of the Commissioner (Appeals) the Revenue preferred an appeal before the Tribunal. The Tribunal dismissed the appeal holding, inter alia, as follows: ‘The assessee has made payment for commission and has been rendered services in consideration of the same. As a matter of fact, it is not even the Revenue’s case that no services have been rendered at all. The fact that services have been rendered by a party other than the agent to whom commission is paid is wholly immaterial so far as deductibility in the hands of the assessee is concerned. As for the position that the payment was highly excessive vis-à-vis the local costs, even if that be so, that aspect of the matter does not affect the deductibility in the hands of the assessee either. The assessee is concerned with commercial expediency of the said payment and not with what are the actual costs incurred in rendering the services for which the payment is made. As we have seen earlier in this order, from the extras of the Volker Committee report itself, it was absolutely necessary for the assessee to make the impugned payments and, in any event, the commercial expediency of these payments has not even been called into question by the Assessing Officer. The case of the Revenue is confined to invoking the Explanation to section 37(1).

7 & ITA Nos.1384-1385/K/2009 Neptune Exports Ltd.. AYs 02-03& 03-04 “The objections to the said commission payment are, therefore not sustainable in law, so far as deductibility under section 37(1) is concerned.” The Department has come up in appeal. Mrs. Smita Das De, learned advocate, appearing in support of the appeal, could not satisfy us as to why were the findings indicated above as recorded by the Commissioner (Appeals) and the Tribunal incorrect either on fact or in law. There is, as such, no reasons why the appeal should be entertained.”