The assessee is engaged in the business of manufacturing of reactive dyes in notified industrial area in the state of Sikkim. Assessee claimed exempt u/s 80IC. AO noticed that assessee achieved a huge turnover within a very short time of two and half months and the turnover was out of the production of two machineries which was used for mixing and grinding of materials. Assessee had shown G.P of 71.38% and N.P. of 70.42% which according to him was not possible in normal course of business.
The DIT (Investigation) on the request of AO visited site and observed that factory was not in running though it was not a official holiday, it was managed by only one person, there was no raw material or finished products or machineries except two Ball Mills which were also rusted, only 5 bags of common salt and some empty paper board cartoons which may be used for packing of goods were found. AO concluded that the activities done was nothing but Assessee simply processes the reactive dyes by mixing some amount of Sodium Chloride and Sodium Sulphate with the purchased reactive dyes. Even after blending or mixing of reactive dyes with different salts, the reactive dyes remain reactive dyes and accordingly it did not amount to manufacture or production of article or thing. Further entire sales were made to 2 sister concerns. Thus, he concluded that the claim was a colourable devise and accordingly disallowed the claim.
The CIT (A) allowed the claim observing that as per 'Central excise Registration certificate' assessee was registered for 'manufacturing of excisable goods'. Central Excise duty was actually paid by the assessee and necessary details were furnished to AO. Once the Central Excise department has accepted the activity of the assessee to be one of manufacture AO was not justified to treat the activity as not one of manufacture. Further as seen from the certificate issued by the State Pollution Control Board, assessee was permitted to operate a unit for blending of Reactive Dyes. Assessee accepted that they were engaged in only mixing, grinding and blending of Reactive Dyes. In view of the Central Excise Tariff of India such an activity constitutes manufacture. AO concluded that the arrangement between the assessee and its sister concern was of the nature referred to u/s. 80 IA(10) and that only net profit @ 6.89% can be considered to be eligible for deduction u/s. 80 1C and the balance is to be taxed as normal business income. However, the A.O went on to disallow the entire claim and the finding regarding applicability of section 80 IA(10) remained an alternate finding.
Assessee contended before CIT (A) that assessee being exempt from levy of Central Excise and VAT/CST, sale consideration is higher in view of the longer period of credit of around 6 months allowed to the purchaser, savings on account of there being no intermediariary between the assessee and the retailer, savings on account of transportation cost of materials, which is borne by the purchaser and economy in administrative expenses resulted in better profits. Further the claim that sister concern made purchases from the assessee at inflated prices do not stand as the market price of any commodity depends on the quality of the product and since the appellant's product was of superior quality higher consideration was paid for the same.
CIT (A) observed that various reasons given by the appellant for earning the G.P @ 71.38 % and N.P. @ 70.42% were tenable. It was not proper to compare the profits of the appellant with the profits of units which do not enjoy the tax concessions enjoyed by the assessee for having established the unit in notified area. Thus, the disallowance was deleted.
After hearing both the parties, the ITAT held that,
++ the main dispute in the present case is whether the activity of blending and mixing of reactive dyes can be considered to be manufacturing or production so as to entitle the assessee to deduction as per the provisions of u/s 80IC. Section 2 (29BA) was inserted by Finance (No. 2) Act, 2009 with effect from 1.4.2009 which defines manufacture a change in a non living physical object or article or thing (a) resulting into transformation of the object or article or thing into a new and distinct 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 composition or integral structures. For the impugned assessment year, the definition of “manufacture” as defined in s. 2(29BA) though not applicable but certainly can be used as a guide. As per clause (b) of section 2 (29BA) the definition of "manufacture" means “bringing into existence a new and distinct object or article or thing with a different chemical composition or integral structure”. Before us, nothing has been brought on record to demonstrate that the chemical composition of the raw materials used by Assessee has undergone a change or there is a substantial change in the chemical composition or integral structure of the raw materials so as to form a new product and that the chemical composition of the finished product is different from that of the original raw material. Though under the Income-tax Act there is nothing to suggest that if a particular process is considered as manufacturing process under the Excise Regulations the same has to be treated as Manufacturing for the purposes of Income tax also. For the purpose of income tax it needs to be found out as to whether the process undertaken by an Assessee meets the test of manufacturing so as to become eligible for deduction for undertaking the manufacturing activity;
++ CIT (A) has not obtained any report from an expert to conclude that the new product which has come into existence by undertaking the process of mixing and grinding is on account of manufacturing process but has accepted the contention of Assessee. A definite finding is required to determine as to whether the activity of the assessee can be termed as manufacture in the light of the requirement of the Act so as to enable the Assessee to claim deduction u/s. 80IC. Therefore the said aspect needs to be examined once again by CIT (A). Since the matter is remitted to the file of CIT (A), he shall also examine the aspect of having gross profit in excess of 70% to be on account of saving in excise duty, VAT, higher price charged on account of longer credit period and lower administrative cost.
(See 2014-TIOL-18-ITAT-AHM)
