M/s. Gemini Communicaion Ltd., CHENNAI V. ACIT, CHENNAI

CO 164/CHNY/2012

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7949 (ITAT-CHENNAI)
• Duration Of Justice: 1 month(s) 11 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 28-09-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S JAYARAMAN
• Keywords: Business income; Earning of tax free income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI (BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER ) .. I.T.A. NO. 1619/MDS/2012 ASSESSMENT YEAR : 2006-07 THE ACIT, COMPANY CIRCLE II(2), ROOM NO.512,FIFTH FLOOR, NEW BLOCK, 121, MAHATMA GANDHI ROAD, CHENNAI. PAN : AAACG 2531 K (APPELLANT) V. M/S.GEMINI COMMUNICATION LTD., NO.1,DR.RANGA ROAD, ALWARPET, CHENNAI 600 018. (RESPONDENT) C.O. NO. 164/MDS/2012 ASSESSMENT YEAR : 2006-07 M/S.GEMINI COMMUNICATION LTD., NO.1,DR.RANGA ROAD, ALWARPET, CHENNAI 600 018. PAN : AAACG 2531 K (CROSS OBJECTOR) V. THE ACIT, COMPANY CIRCLE II(2), ROOM NO.512,FIFTH FLOOR, NEW BLOCK, 121, MAHATMA GANDHI ROAD, CHENNAI. (APPELLANT IN APPEAL) M/S.GEMINI COMMUNICATION LTD 2 ASSESSEE BY : SHRI M.NARAYANAN, RETD. ACIT SHRI G.MOORTHI, ADVOCATE REVENUE BY : SHRI S .JAYARAMAN, CIT DATE OF HEARING : 08 .11.12 DATE OF PRONOUNCEMENT : 09 .11.12 O R D E R PER N.S.SAINI, ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY REVENUE AND CROSS OBJE CTION BY THE ASSESSEE AGAINST THE ORDER OF CIT(A)-III, CHENNAI D ATED 04.05.2012. 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS:- 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS CONTRARY TO THE LAW AND FACTS OF THE CASE. 2. THE LEARNED CIT(A) HAS ERRED IN DELETING THE WIT HDRAWAL OF DEDUCTION U/S. 80IC TO THE EXTENT OF ` 8.84 CRORES; 2.1 THE LEARNED CIT(A) OUGHT TO HAVE NOTICED THAT THE ASSESSEE IS ONLY DOING ASSEMBLING WORK AND NOT MANUFACTURE AS STIPUL ATED IN SEC.80IC OF THE ACT. 2.2 . IT IS SUBMITTED THAT THE DECISIONS OF THE AP EX COURT IN THE CASE OF UNION OF INDIA VS. DELHI CLOTH & GENERAL MILLS CO. LTD. ( AIR1963SC791), INDIAN HOTELS CO. LTD. VS. ITO (245 ITR 538) AND P RABHAT SOUND STUDIOS VS. ADDL CCE (107 STC 70) CLEARLY STIPULATE S MANUFACTURING IS A PROCESS OR SERIES OF PROCESSES BY WHICH A NEW END PRODUCT IS PRODUCED FROM THE RAW MATERIAL AND WHICH IS ALTOGET HER A DIFFERENT COMMODITY IN ITS PHYSICAL AND CHEMICAL FORM. 2.3 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE WAS ONLY DOING ASSEMBLING WORK OF RFID READERS WHIC H ARE NET WORK M/S.GEMINI COMMUNICATION LTD 3 EQUIPMENTS FORMING PART OF INFORMATION AND COMMUNIC ATION TECHNOLOGY INDUSTRY AT PARWANOO UNIT, HIMACHAL PRADESH. 2.4 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE HAD SET UP A MANUFACTURING UNIT AT PARWANOO UNIT IN THE STATE OF HIMACHAL PRADESH. HOWEVER, THE ASSESSEE DID NOT F URNISH LIST OF EMPLOYEES IN PARWANOO UNIT, DETAILS OF ELECTRICITY CHARGES, RENTAL AGREEMENT WITH THE LANDLORD, DELIVERY CHALLANS, SHI PPING ADDRESS AND EVIDENCES FOR STOCK TRANSFER. 2.5 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED T HE FACT THAT THE BILLS AND INVOICES OF CERTAIN ITEMS LIKE CDS AND FLOPPY DISC OF MOSEARBEAR, SONY ETC. SHOWED THAT THE ASSESSEE WAS CARRYING ON TRADING ACTIVITIES. 2.6 THE LEARNED CIT(A) OUGHT TO HAVE ALLOCATED THE EXPENDITURE AT THE RATE OF 50% BETWEEN THE TWO UNITS AT CHENNAI AND HIMACHAL PRADESH UNITS AS SEEN FROM THE CONSOLIDATED PROFIT AND LOSS ACCOU NT FURNISHED BY THE ASSESSEE. 2.7 THE CIT(APPEALS) IN PARA 6.10 AND 6.17 OF THE ORDER HAD APPORTIONED A PORTION OF EXPENDITURE TO THE PARWANOO UNIT WHICH PROVES THAT THE QUANTUM OF PRODUCTION / SALES TO THAT OF THE INFRAS TRUCTURE FACILITIES FOR PRODUCING SUCH QUANTITY WERE NOT AVAILABLE IN PARWA NOO UNIT AND ASSESSEE WAS NOT FULLY ENGAGED IN MANUFACTURING ACT IVITY AND MAJOR ACTIVITY OF MARKETING AND SALES WERE DONE AT PARWAN OO UNIT; 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED COMMISSI ONER OF INCOME TAX (APPEALS) BE SET ASIDE AND THAT OF THE ASSESSING OF FICER BE RESTORED. 4. LD. D.R. SUBMITTED THAT THE SOLE ISSUE INVOLVED IN THE REVENUES APPEAL WAS THAT THE CIT(A) ERRED IN DELET ING THE WITHDRAWAL OF DEDUCTION UNDER SECTION.80-IC OF RS.8 .84 CRORES. 5. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CL AIMED DEDUCTION UNDER SECTION 80-IC OF THE PROFITS DERIVED FROM ITS MANUFACTURING UNIT SITUATED AT HIMACHAL PRADESH. FOR THE YEAR UNDER C ONSIDERATION, THE M/S.GEMINI COMMUNICATION LTD 4 UNIT WAS LOCATED AT MIG-IV, PARWANOO, H.P. A.O. NOT ICED THAT THE ASSESSEE WAS ONLY DOING ASSEMBLING WORK AND NOT MAN UFACTURING. THE ASSESSEE WAS ONLY IMPORTING PCBS AND OTHER COMP ONENTS AND ASSEMBLING IT AT ITS FACTORY. THIS ASSEMBLING WI LL NOT COME UNDER THE HEAD MANUFACTURE OR PRODUCTION. UNDER SECTION 8 0-IC, AN ENTERPRISE WHICH HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUCE ANY ARTICLE OR THING IS ONLY ELIGIBLE FOR DEDUCTION UN DER SECTION 80-IC. FURTHER, ASSESSEE WAS ASKED TO FURNISH THE DETAILS REGARDING THE EMPLOYEES WHO WERE EMPLOYED IN ITS PARWANOO UNIT AN D PROVE THAT MORE THAN 70% OF THE TOTAL MANPOWER WAS FROM HIMACH AL PRADESH. THE ASSESSEE SUBMITTED LIST OF 10 EMPLOYEES WHO WER E DEPUTED TO H.P. FROM THE HEAD OFFICE. ACCORDING TO A.O., NO D ETAILS REGARDING THE OTHER EMPLOYEES WERE SUBMITTED. A.O. FURTHER NOTICE D THAT NO DOCUMENTS WERE PRODUCED TO PROVE THAT SUFFICIENT EM PLOYEES WERE EMPLOYED TO ACHIEVE TURNOVER OF RS.52 CRORES. THE A.O ALSO OBSERVED THAT THE FACT THAT THE ASSESSEE HAD EMPLOY ED ONLY 10 EMPLOYEES WITH A SALARY OF RS.14.59 LAKHS AS COMPAR ED TO THE TOTAL SALARY OF RS.291.03 LAKHS FOR THE OTHE UNITS CREATE D A DOUBT AS TO WHETHER ANY MANUFACTURING ACTIVITY WAS CARRIED OUT IN THE PARWANOO M/S.GEMINI COMMUNICATION LTD 5 UNIT. THE A.O. ALSO OBSERVED THAT THE ASSESSEE HAD SPENT ONLY A SUM OF RS.79,000/- TOWARDS ELECTRICITY FOR ACHIEVING A TURNOVER OF RS.52 CRORES. THE REASON AS TO WHY THE ELECTRICITY CHARG ES WERE SO LOW WAS ALSO NOT SATISFACTORILY EXPLAINED. THE ASSESSING O FFICER ALSO NOTED THAT THE PROOF FOR DELIVERY OF SALE ITEMS AND PURCH ASE ITEMS ALONG WITH THE RELEVANT DOCUMENTS WERE NOT PRODUCED INSPITE OF GIVING ENOUGH OPPORTUNITY TO THE ASSESSEE. FURTHER, THE ASSESSIN G OFFICER OBSERVED THAT BASED ON THE PURCHASE AND SALES INVOICE PRODUC ED BY ASSESSEE IT WAS CLEAR THAT THE ASSESSEE WAS CARRYING OUT ONL Y A TRADING ACTIVITY. IT WAS ALSO STATED THAT THE ASSESSEE COULD NOT PROD UCE ANY EXCISE/VAT ETC. FOR ITS PARWANOO UNIT NOR COULD IT PRODUCE THE PERMANENT REGISTRATION CERTIFICATE . THE A.O. FURT HER OBSERVED THAT THE REASONS FOR HUGE DIFFERENCES BETWEEN PURCHASES AND SALES AND THE ABSENCE OF ANY CLOSING STOCK IN THE PARWANOO UNIT W ERE NOT SATISFACTORILY EXPLAINED BY THE ASSESSEE. IT WAS F URTHER OBSERVED THAT IN THE DIRECTORS REPORT THERE WAS NO MENTION ABOUT THE ESTABLISHMENT OF THE NEW UNIT AT PARWANOO. THE ASSESSEE WAS ALSO NOT ABLE TO PRODUCE EVIDENCE FOR THE TRANSPORT OF GOOD FROM PAR WANOO UNIT TO ITS CUSTOMERS. IN VIEW OF THESE FACTS, A.O HELD THAT THE UNIT IS ONLY A M/S.GEMINI COMMUNICATION LTD 6 BRANCH AND NOT A MANUFACTURING UNIT ELIGIBLE FOR A DEDUCTION UNDER SECTION.80-IC. 6. THE LD. A.R. ARGUED BEFORE THE CIT(A) AGAINST THE DISALLOWANCE OF DEDUCTION U/S 80IC. A.R. HAD FILED DETAILED WRITTEN SUBMISSION AND VARIOUS SUPPORTING DOCUMENTS AND ARG UED THAT THE APPELLANT HAD FULFILLED ALL CONDITIONS REQUIRED FOR DEDUCTION U/S 80-IC. HE STATED THAT THE A.O. HAD REJECTED THE SUBMISSION AND EXPLANATION OF THE APPELLANT WITHOUT CONSIDERING THE MERIT OF T HE CASE AND WITHOUT APPRECIATING THE EVIDENCES PRODUCED BEFORE HIM. THE A.O HAD FOLLOWED THE EARLIER REASONING OF HIS PREDECESSOR A ND THE DIRECTIONS OF THE ADDL.CIT U/S 144A WHILE PASSING THE ORIGINAL ORDER. THE RELEVANT PART OF THE SUBMISSION OF THE ID.AR IS REPRODUCED H EREUNDER: BRIEF HISTORY OF THE HIMACHAL PRADESH MANUFACTURING UNIT:- UP TO 2004 THE APPELLANT DID VARIOUS SMALL & MEDIUM LEVEL NETWORKING PROJECTS TO GOVERNMENT AND OTHERS. FROM THE YEAR 2005 ONWARD S, THE PROJECT SIZE BECOMES MORE THAN 100 CRORE MAINLY FROM STATE AND C ENTRAL GOVERNMENT ENTERPRISES. TO DO THESE PROJECTS SUCCESSFULLY WITH COMPETITIVE PRICE AND BY AVAILING TAX EXEMPTION, THE APPELLANT STARTED ITS O WN MANUFACTURING UNIT AT THE TAX EXEMPTED INDUSTRIAL AREA IN THE STATE OF HIMACH AL PRADESH. M/S.GEMINI COMMUNICATION LTD 7 WITH THE GUIDANCE OF THE HIMACHAL PRADESH STATE IND USTRIAL DEVELOPMENT CORPORATION, THE APPELLANT COMPANY COMMENCED ITS MANUFACTURING. FOR THIS, THE APPELLANT PASSED THROUGH VARIOUS STAGES AS FOLLOWS:- A). ON 22.8.2005 AFTER SUBMISSION OF CAUTION DEPOSI T RECEIPT, THE COMPANY GOT PROVISIONAL REGISTRATION FROM HPSIDC, AND REGISTERED WITH CST, HPGST AUTHORITIES. AFTER THIS STARTED ITS COMMERCIAL PRODUCTION AT MIG-4, SEC-3 PARVANOO DIST SOLAN (H.P) AND STARTED PRODUCTION - (ANNEXURE - PAGE 1-4) FOR THIS THE ANNUAL SALES TAX RETURN FILED WITH THE ABOVE HPGST AUTHORITIES (ANNEXURE - 5) B). ON 20.12.2005 THE HPSIDC ALLOTTED 500 SQ.MTS. O F LAND AT PLOT NO 18 -EXT. INDUSTRIAL AREA, BADDI TO THE APPELLANT - (ANNEXURE - PAGE 6-13) C). ON 18.01.2006, HPSIDC HANDED OVER THE LAND AND ON 9.6.2006 THEY HAVE BEEN GIVEN PLAN APPROVAL FOR CONSTRUCTING THEIR OWN FACTORY. T HEN THE APPELLANT BUILT THE FACTORY FOR MANUFACTURING THEIR PRODUCTS IN THEIR OWN UNIT- (AN NEXURE - PAGE 14-15) D). ON 21.01.2007 APPELLANT RECEIVED POWER RELEASE CERTIFICATE FOR ITS OWN FACTORY AND AFTER PROPER INSPECTION AND TESTING CONDUCTED BY THE OFFI CIALS OF HPSIDC, FROM 30.7.2008 ONWARDS THEY HAD STARTED PRODUCTION AT THEIR OWN FA CTORY UNIT AT PLOT. NO. 18 EXTN., INDUSTRIAL AREA, BADDI (HP) (ANNEXURE - PAGE 16-17) E). AFTER HAVING COMMENCED PRODUCTION AT THEIR OWN PLACE THE APPELLANT HAVE BEEN GIVEN ORIGINAL PERMANENT REGISTRATION ALONG WITH ENTREPRE NEURS MEMORANDUM CONFIRMING NO OF EMPLOYEES AND GOT IT ON 12.12.2008. (ANNEXURE - PAGE -18-21) F). IN DUE COURSE APPELLANT ALSO GOT NO DUES CERTIF ICATE UP TO 2010 FROM THE % THE EXCISE AND TAXATION COMMISSIONER AT BADDI AND STILL PAYING AMC PAYMENTS TO HPSIDC. (ANNEXURE - PAGE - 22-23) ABOUT PROCESS OF MANUFACTURING:- AFTER PROCURED THE RAW MATERIALS LIKE PCB'S, RAM, C ABINET, HIGH AND LOW TRANSMISSION WIRELESS ADAPTORS AND WIRELESS ANTENNA COMPONENTS E TC., THE APPELLANT COMPANY DESIGNED A CPU WITHOUT HARD DISC M/S.GEMINI COMMUNICATION LTD 8 IN THAT CPU AN INDIGENOUSLV DESIGNED AND STRUCTURED STEEL PANEL WAS INBUILT WITH THE CPU. ON THAT STRUCTURED STEEL PANEL AN EMPTY CHIP CALLED E-PHOM WAS FIXED AT A PLACE WHICH WAS STRUCTURED BY THE APPELLANT COMPANY . ITT:XT TO THE ABOVE, BASED ON THE REQUIREMENTS THE HIGH OR LOW TRANSMISSION WIRELESS ADAPTOR WAS BUILT IN BY THE APPELLANT ON T HE STRUCTURED STEEL PANEL INSIDE THE CPU. THEN, SOFTWARE CALLED RED HAT LINUX SOFTWARE SPECIF ICALLY DEVELOPED FOR THE PROJECT REQUIREMENT WAS TRANSFERRED FROM THE MASTER DATA TO THE EMPTY E- PHORN CHIP. THIS SOFTWARE LOADED CHIP ONLY, ALLOWS ACCESSING TH E FREQUENCY WITH THE CENTRALIZED ADMIN NETWORK OF THE CUSTOMER. WITH ALL THESE MANUFACTURING PROCESS A DISTINCT AND DIFFERENT NEW PRODUCT WILL COME OUT TO SUIT THE UNIQUE REQUIREMENT OF THE CUSTOMER. IN THE CASE OF UPS, GENERALLY UPS ARE AVAILABLE WIT H 5AMS OUTPUT OR DISCHARGE POINTS, IT IS NOT ENOUGH OR SUITABLE FOR THE USE OF NETWORKING BASED UNITS. SO, AFTER PROCURING THE 5AMS SINGLE OUTPUT U PS, THE APPELLANT REMOVED THE BACK PANEL AND LOW DENSITY WIRES CONNECTED WITH BATTERY AND FIXED THEIR OWN PRE' DESIGNED PANEL SUITS FOR 15AMS DELIVERY OR OUTPUT POINTS WHICH IS CAPABLE TO USE MULTI CONNECTIVITY SPIKE BUSTERS. THIS INDIGENOUSLY DESIGNED AND MANUFACTURED PRODUCT WON'T BE AVAILABLE IN THE MARKET TO ANYONE. ONCE THE PRODUCT IS DISMANTLED IT BECOMES U SELESS I.E. OUR PROCESS OF MANUFACTURING IS IN SEPARABLE. FOR THE ABOVE PROCESS OF MANUFACTURING THE REQUIREM ENT OF ELECTRICITY IS VERY MINIMUM I.E. ONLY AT THE TIME OF TRANSFER OF SOFTWARE FROM THE MASTER DA TA TO EMPTY E-PHORN CHIP AND ALSO FOR FINAL TESTING OF TH E PRODUCT. M/S.GEMINI COMMUNICATION LTD 9 ALSO THESE FINISHED NETWORKING PRODUCTS ARE HIGH IN VALUE. LESS IN NUMBERS. COMPACT IN SIZE AND LIGHT WEIGHT (EXCEPT UPS WHICH IS SMALL IN SIZE HIGH IN WEIGHT). A MINIMUM NUMBER OF MANPOWER IS ENOUGH TO PRODUCE MAJOR VALUE OF FINISHED PRODUCTS IN A SINGLE DAY. PARA-WISE REPLY OF THE ASSESSMENT ORDER: 1. PARAS 1 TO 5.1 ARE STATEMENTS OF FACTS AND I'N PLACES WERE WE DO N OT CONCUR WE HAVE SUITABLY REPLIED OUR SIDE OF THE FACTS IN O UR EARLIER PARAS. 2. IN REPLY TO PARA 5.2.1 WE WOULD LIKE TO HUMBLY STATE THAT THE AO DOES NOT TAKE INTO CONSIDERATION THAT THAT 8 OUT OF THE 10 EMPLOYEES WHO WERE EMPLOYED AT PARWANOO MANUFACTURING UNIT BELONGED TO HIMACHAL AN D THE SAME NUMBER WAS APPROVED BY THE MEMBER SECRETARY OF THE HPSIDC. (AN NEXURE - PAGE 18-20). ALSO HE DID NOT AGREE THAT THE PF AND ESI CONTRIBUT IONS ARE CENTRALIZED AND THESE PAYMENTS EFFECTED FROM HEAD OFFICE LEVEL. THE UNDERSTANDING OF THE BUSINESS NEEDS TO BE THERE FOR THE AO TO PASS AN ORDER WHICH UNFORTUNATELY IS MISSING. WE HAD REPEATEDLY TOLD THE AO THAT EVEN TH OUGH THE VALUE IS LARGE WE DON'T NEED MORE PEOPLE TO DO THIS JOB. IN INFORMATION TECHNOLOGY AND ESPECIAL LY IN HARDWARE MANUFACTURING A SMALL CHIP CAN BE THE GAME CHANGER AND OF VERY HIGH VALUE. HE FAILED TO NOTE THAT THE CONTRACT WORKERS WERE TEMPORARY IN NA TURE AND THEY WERE UTILIZED FOR INCIDENTAL DOMESTIC PURP OSE AND THERE WAS NO NEED TO DEDUCT PF AND ESI FOR THEM AS PER CONCERNED ACT'S. WE HAVE PROVIDED THE PF ACCOUNTS FOR THE 10 EMPLOYEE'S WHO WERE WORKING FOR US IN PARWANOO. SIN CE THE AO IS LOOKING AT IT WITH A CLOSED MIND SET THESE DETAILS HAVE NOT BEEN APPRECIATED BY HIM. U/S 2(12) OF THE ESI ACT IS APPLICABLE TO NONSEASONAL FACTORIES EMPLOYING 10 OR MORE PERSONS. THE EXISTING WAGE LIMIT FOR COVER AGE IS RS.15.000/- (W.E.F 01.05.2010. PREVIOUSLY IT IS RS. 7.500/-) AS PER THE PF ACT. IT IS ONLY APPLICABLE FOR THE ESTABLISHMENT EMPLOYING 20 OR MORE PERSONS. FROM THE ABOVE PROVISIONS OF BOTH ESI AND PF ACT, IT IS VERY CLEAR AS FOR AS THE HP UNIT IS CONCERNED, IT IS NOT NECESSARY TO DEDUCT EVEN FOR THE PERMANEN T EMPLOYEES OF M/S.GEMINI COMMUNICATION LTD 10 THE HP UNIT. BECAUSE, THEIR MINIMUM MONTHLY SALARY IS ABOVE THE LIMIT SPECIFIED AND THE NUMBER OF EMPLOYEES OF THE ESTABLISHMENT IS BELOW 20, SPECIFIED IN PF ACT. 3. IN REPLY TO PARA 5.2.2 RIGHT FROM THE BEGINNING ALL THE AO'S WHO HAVE LOOK ED INTO OUR PAPERS HAVE HAD A CLOSED MIND WHILE LOOKING INTO THE FACTS. IT IS AMP LY CLEAR FROM THE AO'S STATEMENT THAT HE HAS GOT A DOUBT ON HOW SO LITTLE PEOPLE CAN MANUFACTURE ARD ALSO EQUATES THE REVENUES OF OTHER DIVISIONS AND GEOGRAPHIES. WE WOULD LIKE TO GIVE A SMALL EXAMPLE TO CLEAR THIS DOUBT. LET'S CONSIDER HCL OR WIPRD WHICH MANUFACTURES COMPUTER A ND OTHER ELECTRONIC GOODS. THE FACTORY EMPLOYEES ONLY A SMALL PERCENTAGE OF THE PEOPLE FOR MANUFACTURING WHILE MOST OF THE OTHERS WHO ARE SPREAD ACROSS INDIA DO THE SELLING AND MAINTENANCE JOB. THE REVENUE FOR A IT INDUSTRY CANNOT BE RELATED TO THE NUMBER OF PEOPLE WHO HAVE BEEN EMPLOYED. WE DON'T UNDERSTAND HOW THE AD IS RELATING REVENUE TO THE NUMBER OF PEOPLE WHO HAVE BEEN IN MANUFACTURING IN IT HARDWARE. TODAY HCL IS MORE THA N A $ 4 BILLION COMPANY AND ITS HARDWARE SALES IS LESS THAN 10% FROM ITS MA NUFACTURING UNIT. THE AD FAILS TO NOTE THAT THE HP UNIT TURNOVER OF RS. 52. 00 CRORES WAS CONSISTING OF MATERIALS AND PRE DESIGNED ACCESSORIES WORTH OF RS.42.70 CRORES, THE VALUE ADDITION PART IS ONLY RS.9.30 CRORES, FOR THAT THE SALARY FOR THE 10 EMPLOYEES FOR 7-MONTHS FROM THE DATE OF COMMENCEMENT OF PRODUCTION IS ONLY 14.59 LACS. BUT FOR THE OTHER 6-BRANCHES CONCERNED IT IS MAINLY CON SISTING OF FIELD ASSISTANTS FOR REGULAR SERVICE, MARKETING, OFFICE AND ADMINISTRATI VE STAFFS WHICH DEFINITELY REQUIRES A MAXIMUM NUMBER OF EMPLOYEES INCURRING HUGE SALARY. MOST PART OF THE RECEIPTS IS BEING SPENT AS SALARY. SO COMPARISON IN THIS ANGLE IS NOT AGREEABLE. 4. IN REPLY TO PARA 5.3.1 TO PARA 5.3.3 WE WOULD LIKE TO STATE THAT THE MINIMUM ELECTRICITY CHARGE FOR THE TURNOVER OF RS.52 CRORES. AS ALREADY EXPLAINED THE USE OF ELECTRICITY IS ONLY FOR TESTING OF THE PRODUCT IN THE FINAL STAGE OF MANUFACTURING AND RS. 79,000/- WAS ONLY FOR 7-MONTHS. THE COMPARI SON OF ELECTRICITY CHARGES M/S.GEMINI COMMUNICATION LTD 11 WITH RS.52 CRORES TURNOVER OF NETWORKING BASED PRODUCTS IS NOT JUSTIFIABLE. ALSO AS EARLIER MENTIONED MORE THAN RS.42 CRS OF THE RS.52 CRS TURN OVER WAS BOUGHT OUT ITEMS AND HENCE IT IS UNFORTUNATE THAT T HE AD IS UNABLE TO UNDERSTAND THE EFFECTIVE LOAD THAT WILL BE REQUIRED TO MANUFACTURE AND PUT TOGETHER A FULLY FUNCTIONAL PRODUCT IS LOW AND NOT VERY HIGH. WE WOULD ONLY REQUEST THE DEPARTMENT TO UNDERSTAND THE NATURE OF BUSINESS AND WHILE SUCH PRODUCTS CAN BE MANUFACTURED AT HOME ITSELF WITHOUT MUCH OF SPEND ON ELECTRICITY IT IS BUT OBVIOUS THAT THE CHARGES OF ELECTRICITY WILL BE LOW. 5. IN REPLY TO PARA 5.4 WE STRONGLY OBJECT TO CERTAIN CONCLUSIONS THAT THE AD IS MAKING ON RELATING THE PLACE OF PURCHASE TO THE END USER LOCATIONS. WE WOULD LIKE TO STATE THAT WE HAD GIVEN ALL THE DOCUMENTATI ON IN THIS REGARD AND IT WAS NOT PROPERLY CONSIDERED. ALL DELIVERY CHALLANS HAVE BEEN HANDED OVER TO THE AO BEFORE HE HAD MADE THE ORDER. WE WOULD LIKE TO SUBMIT THAT THE PURCHASES WERE MADE BY THE APPELLANT WAS ONLY RAW MATERIALS A ND NOT USABLE AS FINAL PRODUCT. FOR EXAMPLE APPELLANT PROCURED PLAIN CLOTH ; IT IS NOT WEARABLE, AFTER STITCHING WITH BUTTON AND THREADS ETC THE CLOTH BEC OME WEARABLE ONE. LIKE WISE THE APPELLANT DID MANUFACTURING WITH ALL THE ACCESS ORIES AND ALSO WITH THE PRE DESIGNED MATERIALS ONLY THEN THE PRODUCT BECOMES A NEW AND COMMERCIALLY SALABLE PRODUCT. MERE TRADING IS NOT POSSIBLE ON TH E PROCURED RAW MATERIALS. THE PRODUCT SUPPLIED TO THE END CLIENT IS VASTLY DI FFERENT FROM THE PRODUCT BOUGHT OUT FROM THE VENDORS. IN THE INTEREST OF SAVING COST FOR OUR COMPANY WE HAD REQUESTED ALL THE VENDORS WHO WERE GIVING US PR ODUCTS TO THE TUNE OF MORE THAN RS.42 CRS TO SHIP THE MATERIALS TO OUR MANUFACTURING UNIT AT HP AND SINCE IT DOES NOT TAKE MUCH TIME TO MANUFACTURE OUR DESIG N IN TO THE PRODUCTS SUPPLIED BY THE VENDOR THE VENDOR IN THE SAME TRANS PORT WAS ASKED TO DELIVER THE MATERIALS TILL THE END CUSTOMER LOCATION. THIS SAVED US TRANSPORTATION COST AND A LOT OF OTHER FORMALITIES WHEN IT CAME TO TRANSPORTATION. I T IS IMPORTANT TO NOTE THAT THE TOTAL COST OF PURCHASE INCLUDES THE TRANSPORTATION COST AS WELL. ALSO IT IS WRONG THAT THE AO STATED THAT TRANSPORTA TION OF THESE MATERIALS FETCH M/S.GEMINI COMMUNICATION LTD 12 HUGE AMOUNT OF TRANSPORT. AS FAR AS THE NETWORKING PRODUCTS ARE CO NCERNED THE VALUE IS HIGH, LOW IN WEIGHT, SMALL IN SIZE. FOR EX AMPLE A CHIP: - MAXIMUM SIZE IS EQUAL TO CELL PHONE BATTERY, VALUE IS RS.20,000/ - OR MORE. TO TRANSPORT 1000 NUMBER OF THIS CHIP, A BRIEF CASE AND A MOTORCYCLE IS MORE THAN ENOUGH, THE VALUE OF THIS MATERIAL COMES TO RS.2,00,00,000/. SO, ASSUMPTION AND SUSPICIONS ARE NOT HAVING ANY BASIS. ALSO THE AD ME NTIONED THAT THERE IS NO MENTIONING OF SHIPPING ADDRESS IN THE PURCHASE INVO ICES. THIS STATEMENT IS DISPROVED BY THE AD HIMSELF WHILE PASSING THE ORDER ULS 143(3) THE AD ENCLOSED SOME PURCHASE INVOICES SUBMITTED BY THE AP PELLANT WHICH ALL HAVE CLEAR CUT DETAILS. 6. IN REPLY TO PARA 5.5.1 IT IS A GENERIC REFERENCE FROM THE AUDITOR BUT HE HAS ALSO PROVIDED FOR 80LC IN WHICH HE IS CLEAR THAT MA NUFACTURING HAS ACTUALLY HAPPENED. THE AD POINTED OUT THAT IN THE P&L ALC OF THE HP UNIT UNDER THE EXPENDITURE HEAD IT WAS MENTIONED THAT 'COST OF MAT ERIALS FOR RESALE'. USING A COMMON WORD IN THE PREPARATION OF ACCOUNTS AND AUDI T REPORTS ARE QUITE NATURAL AND IT WON'T BE HIGHLIGHTED AS MERIT FOR DISALLOWANCE. IF THIS IS CONSIDERED AS MERIT THEN IN THE INCOME TAX RETURN FORM, WHERE IT WAS MENTIONED 'PURCHASES (NET OF REFUNDS AND DUTY OR TAX, IF ANY)' HOW TO CO NSIDER THIS? (WHAT FOR ASSESSEE'S HAVING BUSINESS INCOME WITHOUT PURCHASE). ALSO THIS IS THE FORM FOR ALL TYPES OF ASSESSEE'S WHO ARE DOING TRADING, MANUFACTURING AND SERVICES E TC. 7. IN REPLY TO PARA 5.5.2 WE CAN ONLY STATE THAT THE AD HAS EITHER DELIBERATE LY OR WITH A LACK OF KNOWLEDGE IN THE FIELD THAT WE ARE IN TRIED TO DISPROVE, THERE IS NO MANUFACTURING ONLY TRADING IS DONE AT HP UNIT. FOR THAT, HE ENCLOSED THE PURCHASE BILLS OF UPS AND CD'S AND FLOPPY DISCS. RE GARDING THIS REQUIRED AMOUNT OF EXPLANATION HAS BEEN PROVIDED IN THE EARL IER PARAGRAPHS. WE WOULD ONCE AGAIN STATE THAT THE PURCHASE OF MATERIALS THA T WE DID OUT OF OUR HP UNIT UNDERWENT A SEA CHANGE. IT IS VERY CLEAR THAT COMMERCIALLY DIFF ERENT PRODUCT WHICH COMES OUT OF AN ACTIVITY CAN BE CALLED AS MAN UFACTURE. AFTER PROCESSING DONE BY THE APPELLANT THE PRODUCT BECOMES A DISTINCT ARTICLE AND THE BASIC M/S.GEMINI COMMUNICATION LTD 13 CHARACTER OF THE COMPONENTS CHANGED, ALSO IT BECOME COMMERCIALLY USABLE TO SUIT THE REQUIREMENT OF CUSTOMERS. THE AD WANTS TO LOOK AT IT FROM A ONE SIDED ANGLE ON ONLY THOSE INVOICES IN WHICH WE MAKE LESSE R PROFITS. WE LOOK AT IT FROM A PROJECT PERSPECTIVE AND HENCE INDIVIDUAL PRODUCT VA LUES DO NOT MATTER FOR US. IT IS VERY CLEAR THAT ON THE UPS FRONT WE HAD CHANG ED THE 5 AMPS TO A 15 AMPS SOCKET AND ALSO WE HAD IMPORTED ALL THE SOFTWARE IN TO THE E-PROME THAT WAS DESIGNED AND MANUFACTURED BY US WHICH GAVE THE PRODUCT ITS FINAL SHAPE. 8. IN REPLY TO PARAS 5.6.1 AND 5.6.2 THE AD CONVENIENTLY HIGHLIGHTED SOME PORTION OF THE AUDIT REPORT AND OMITTED TO LOOK IN TO THE O THER AREAS OF THE AUDIT REPORT I.E. IN SI.NO 29 & 30 OF THE AUDIT REPORT IT WAS CLEARLY CERTIFIED BY THE AUDITOR ABOUT THE ELIGIBLE DEDUCTION IN THE FORM ISSUED UNDER RUL E 18888. 9. IN REPLY TO PARA 5.7 THE AD FAILS TO UNDERSTAND THAT A WORD 'SINGLE WINDOW' MEANS ALL UNDER ONE ROOF. IT IS VERY UNFORTUNATE TH AT THE LEARNED AD NOT ABLE TO FIND THE SAME IN THE WEBSITE OF THE HPSIDC ALSO RAI SED THIS AS A FAILURE IN THE PART OF THE APPELLANT WHICH IS NOT FAIR. THIS IS A ISSUE OF THE GOVT AND THE AD WANTS US TO CHANGE THE RULES OF THE HP STATE TO SUIT HIS NEE DS. WHEN STATES ATTRACT INVESTMENTS FROM CORPORATE IT IS A KNOWN FACT THAT A SINGLE WINDOW CLEARANCE IS GIVEN AND THE SAME WAS GIVEN TO US AS WELL. 10. IN REPLY TO PARA 5.8 IT IS YET ANOTHER INSTANCE WERE THE AD HAS FAILED TO GO THROUGH OUR RECORDS IN FULL AND BASED ON DOUBTS AND WITH A PREFIXED MIND SET HAS ISSUED THE ORDER. WE HAVE RECEIVED THE PERMANEN T REGISTRATION AND HENCE IN THE ADS OWN WORDS SINCE WE HAVE GOT THE PERMANEN T REGISTRATION IT CAN BE INFERRED THAT WE HAVE SATISFIED THE CONDITIONS FOR PROVISIONAL REGISTRATION WHICH IS MANUFACTURING THE GOVT HAS ISSUED THE PERMANENT REGISTRATION. 11. IN REPLY TO PARA 5.9.1 TO 5.9.3 THE AD HAS MADE THIS REMARK NOT UNDERSTANDING BUSINESS DYNAMICS. THE SALE IS NOT ME RELY ON THE COMPONENTS PURCHASED DURING THE PERIOD BUT IT COULD INCLUDE ST OCK THAT HAD BEEN THERE PRIOR AS WELL. ALSO WE CONSIDER IT AS PROJECTS AND IN CERTAIN PRODUCTS WE MAKE LESS MARGINS AND COMPENSATE IT WITH OTHERS WERE IN WE HAVE FAR BETTER MARGINS. IT IS M/S.GEMINI COMMUNICATION LTD 14 NOT PROPER TO COMPARE THIS WAY. THE AD CLEARLY IS C ONTRADICTING HIMSELF FROM HIS COMMENTS IN PARA 5.5.2 WERE IN WHEN WE MAKE LESS MARGINS ON MANUFACTURING HE SAYS IT IS TRADING AND WHEN WE MAKE MORE MARGINS HE ALSO SAYS IT IS TRADING. 12. IN REPLY TO PARA 5.10.1 AND 5.10.2 IT WAS FREQUENTLY EXPLAINED BY THE APPELLANT THAT HE WAS NOT RUNNING A SHOWROOM TO KEEP HUGE AMOUNT OF STOCKS IN ITS GODOWN. THE PROCUREMENT OF RAW MATERIALS WAS ON THE BASIS OF PROJECT REQUIREMENT ONLY. BUT FOR THE AD WITH HIS OWN ASSUM PTION AND FINDINGS THAT THERE WAS NO CLOSING STOCK WAS PRESENT AT HP UNIT, HENCE THERE WAS NO MANUFACTURING. ALSO THE AD RAISED A DOUBT ABOUT THE JUST IN TIME PROCUREMENT FOR THE PROJECT. IN THIS PRESENT SOCIO AND ECONOMIC SCENARIO NOTHING IS IMPOSSIBLE AND THE PROCUREMENT OF ANY TYPE OF STOCK IS POSSIBLE WITHIN SOME HOURS IN AND AROUND THE WORLD. THIS KIND OF FINDING S OF THE AD DOES NOT HAVE ANY MERIT. WE UNDERTAKE PROJECTS AND WE ARE NOT DOING RETAIL SALES AT ALL. HENCE THE BASIC MODEL OF BUSINESS IS DIFFERENT FROM THE ONE OUR LEARNED AD'S POINT OF VIEW. IN MANY OF HIS DISCUSSION THE AD HIMSELF CONT RADICTED WITH HIS FINDINGS SUCH AS IN ONE PARAGRAPH HE MENTIONED THAT THERE WAS NO LIST OF PURCHASE ANTI IN ANOTHER HE MENTIONED THAT 'AS PER THE DETAILED LIST OF PURCHASE SUBMITTED BY THE ASSESSEE'. MOST OF THE FINDINGS OF THE AD ARE NOT A VALID ONE AND IT CLEARLY PROVES THE PRE DETERMINED MINDSET. 13. IN REPLY TO PARA 5. 11 IT IS VERY CLEAR THAT WE HAD USED OUR VENDORS TO SEND THE EQUIPEMENTS FROM WERE EVER THEY SELL IT FROM AND DE LIVER IT TO THE CUSTOMER LOCATION. IT WAS STRATEGY TO REDUCE COST IN TRANSPORTATION AND ALSO TO REDUCE BACK OFFICE EXPENSES. 14. IN REPLY TO PARA 5.12.1 AND 5.12.2 THERE IS NO MERIT IN THE AD ASSUMING WISHFULLY THAT THE DETAILS OF A MANUFACTURING UNIT SHOULD BE GIVEN IN THE DIRECTORS REPORL. IT CAN BE SEEN THAT WE HAD MADE PUBLIC ANNOUNCEMENTS ON THIS AND MOST OF THE LEADING DAILIES HAD CARRIED THIS. ALSO TO AL L THE STATUTORY BODIES WE HAD CLEARLY INFORMED AT THE RIGHT TIME AND TAKEN AP PROVAL. M/S.GEMINI COMMUNICATION LTD 15 15. IN REPLY TO PARA 5.13 THE AD FREQUENTLY RAISED DOUBTS ABOUT THAT THE PROCESS OF ASSEMBLING WOULD AMOUNT TO MANUFACTURE OR NOT, I N THIS CONNECTION YOUR HONOR'S KIND ATTENTION IS INVITED TO THE FOLLOWING JUDGMENTS A. CIT, DELHI VS.MLS ORACLE SOFTWARE INDIA LTD (C.A.NO .235 OF 2010 DT:13.01.2010 -SC) B. CRR -MUMBAI VS EMPTEE POLY YARN PVT LTD (C.A.NO. 786 OF 2010 DT:20.01.2010 -SC) C. ITO UDAIPUR VS ARIHANT TILES & MARBLES P LTD (C.A.NO.8036 OF 2009 SC) D. TITANOR COMPONENTS LTD VS. CIT (04.02.2011- DELHC) E. CIT VS. JINDAL PHOT INDUSTRIES I PVT LTD (MAD. HC - 16.02.2006) F. CIT V. SESA GOA LTD (2004) 271 ITR 331 - SC. 16. IN REPLY TO PARA 5.14 WE WOULD ONLY LIKE TO STATE THAT WE HAVE SUBMITTED ALL THE RELEVANT DOCUMENTS AND THAT ALL THE AD'S WHO HAD SE EN THEM HAVE NOT APPLIED THERE MIND AND LOOKED AT IT FROM A CLOSED MIND SET. IT WILL BE PROVED BY THE FACT THAT EVEN AFTER THE DIRECTION ISSUED BY THE HON'BLE HIGH COURL THE AD DID NOT CONCENTRATE IN FINDING THE CORRECT RETURNED INCOME OF THE APPELLANT BUT SIMPLY IMPORLED THE FIGURES FROM HIS PREDECESSORS. 17. IN VIEW OF THE ABOVE SUBMISSION IT IS PRAYED THAT T HE HONBLE CIT(A) MAY KINDLY CANCEL THE ASSESSMENT MADE BY THE ACIT AND R ENDER JUSTICE. 7. THE CIT(A) AFTER CONSIDERING THE SUBMISS IONS OF THE ASSESSEE, HELD AS UNDER: M/S.GEMINI COMMUNICATION LTD 16 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE A ND THE SUBMISSIONS OF THE ID.AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIE D ON BY THE ID.AR AND THE AD. I HAVE ALSO PERUSED THE DETAILS OF DOCUMENT S FILED BY THE APPELLANT IN SUPPORT OF THE CLAIM FOR DEDUCTION U/S 80-IC. THE ISSUE FOR ADJUDICATION IS WHETHER THE APPELLANT IS ELIGIBLE FOR DEDUCTION U/S 80-IC AND IF SO, THE QUANTUM OF SUCH DEDUCTION. BEFORE DECIDING THE FIRS T ISSUE, IT WOULD BE PROPER TO REPRODUCE SECTION 80-IC WHICH READS AS UNDER: 80-IC. (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INC LUDES ANY PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR AN E NTERPRISE FROM ANY BUSINESS REFERRED TO IN SUB-SECTION (2), THERE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED, IN COMP UTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS AND GAINS, AS SPECIFIED IN SUB-SECTION (3). (2) THIS SECTION APPLIES TO ANY UNDERTAKING OR ENTERPRISE,- ( A ) WHICH HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUCE ANY ARTICLE OR THING, NOT BEING ANY ARTICLE OR THING SPECIFIED IN THE THIRTEENTH SCHEDULE, OR WHICH MANUFACTURES OR PRODUCES ANY ART ICLE OR THING, NOT BEING ANY ARTICLE OR THING SPECIFIED IN THE THI RTEENTH SCHEDULE AND UNDERTAKES SUBSTANTIAL EXPANSION DURING THE PER IOD BEGINNING- ( I) ON THE 23RD DAY OF DECEMBER, 2002 AND ENDING BEF ORE THE 1ST DAY OF APRIL, [2007], IN ANY EXPORT PROCESSING ZONE OR INTEGRATED INFRASTRUCTURE DEVELOPMENT CENTRE OR IND USTRIAL GROWTH CENTRE OR INDUSTRIAL ESTATE OR INDUSTRIAL PA RK OR SOFTWARE TECHNOLOGY PARK OR INDUSTRIAL AREA OR THEM E PARK, AS NOTIFIED BY THE BOARD IN ACCORDANCE WITH THE SCH EME FRAMED AND NOTIFIED BY THE CENTRAL GOVERNMENT IN TH IS REGARD, IN THE STATE OF SIKKIM; OR (II) ON THE 7TH DAY OF JANUARY, 2003 AND ENDING BEF ORE THE 1ST DAY OF APRIL, 2012, IN ANY EXPORT PROCESSING ZONE OR IN TEGRATED INFRASTRUCTURE DEVELOPMENT CENTRE OR INDUSTRIAL GRO WTH CENTRE OR INDUSTRIAL ESTATE OR INDUSTRIAL PARK OR SOFTWARE TECHNOLOGY PARK OR INDUSTRIAL AREA OR THEME PARK, AS NOTIFIED BY THE BOARD IN ACCORDANCE WITH THE SCHEME FRAMED AND NOTIFIED B Y THE CENTRAL GOVERNMENT IN THIS REGARD, IN THE STATE OF HIMACHAL PRADESH OR THE STATE OF UTTARANCHAL; OR (III) ON THE 24TH DAY OF DECEMBER, 1997 AND ENDING BEFORE THE 1ST DAY OF APRIL, 2007, IN ANY EXPORT PROCESSING ZONE O R INTEGRATED INFRASTRUCTURE DEVELOPMENT CENTRE OR IND USTRIAL GROWTH CENTRE OR INDUSTRIAL ESTATE OR INDUSTRIAL PA RK OR SOFTWARE TECHNOLOGY PARK OR INDUSTRIAL AREA OR THEM E PARK, AS NOTIFIED BY THE BOARD IN ACCORDANCE WITH THE SCH EME FRAMED AND NOTIFIED BY THE CENTRAL GOVERNMENT IN TH IS REGARD, M/S.GEMINI COMMUNICATION LTD 17 IN ANY OF THE NORTH-EASTERN STATES; ( B) WHICH HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUCE ANY ARTIC LE OR THING, SPECIFIED IN THE FOURTEENTH SCHEDULE OR COMM ENCES ANY OPERATION SPECIFIED IN THAT SCHEDULE, OR WHICH MANU FACTURES OR PRODUCES ANY ARTICLE OR THING, SPECIFIED IN THE FOU RTEENTH SCHEDULE OR COMMENCES ANY OPERATION SPECIFIED IN THAT SCHEDULE AND UNDERTAKES SUBSTANTIAL EXPANSION DURING THE PERIOD BEGINNING- ( I) ON THE 23RD DAY OF DECEMBER, 2002 AND ENDING BEF ORE THE 1ST DAY OF APRIL, [2007], IN THE STATE OF SIKKIM; OR (II) ON THE 7TH DAY OF JANUARY, 2003 AND ENDING BEF ORE THE 1ST DAY OF APRIL, 2012, IN THE STATE OF HIMACHAL PRADESH OR TH E STATE OF UTTARANCHAL; OR (III) ON THE 24TH DAY OF DECEMBER, 1997 AND ENDING BEFORE THE 1ST DAY OF APRIL, 2007, IN ANY OF THE NORTH-EASTERN STA TES. (3) THE DEDUCTION REFERRED TO IN SUB-SECTION (1) SHALL BE- ( I) IN THE CASE OF ANY UNDERTAKING OR ENTERPRISE REF ERRED TO IN SUB-CLAUSES ( I) AND ( III ) OF CLAUSE ( A ) OR SUB-CLAUSES ( I) AND ( III) OF CLAUSE ( B ), OF SUB-SECTION (2), ONE HUNDRED PER CENT OF SUCH PROFITS AND GAINS FOR TEN ASSESSMENT YEARS COMMENCING WITH THE INITIAL ASSESS MENT YEAR; ( II) IN THE CASE OF ANY UNDERTAKING OR ENTERPRISE RE FERRED TO IN SUB-CLAUSE ( II) OF CLAUSE ( A ) OR SUB-ELAUSE ( II) OF CLAUSE ( B), OF SUB-SECTION (2), ONE HUNDRED PER CENT OF SUCH PROFITS AND GAINS FOR FIVE ASSESSMENT YEARS COMMENCING WITH THE INITIAL ASSESSMENT YEAR AND THE REAFTER, TWENTY-FIVE PER CENT (OR THIRTY PER CENT WHERE THE ASSESSEE IS A COMPANY) OF THE PROFITS AND GAINS. (4) THIS SECTION APPLIES TO ANY UNDERTAKING OF ENTE RPRISE WHICH FULFILS ALL THE FOLLOWING CONDITIONS, NAMELY:- ( I) IT IS NOT FORMED BY SPLITTING UP, OR THE RECONST RUCTION, OF A BUSINESS ALREADY IN EXISTENCE: PROVIDED THAT THIS CONDITION SHALL NOT APPLY IN RESPECT OF A N UNDERTAKING WHICH IS FORMED AS A RESULT OF THE RE-ESTABLISHMENT, RECONSTRUCTION OR R EVIVAL BY THE ASSESSEE OF THE BUSINESS OF ANY SUCH UNDERTAKING AS IS REFERRED TO IN SECTION 33B, IN THE CIRCUMSTANCES AND WITHIN THE PERIOD SPECIFIE D IN THAT SECTION; ( II) IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. EXPLANATION. -THE PROVISIONS OF EXPLANATIONS 1 AND 2TO SUB-SECTION (3) OF SECTION 80- FA SHALL APPLY FOR THE PURPOSES OF CLAUSE ( II ) OF THIS SUB-SECTION AS THEY APPLY FOR THE PURPOSES OF CLAUSE ( II) OF THAT SUB-SECTION. ' 6.1 THIS SECTION HAS BEEN INSERTED FROM ASSESSMENT YEAR 2004-05, IN ORDER TO GIVE EFFECT TO NEW PACKAGES OF FISCAL AND NON-FISCAL CONCESSIONS FOR SPECIAL CATEGORY STATES OF HIMACHAL PRADESH, UT TARANCHAL, SIKKIM AND M/S.GEMINI COMMUNICATION LTD 18 NORTH-EASTERN STATES, ANNOUNCED BY THE UNION CABINE T. CONSEQUENT TO THIS, DEDUCTIONS U/S 10C AND 80-1B(4) IS NOT AVAILABLE IN RESPECT OF UNDERTAKING OR ENTERPRISES ELIGIBLE FOR DEDUCTION U NDER THIS SECTION FROM A.Y.2004-05. THE DEDUCTION IS GRANTED BROADLY TO UN DERTAKING OR ENTERPRISE REFERRED TO IN EITHER CLAUSE (A) OR (B) OF SUB-SECTION (2). CLAUSE (A) OF SUB-SEC (2) IS APPLICABLE WHERE THE UNDERTAK ING OR ENTERPRISE IS LOCATED IN A NOTIFIED AREA AND IS ENGAGED IN MANUFA CTURE OR PRODUCTION OF ANY ARTICLE OR THING NOT SPECIFIED IN THE THIRTEENT H SCHEDULE. INDUSTRIAL ESTATES I AREAS IN HIMACHAL PRADESH HAVE BEEN NOTIF IED VIDE S.O.1269(E) DATED 4.11.2003. CLAUSE (B) OF SUBSECTION (2) IS, O N THE OTHER HAND, APPLICABLE WHERE THE UNDERTAKING OR ENTERPRISE IS L OCATED IN ANY OTHER AREA, NOT BEING A NOTIFIED AREA, AND IS ENGAGED IN MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING OR COMMENCES ANY OPERATION, THAT IS SPECIFIED IN THE FOURTEENTH SCHEDULE. THE FOLLOWING PROVISIONS OF SECTION 80-IA ARE APPLICABLE, SO FAR AS MAY BE, TO THE ELIG IBLE UNDERTAKING OR ENTERPRISE UNDER THIS SECTION: (I) DEDUCTION IS TO BE COMPUTED AS IF THE ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME, (II ) DEDUCTION IS AVAILABLE ONLY WHEN THE ACCOUNTS OF THE UNDERTAKING ARE AUDIT ED AND THE AUDIT REPORT IN THE PRESCRIBED FORM IS FURNISHED ALONG WI TH THE RETURN OF INCOME, (III) PROFITS OF THE UNDERTAKING CAN BE RECOMPUTED IN CERTAIN CASES, (IV) NO DEDUCTION AVAILABLE UNDER ANY OTHER PROVISION OF CH APTER VIA (IN RESPECT OF CERTAIN INCOMES), (V) CENTRAL GOVERNMENT MAY WIT HDRAW EXEMPTION BY NOTIFICATION, (VI) BENEFIT OF DEDUCTION IS SWITCHED OVER IN RESPECT OF THE REMAINING PERIOD IN CASE OF AMALGAMATION OR DEMERGE R AND (VII) AUDIT REPORT IS TO BE OBTAINED IN FORM NO.10CCB. 6.2 THE APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SERVICE OF COMMUNICATION AND NETWORKING PRODUCTS MA INLY FOR STATE GOVERNMENT AND CENTRAL GOVERNMENT UNDERTAKINGS SUCH AS TNEB AND BSNL. IT HAS ALSO SUPPLIED ITS PRODUCTS TO OTHER PR IVATE CUSTOMERS ALSO. THE SALES MADE TO THE ABOVE TWO GOVERNMENT UNDERTAK INGS WAS M/S.GEMINI COMMUNICATION LTD 19 RS.37.62 CRORES (TNEB- RS. 35.65 CRORES AND BSNL- R S.1.96 CRORES) OUT OF THE TOTAL SALE OF RS.52.61 CRORES. DURING THE YE AR UNDER CONSIDERATION, THE COMPANY DID PROJECT FOR TAMILNADU ELECTRICITY B OARD FOR CENTRALIZATION OF VARIOUS COLLECTION CENTRES WITH THE ADMINISTRATI VE NETWORK FOR THE WHOLE STATE. FOR THIS PURPOSE, THE APPELLANT PURCHASED AN D IMPORTED PCBS, RAMS, HIGH AND LOW TRANSMISSION WIRELESS ADAPTORS, WIRELESS ANTENNAE COMPONENTS, FLASH RAM SOFTWARE, RED HAT LINUX SOFTW ARE AND OTHER NETWORKING COMPONENTS. USING THESE COMPONENTS, THE COMPANY REDESIGNED, DEVELOPED AND MANUFACTURED A SINGLE PRO DUCT TO SUIT THE REQUIREMENT OF THE PROJECT. THE END PRODUCT WAS A D ISTINCT ARTICLE AND BECAME A MARKETABLE PRODUCT. IN ORDER TO PRODUCE TH E ABOVE PRODUCT, THE APPELLANT GOT PROVISIONAL REGISTRATION FROM HIMACHA L PRADESH STATE INDUSTRIAL DEVELOPMENT CORPORATION (HPSIDC) ON 22.8 .2005 AFTER MAKING THE NECESSARY DEPOSIT. IT STARTED ITS MANUFACTURING I PRODUCTION ACTIVITY FROM A RENTED PREMISES AT MIG-4, SEC-3, PARWANOO, S OLAN DISTRICT, HIMACHAL PRADESH. IT MAY BE STATED THAT THE APPELLA NT SUBSEQUENTLY GOT PERMANENT REGISTRATION FROM HPSIDC ON 12.12.2008. T HE APPELLANT IS ALSO REGISTERED WITH CST AND HPGST AUTHORITIES. IT WAS SUBSEQUENTLY ALLOTTED LAND AT BADDI, DISTRICT SOLAN ON 20.12.200 5. IT TOOK POSSESSION OF THE LAND ON 18.1.2006. IT RECEIVED THE APPROVAL OF THE PLAN TO CONSTRUCT FACTORY ON 9.6.2006. THE APPELLANT RECEIVED POWER R ELEASE CERTIFICATE FOR ITS FACTORY FROM HPSIDC ON 21.1.2007. AFTER INSPECT ION AND FULFILLMENT OF THE TERMS AND CONDITIONS, HPSIDC ISSUED PERMANENT R EGISTRATION CERTIFICATE ON 12.12.2008. THE APPELLANT HAS ALSO R ECEIVED CENTRAL EXCISE REGISTRATION CERTIFICATE ON 25.7.2008 FOR MANUFACTURING OF EXCISABLE GOODS. THE APPELLANT HAS ALSO FILED ANNUAL SALES-TAX RETURN WI TH HPGST ON 29.05.2006. IT ALSO GOT NO DUES CERTIFICATE UP TO 2 010 FROM THE OFFICE OF THE EXCISE AND TAXATION COMMISSIONER AT BADDI. IT W AS ALSO PAYING AMC TO HPSIDC EVEN IN THE YEAR 2010. IT IS CLEAR FROM T HE ABOVE DETAILS THAT M/S.GEMINI COMMUNICATION LTD 20 THE APPELLANT HAD, IN FACT, CARRIED ON ITS BUSINESS OPERATION AT PARWANOO, DIST.SOLAN (H.P.). THE HON'BLE SUPREME COURT IN THE CASE OF BAJAJ TEMPO LTD V. CIT (62 TAXMAN 480) HAS HELD THAT A PROVISIO N IN THE TAXING STATUTE GRANTING INCENTIVES FOR PROMOTING GROWTH AND DEVELO PMENT SHOULD BE CONSTRUED LIBERALLY. SINCE A PROVISION INTENDED FOR PROMOTING ECONOMIC GROWTH HAS TO BE INTERPRETED LIBERALLY, THE RESTRIC TION ON IT TOO HAS TO BE CONSTRUED SO AS TO ADVANCE THE OBJECTIVE OF THE PRO VISION AND NOT TO FRUSTRATE IT. 6.3 THE SECOND ASPECT IS WHETHER THE APPELLANT IS C ARRYING ON 'MANUFACTURING OR PRODUCTION' AS REQUIRED U/S 80-IC OF THE ACT. A PERUSAL OF THE VARIOUS PROCESSES DEMONSTRATED BY THE APPELL ANT, AS SUBMITTED BY THE ID.AR (REPRODUCED AT PAGE 4 OF THIS ORDER), SHO WS THAT THE APPELLANT IS CARRYING ON MANUFACTURING ACTIVITIES. THE PROVISION S OF SECTION 80-LC STATES THAT IT APPLIES TO ANY UNDERTAKING OR ENTERP RISE WHICH HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUCE ANY ARTICLE OR THI NG NOT BEING ANY ARTICLE OR THING SPECIFIED IN THIRTEENTH SCHEDULE. ADMITTEDLY, THE APPELLANT HAS COMMISSIONED THE UNIT DURING AUGUST, 2005 AT PA RWANOO. THE FACT THAT THE UNIT WAS STARTED ON THE BASIS OF PROVISION AL REGISTRATION AND NOT ON PERMANENT REGISTRATION WOULD NOT MAKE ANY DIFFER ENCE TO THE CLAIM FOR DEDUCTION U/S 80-LC. THE PROCESS TO GET PERMANENT REGISTRATION TA KES TIME BECAUSE VARIOUS FORMALITIES INCLUDING INSPECTION BY THE AUTHORITIES OF THE DEPARTMENT OF INDUSTRIES, HIMACHAL PRADESH, IS REQU IRED TO BE COMPLETED BEFORE ISSUING THE PERMANENT REGISTRATION CERTIFICA TE. HENCE, ABSENCE OF PERMANENT REGISTRATION WOULD NOT BE A GROUND TO DIS ENTITLE THE APPELLANT FROM THE LEGITIMATE CLAIM OF THE DEDUCTION. BE THAT AS IT MAY, THE APPELLANT ON FULFILLING THE TERMS AND CONDITIONS OF THE DEPAR TMENT OF INDUSTRIES, HIMACHAL PRADESH RECEIVED THE PERMANENT REGISTRATIO N ON 12.12.2008. COMING BACK TO THE MANUFACTURING PROCESS, THE APPEL LANT, AFTER PROCURING M/S.GEMINI COMMUNICATION LTD 21 THE RAW MATERIALS LIKE PCBS, RAM, CABINET, HIGH AND LOW TRANSMISSION WIRELESS ADAPTORS AND WIRELESS ANTENNA COMPONENTS E TC., DESIGNED CPU WITHOUT HARD DISK. AN INDEPENDENTLY DESIGNED AND ST RUCTURED STEEL PANEL WAS INBUILT WITH THE CPU. ON THE STRUCTURED STEEL P ANEL, AN EMPTY CHIP CALLED E-PROM WAS FIXED AT THE DESIGNATED PLACE. SU BSEQUENTLY, BASED ON THE REQUIREMENTS OF HIGH OR LOW TRANSMISSION, WI RELESS ADAPTOR WAS BUILT IN ON THE STRUCTURED STEEL PANEL INSIDE THE C PU. A SOFTWARE NAMED RED HAT LINUX SOFTWARE SPECIFICALLY DEVELOPED FOR T HE TNEB PROJECT WAS THEN TRANSFERRED FROM THE MASTER DATA TO THE EMPTY E-PROM CHIP. THIS SOFTWARE LOADED CHIP WAS ONLY ALLOWED TO ACCESS THE FREQUENCY WITH THE CENTRALIZED ADMINISTRATION NETWORK OF THE TNEB AND OTHER CUSTOMERS. DUE TO THESE PROCESSES, A DISTINCT AND DIFFERENT NE W PRODUCT EMERGES TO SUIT THE SPECIFIC REQUIREMENT OF THE CONCERNED CUST OMERS. ALSO THIS INDIGENOUSLY DESIGNED AND MANUFACTURED PRODUCT WOUL D NOT BE AVAILABLE IN THE MARKET TO ANY OTHER PERSON. IT IS THUS CLEAR THAT AFTER SEVERAL PROCESSES AS AFORESAID, MANUFACTURE OF CPU WITHOUT HARD DISK TAKES PLACE. IN OTHER WORDS, IN THE COURSE OF MANUFACTURE , THE RAW MATERIAL/INPUTS USED THEREIN UNDERGO SEVERAL PROCES SES AND A NEW COMMERCIAL PRODUCT COMES INTO EXISTENCE WHICH IS A DISTINCT AND SEPARATE COMMODITY HAVING ITS OWN CHARACTER, USE AND NAME. 6.4 LET US NOW DISCUSS VARIOUS PRECEDENTS AGAINST T HE ABOVE FACTUAL BACKGROUND OF THE APPELLANT. THE HON'BLE SUPREME CO URT IN THE CASE OF INDIA CINE AGENCIES V. CIT, 220 CTR 223 WAS CONSIDE RING DEDUCTION U/S 80-HH AND 80-1 OF THE ACT. IT CONSIDERED THE WORD ' MANUFACTURE' WITH REFERENCE TO BLACK'S LAW DICTIONARY, WEBSTER'S NEW INTERNATIONAL DICTIONARY AND ADVANCE LAW LEXICON (THIRD EDITION) AND HELD THAT THE MOMENT THERE IS A TRANSFORMATION INTO A NEW COMMODI TY KNOWN AS DISTINCT AND SEPARATE COMMODITY HAVING ITS OWN CHARACTER, US E AND NAME, M/S.GEMINI COMMUNICATION LTD 22 WHETHER BE IT THE RESULT OF ONE PROCESS OR SEVERAL PROCESSES, MANUFACTURE TAKES PLACE AND LIABILITY TO DUTY IS ATTRACTED. ETY MOLOGICALLY THE WORD MANUFACTURE PROPERLY CONSTRUED WOULD DOUBTLESS COVE R THE TRANSFORMATION. IT IS A TRANSFORMATION OF MATTER IN TO SOMETHING ELSE AND THAT SOMETHING ELSE IS A QUESTION OF DEGREE, WHETHE R THAT SOMETHING ELSE IS A DIFFERENT COMMERCIAL COMMODITY HAVING ITS DIST INCT CHARACTER, USE AND NAME AND COMMERCIALLY AS SUCH FROM THAT POINT OF VI EW IS A QUESTION DEPENDING UPON THE FACTS AND CIRCUMSTANCES OF THE C ASE [EMPIRE INDUSTRIES LTD V. UOI 1985 (3) SCC 314.]. THE AFORE SAID ASPECTS WERE HIGHLIGHTED IN KORES INDIA LTD V. CCE, 2005 (1) SCC 385 IN THE BACKGROUND OF CENTRAL EXCISE ACT, 1944 AND CENTRAL EXCISE RULES, 1944. THE HON'BLE SUPREME COURT RELYING ON ITS OWN DECISI ONS IN EMPIRE INDUSTRIES AND KORES INDIA (SUPRA) HELD IN THE CASE OF INDIA CINE AGENCIES (SUPRA) THAT CONVERSION OF JUMBO ROLLS OF PHOTOGRAPHIC FILMS INTO SMALL FLATS AND ROLLS IN DESIRED SIZES W OULD AMOUNT TO MANUFACTURE OR PRODUCTION ELIGIBLE FOR BENEFITS U/S 80-HH AND 80-1 OF THE ACT. THE RAW MATERIALS I PRODUCTS USED IN THE COURS E OF MANUFACTURE UNDERGO SEVERAL PROCESS AND A NEW COMMERCIAL PRODUC T COMES INTO EXISTENCE WHICH IS COMMERCIALLY KNOWN AS A DISTINCT AND SEPARATE COMMODITY HAVING ITS OWN CHARACTER, USE AND NAME. I F THE PRODUCT I RAW MATERIAL DOES NOT UNDERGO ANY PROCESS, SUCH A PRODU CT CANNOT BE SOLD IN THE MARKET AS IT IS AND HENCE A NEW AND DISTINCT PR ODUCT COMES INTO EXISTENCE ONLY AFTER UNDERGOING CERTAIN PROCESS AND THEREAFTER ASSUMES A DISTINCT NAME, USE AND CHARACTER. 6.5 WHEN A COMMODITY UNDERGOES A CHANGE AS A RESULT OF SOME OPERATIONS PERFORMED ON IT OR IN REGARD TO IT, SUCH OPERATIONS WOULD AMOUNT TO PROCESSING OF THE COMMODITY. BUT IT IS ON LY WHEN A CHANGE OR A SERIES OF CHANGE TAKES THE COMMODITY TO THE POINT W HERE COMMERCIALLY IT CAN NO LONGER BE REGARDED AS THE ORIGINAL COMMODITY BUT INSTEAD IT IS M/S.GEMINI COMMUNICATION LTD 23 RECOGNIZED AS A NEW DISTINCT ARTICLE THAT A MANUFAC TURE CAN BE SAID TO TAKE PLACE. THE HON'BLE SUPREME COURT IN THE CASE O F TITAN MEDICAL SYSTEMS PVT. LTD V. COMMISSIONER OF CUSTOMS, 2002 ( 11) LCX 0086 HELD THAT THE WORDS 'SUBSTANTIAL MANUFACTURE' APPEAR TO INDICATE THAT THERE NEED NOT NECESSARILY BE ANY MANUFACTURE BUT ANY ACT IVITY, INCLUDING ACTIVITIES LIKE ASSEMBLY WHICH RESULT IN A NEW PROD UCT, WHICH IS COMMERCIALLY A NEW PRODUCT FROM WHAT IS IMPORTED WO ULD BE SUFFICIENT. THE WORDS 'SUBSTANTIAL MANUFACTURE' DO NOT INDICATE IN ANY MANNER THAT SUBSTANTIAL AMOUNT OF COMPONENTS MUST ALSO BE MANUF ACTURED. 6.6 THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. ORACLE SOFTWARE INDIA LTD WAS CONSIDERING WHETHER THE PROC ESS BY WHICH A BLANK COMPACT DISC (CD) IS TRANSFERRED INTO SOFTWARE LOAD ED DISC CONSTITUTES MANUFACTURE OR PROCESSING OF GOODS IN TERMS OF SECT ION 80IA(1). IT WAS OBSERVED THAT IF AN OPERATION I PROCESS RENDERS A C OMMODITY OR ARTICLE FIT FOR USE FOR WHICH IT IS OTHERWISE NOT FIT, THE OPER ATION I PROCESS FALLS WITHIN THE MEANING OF THE WORD 'MANUFACTURE'. FOR THIS, TH E HON'BLE COURT REFERRED THE DECISION IN THE CASE OF UNITED STATES V. INTERNATIONAL PAINT CO., REPORTED IN 35 C.C.P.A. 87, C.A.D. 76. IT ALSO REFERRED TO THE DECISION OF THE SUPREME COURT IN CASE OF GRAMOPHONE CO OF IN DIA LTD V. COLLECTOR OF CUSTOMS, CALCUTTA, 114 ELT 770. IN THAT CASE, TH E QUESTION WHICH AROSE FOR DETERMINATION WAS WHETHER RECORDING OF AU DIO CASSETTES ON DUPLICATING MUSIC SYSTEM AMOUNTS TO MANUFACTURE. TH E ANSWER WAS IN THE AFFIRMATIVE. IT WAS HELD THAT A BLANK AUDIO CAS SETTE IS DISTINCT AND DIFFERENT FROM A PRE-RECORDED AUDIO CASSETTE AND THE TWO HAVE DIFFERENT USE AND NAME. IN THE PRESENT CASE ALSO, THE FINAL P RODUCT IS DIFFERENT FROM THE VARIOUS RAW MATERIALS OR PRODUCTS USED TO PRODU CE THE SAME. AFTER PROCURING VARIOUS RAW MATERIALS LIKE PCBS, RAM, CAB INET, HIGH AND LOW M/S.GEMINI COMMUNICATION LTD 24 TRANSMISSION WIRELESS ADAPTORS AND WIRELESS ANTENNA E COMPONENTS ETC, THE APPELLANT DESIGNS CPU WITHOUT HARD DISK WHICH I S A DISTINCT AND DIFFERENT NEW PRODUCT FROM THE RAW MATERIALS USED T O PRODUCE IT. 6.7 THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. M.R. GOPAL (58 ITR 598) HELD THAT CONVERSION OF BOULDERS INTO SMALL STONES IS A MANUFACTURING PROCESS AND AN ASSESSEE ENGAGED IN SU CH PROCESS IS ENTITLED TO DEDUCTION. THE HON'BLE HP HIGH COURT IN THE CASE OF CIT V. JANAK RAJ BANSAL (229 CTR 89) HELD THAT CONVERTING LIMESTONE INTO LIMESTONE POWDER IS A MANUFACTURING ACTIVITY FOR TH E PURPOSE OF DEDUCTION U/S 80-IA I 80-IB. THE HON'BLE SUPREME COURT IN THE CAS E OF ITO V. ARIHANT TILES AND MARBLES PVT.LTD (186 TAXMAN 439) HELD THAT CONVERSION OF MARBLE BLOCKS INTO SLABS AND TILES AND POLISHING IS MANUFACTURE. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. JAM AL PHOTO INDUSTRIES (I) (P) LTD, 203 CTR 256 I 205 CTR 427 HELD THAT PR OCESSING OF FILM AND PRINTING PHOTOGRAPHS FROM NEGATIVES AMOUNTS TO A MA NUFACTURING ACTIVITY. PRINTING OF PAPER LABELS CONSTITUTES MANUFACTURING SO AS TO ENTITLE ASSESSEE ENGAGED IN SUCH ACTIVITY TO DEDUCTION U/S 80-IA, AS HELD BY THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. BAL AJI HOTELS & ENTERPRISES LTD (311 ITR 389). 6.8 THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF C IT V. TATA LOCOMOTIVE AND ENGINEERING CO.LTD (86 ITR 325) HELD THAT. BOTH THE WORDS 'MANUFACTURE' AND 'PRODUCE' MEAN BRINGING INT O EXISTENCE OF SOMETHING WHICH IS DIFFERENT FROM ITS .COMPONENTS. THUS, ASSEMBLING OF AUTOMOTIVE BUS I TRUCK CHASSIS FROM IMPORTED PARTS IN A KNOCKED DOWN CONDITION WOULD GIVE RISE TO AN ARTICLE WHICH IS TO TALLY DIFFERENT FROM THE PARTS. THIS IS SO EVEN THOUGH THE COMPONENT PARTS F ROM WHICH THE AUTOMOTIVE CHASSIS IS MADE RETAIN THEIR INDIVIDUAL IDENTITY IN THE WHOLE M/S.GEMINI COMMUNICATION LTD 25 ARTICLE WHICH IS THUS MANUFACTURED OR PRODUCED. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. MAHESH CHA NDRA SHARMA (178 TAXMAN 22) HELD THAT WHERE THE ASSESSEE WAS ENGAGED IN MANUFACTURING OF MOTORCYCLE WHEELS BY ASSEMBLING RAW MATERIALS I COMPONENTS, VIZ., RIM, TYRE, TUBE, BEARING, DRUM SPOKE, NIPPLE AND CO LLAR BY CARRYING OUT INTERMITTENT PROCESSED, PROCESS OF ASSEMBLING CARRI ED OUT BY ASSESSEE AMOUNTED TO MANUFACTURE OR PRODUCTION OF AN ARTICLE . THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. JACKSON ENGINEERS LTD (231 CTR 348) HELD THAT ACTIVITY OF ASSEMBLING GENSETS FROM VARIO US COMPONENTS AMOUNTS TO MANUFACTURE OR PRODUCTION OF ANY ARTICL ES OR THINGS. 6.9 IN THE PRESENT CASE ALSO THE FINAL PRODUCT I.E. CPU WITHOUT HARD DISK IS DIFFERENT FROM THE VARIOUS RAW MATERIALS OR PRODUCT S USED TO PRODUCE THE SAME. AFTER PROCURING VARIOUS RAW MATERIALS LIKE PC BS, RAM, CABINET, HIGH AND LOW TRANSMISSION WIRELESS ADAPTORS AND WIR ELESS ANTENNAE COMPONENTS ETC, THE APPELLANT DESIGNS CPU WITHOUT H ARD DISK WHICH IS A DIFFERENT AND NEW PRODUCT FROM THE RAW MATERIALS US ED TO PRODUCE IT. FOLLOWING THE RATIO OF THE DECISIONS OF THE HON'BLE SUPREME COURT AND VARIOUS HIGH COURTS CITED SUPRA, I AM OF THE CONSID ERED OPINION THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND PRODUCTION OF ARTICLE SPECIFIED IN SECTION 80-IC AND IS, THEREFOR E, ENTITLED FOR BENEFITS OF SECTION 80-IC OF THE ACT. THE SAME IS ALLOWED SUBJECT TO THE FOLLOWING DISCUSSION AND ADJUSTMENTS: 6.10 IT IS SEEN FROM THE DETAILS SUBMITTED BY THE APPELLANT THAT THE TURNOVER OF THE PARWANOOUNIT INCLUDES SALE OF ARTIC LES WHICH INVOLVES COMPLETE MANUFACTURING PROCESS AS WELL AS SOME OTHE R ITEMS WHICH DO NOT REQUIRE ANY MANUFACTURING PROCESS. FROM THE DET AILS, IT IS FOUND THAT THE TURNOVER OF THE ITEMS WHICH HAS BEEN MANUFACTUR ED AT THE PARWANOO UNIT AMOUNTS TO RS.41, 15,48,964/-INCLUDING SALE OF RS.35,65,40,978/- AND RS.1,96,83,582/- TO TNEB AND BSNL, ORISSA RESPE CTIVELY. THE M/S.GEMINI COMMUNICATION LTD 26 TURNOVER OF VARIOUS ITEMS WHICH REALLY DO NOT INVOL VE MANUFACTURING PROCESS WAS RS.11,45,80,6891-. SUCH PRODUCTS ARE CD S, FLOPPY DISK, PRINTERS, RIBBONS, TABLES, DATA CARDS, UPS ETC. THE ABOVE PRODUCTS, FROM WHATEVER ANGLE ONE MAY LOOK AT, CANNOT BE CONSIDERE D AS PART OF ANY MANUFACTURING OR PRODUCTION ELIGIBLE FOR DEDUCTION ULS 80-IC. THE AO IN THE ASSESSMENT ORDER HAD ALSO MENTIONED SOME EXAMPL ES AT PARA 5.5.2. THE MAIN CLIENTS WITH WHOM THE APPELLANT HAS ONLY T RADED IN GOODS WERE MIS MANTRA CYBER TECH, MIS. TERA SOFTWARE AND MIS. EVERONN SYSTEM INDIA LTD AMOUNTING TO RS.3,87,45,9001-, RS.2,46,74 ,2501- AND RS.4,72,03,121/RESPECTIVELY. THE PROFIT MARGIN, AS ADMITTED BY THE ID. AR, IN RESPECT OF THE GOODS SOLD TO TERA SOFTWARE AND E VERONN SYSTEM INDIA LTD WAS 1.80%. IN RESPECT OF THE OTHER CUSTOMERS, T HE MARGIN WAS 3% BARING ONLY A FEW WHERE IT WAS 2%. HENCE, THE PROFI T ON TRADING IS TAKEN AT 1.80% IN RESPECT OF SALES MADE TO TERA SOFTWARE AND EVERONN SYSTEM INDIA LTD. FOR THE OTHER CUSTOMERS, THE MARGIN IS T AKEN AT 3%. THE TOTAL PROFIT ON SUCH TRADING ITEMS OF RS.11,45,80,689/- WOULD BE RS.25,74,893/-. SINCE THIS PROFIT WAS NOT DERIVED B Y THE APPELLANT FROM MANUFACTURE AND PRODUCTION OF ANY ARTICLE OR THING FROM ITS PARWANOO UNIT, THE APPELLANT IS NOT ELIGIBLE FOR DEDUCTION U/S 80- IC ON SUCH PROFIT. THE AO IS DIRECTED TO REDUCE THE SAME FROM THE QUANTUM OF DEDUCTION CLAIMED U/S 80-IC. 6.11 IT IS FURTHER SEEN FROM THE DETAILS FURNISHED BY THE APPELLANT THAT CERTAIN EXPENSES LIKE FREIGHT EXPENSES, SUNDRY EXPE NSES AND DIRECTORS REMUNERATION HAVE NOT AT ALL BEEN ALLOCATED TO PARW ANOO UNIT. . THE ID. AR WAS ASKED TO EXPLAIN AS TO WHY THE EXPENSES HAVE NOT BEEN DEBITED TO THE ACCOUNT OF PARWANOO UNIT. HE HAS GIVEN THE B REAK-UP OF FREIGHT AND SUNDRY EXPENSES AND HAS STATED THAT THE INCIDENTAL / CONTRACT LABOUR PAYMENTS ARE FULLY CHARGED TO THE ACCOUNTS OF ITS D ELHI BRANCH. FURTHER, PRE-OPERATIVE EXPENSES SUCH AS REGISTRATION FEE, IN CORPORATION FEES AND EXPENSES PAID TO HPSIDC ETC HAVE NOT BEEN ACCOUNTED FOR AT PARWANOO M/S.GEMINI COMMUNICATION LTD 27 UNIT, BUT DEBITED TO DELHI BRANCH. 6.12 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSION OF THE ID. AR. IT IS SEEN THAT THE PARWANOO UNIT IS CONTROLLED BY THE DELHI BRANCH OF THE APPELLANT. IN ORDER TO INCREASE THE E XEMPTED PROFIT (DEDUCTION U/S 80-IC), THE APPELLANT HAS DEBITED PA RT OF THE EXPENSES OF PARWANOO UNIT IN THE ACCOUNTS OF DELHI BRANCH. THE INCIDENTAL/CONTRACT LABOUR PAYMENTS OF RS.22,83,782/- AND MISCELLANEOUS EXPENSES OF RS.2,94,884/- PERTAINING TO THE PARWANOO UNIT HAS B EEN DEBITED TO THE DELHI BRANCH. SIMILARLY, INCIDENTAL LABOUR FOR PROJ ECTS AT HYDERABAD AMOUNTING TO RS.9,84.367/- PERTAINS TO THE SALE OF GOODS MANUFACTURED AT PARWANOO UNIT WHICH WAS SUPPLIED TO BSNL, ORISSA. T HESE EXPENSES ARE DIRECTLY RELATED TO THE EXEMPT INCOME. THE AO IS DI RECTED TO REDUCE THE PROFIT OF THE 80-IC UNIT BY THE ABOVE AMOUNTS TOTAL ING TO RS.35,63,033/-. 6.13. IT IS FURTHER SEEN THAT RFID EXPENSES OF RS.1 1,21,074/- HAS BEEN INCLUDED UNDER THE HEAD SUNDRY EXPENSES. THESE PERT AIN TO THE GOODS MANUFACTURED BY THE APPELLANT AT ITS PARWANOO UNIT AND ARE DIRECTLY RELATED TO THE SAID UNIT. THE AO IS ACCORDINGLY DIR ECTED TO REDUCE THE PROFIT OF PARWANOO UNIT BY THE ABOVE AMOUNT. 6. 14. IT IS FURTHER SEEN THAT NO FREIGHT EXPENSES H AS BEEN DEBITED TO PARWANOO UNIT. AS STATED EARLIER, THE FREIGHT CH ARGES OF RS.10,83,241/- PERTAINING TO PARWANOO UNIT HAS BEEN DEBITED TO ITS BRANCH AT DELHI. THE APPELLANT HAS ALSO INCURRED F REIGHT CHARGES OF RS.5,94,813/- AND RS.6,69,439/- IN RESPECT OF ITS O PERATION AT CHENNAI AND COIMBATORE. . SINCE THESE EXPENSES ARE RELATED TO SET UP OF COMMUNICATION AND NETWORKING PRODUCTS OF TNEB, THEY ARE DIRECTLY RELATED TO THE SALE OF ITEMS MANUFACTURED BY THE PA RWANOO UNIT. ACCORDINGLY, THE A.O. IS DIRECTED TO REDUCE FREIGHT EXPENSES OF RS.23,47,493/- FROM THE PROFIT OF PARWANOO UNIT. ,;_.~ M/S.GEMINI COMMUNICATION LTD 28 6.15 THE APPELLANT HAS ALSO NOT ALLOCATED ANY PORTI ON OF THE DIRECTORS REMUNERATION OF RS.17.98 LAKHS TO PARWANOO UNIT. TH E DIRECTORS ARE TAKING DECISION ON ALL CRUCIAL ISSUES FOR ALL UNITS OF THE APPELLANT INCLUDING PARWANOO UNIT. HENCE, IT WOULD BE REASONABLE IF THE ABOVE EXPENDITURE IS ALSO ALLOCATED TO PARWANOO UNIT ON THE RATIO OF TUR NOVER OF THE ABOVE UNIT (RS.52.61 CRORES) TO THE TOTAL TURNOVER RS.126.16 C RORES) OF THE APPELLANT. THE AD IS ACCORDINGLY DIRECTED TO ALLOCATE DIRECTOR S' REMUNERATION OF RS. 7 ,49, 784/- TO PARWANOO UNIT AND REDUCE THE PROFITS OF THE ABOVE UNIT TO THAT EXTENT. 6.16.THE ELECTRICITY CHARGES OF PARWANOO UNIT WAS R S.79,OOO/- ONLY. THE APPELLANT, ON THE OTHER HAND, HAS DEBITED RS.6.71 L AKHS TO THE OTHER UNITS. THE ID.AR EXPLAINED THAT ELECTRICITY IS REQU IRED ONLY FOR TESTING OF THE PRODUCT IN THE FINAL STAGE AND HENCE THE AMOUNT DEBITED IS REASONABLE. THE ID.AR ALSO STATED THAT MOST OPERATI ONS AT PARWANOO UNIT ARE LABOUR ORIENTED AND HAND PROCESSED. THEREFORE, THE POWER CONSUMPTION IS LOW. THE SAME IS CONSIDERED BUT THE EXPLANATION IS NOT ACCEPTABLE BECAUSE THE EXPENSES CLAIMED IS TOO LOW TO ACCEPT IT AS REASONABLE. IT IS THUS CLEAR THAT THE APPELLANT HAS NOT ALLOCATED THE CORRECT EXPENDITURE ON ELECTRICITY, SO AS TO INFLATE THE PR OFIT OF PARWANOO U NIT. IT WOULD BE REASONABLE IF THE ABOVE EXPENSES ARE ALLOC ATED ON THE RATIO OF TURNOVER OF THE EXEMPT UNIT TO TOTAL TURNOVER OF TH E APPELLANT. THE SHARE OF PARWANOO UNIT COMES TO RS.3,12,758/-. T HE AD IS ACCORDINGLY DIRECTED '\ TO REDUCE PROFIT OF PARWANOO UNIT BY RS.3,12,758/-. 6.17. THE APPELLANT HAS DEBITED RENT OF RS.72,OOO/- ONLY TO THE ACCOUNTS OF PARWANOO UNIT. IT WAS FOUND BY THE INSPECTOR OF INCOME-TAX, D/O.DY.DIT(LNV), SHIMLA, ON FIELD ENQUIRY, THAT THE PREMISES AT PARWANOO M/S.GEMINI COMMUNICATION LTD 29 HAD BEEN TAKEN ON RENT @ RS.25,000/- PER MONTH BY T HE APPELLANT FROM ONE MR. VIVEK SAINI. THE TOTAL RENT FOR SEVEN MONTH S WOULD BE RS.1 ,75,000/-. THE APPELLANT HAS NOT DEBITED THE ACTUAL RENT SO AS TO INFLATE THE PROFIT OF PARWANOO UNIT. THE AD IS, THEREFORE, DIRECTED TO REDUCE EXCESS RENT OF RS.1,03,OOO/- FROM THE PROFIT OF PAR WANOO UNIT. IN THE RESULT, THE AO IS DIRECTED TO ALLOW THE DED UCTION CLAIMED BY THE APPELLANT U/S 80-IC AFTER REDUCING THE AMOUNTS DISCUSSED IN PARAS 6.10 TO 6.17 ABOVE. THE GROUND IS PARTLY ALLOWED. AFTER CONSIDERING THE SUBMISSIONS ON ALL THE GROUND S, THE APPEAL IS PARTLY ALLOWED. 8. LD. D.R. VEHEMENTLY ARGUED IN SUPPORT OF THE ORD ER OF THE A.O. HE SUBMITTED THAT THE DECISIONS OF THE APEX COURT IN THE CASE OF U.O.I VS. DELHI CLOTH & GENERAL MILLS CO. LTD. (AI R 1963 SC 791), INDIA HOTELS CO. LTD VS. ITO (245 ITC 538) AND PRAB HAT SOUND STUDIOS VS. ADDL. CCE (107 STC 70) STIPULATES THAT MANUFACTURING IS A PROCESS OR SERIES OF PROCESSES BY WHICH A NEW END PRODUCT IS PRODUCED FROM THE RAW MATERIAL AND WHICH IS ALTOGET HER A DIFFERENT COMMODITY IN ITS PHYSICAL AND CHEMICAL FORM. HE SU BMITTED THAT THE ASSESSEE WAS ONLY DOING ASSEMBLING WORK OF RADIO FREQUENCY IDENTIFICATION DEVICE (RFID) READERS WHICH ARE NET WORK EQUIPMENTS M/S.GEMINI COMMUNICATION LTD 30 FORMING PART OF INFORMATION AND COMMUNICATION TECHN OLOGY INDUSTRY AT PARWANOO UNIT, HIMACHAL PRADESH(H.P.). 9. ON THE OTHER HAND, THE A.R. OF ASSESSEE SUPPORTE D THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE FINISHED PRODUCT MANUFACTURED AT PARWANOO UNIT IN H.P. WAS RADIO FREQUENCY IDENTIFI CATION DEVICE (RFID) READERS, WHICH IS QUITE DISTINCT AND DIFFERE NT FROM THE VARIOUS RAW MATERIALS AND COMPONENTS USED TO MANUFACTURE TH E SAME. THE RAW-MATERIALS OR COMPONENTS WERE PCB'S, RAM, CABINE T, HIGH AND LOW TRANSMISSION WIRELESS ADAPTORS AND WIRELESS ANT ENNA COMPONENTS ETC., RED HAT LINUS SOFTWARE, E-PHOM CH IP. HE ALSO SUBMITTED THAT THE ABOVE IS USED TO RECEIVE THE FRE QUENCY WITH THE CENTRALIZED ADMIN NETWORK OF THE CUSTOMER FOR WHICH THE RAW- MATERIALS CANNOT BE USED. THUS, HE SUBMITTED THAT THERE IS NO ERROR IN THE ORDER OF THE CIT(A). 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD . THE MAIN CONTENTION OF THE D.R BEFORE US IS THAT AS THE PRO CESS INVOLVED IN M/S.GEMINI COMMUNICATION LTD 31 PRODUCING RFID WAS ASSEMBLING OF COMPONENTS OR PAR TS AND THEREFORE, THE ACTIVITY OF THE ASSESSEE WAS MERE LY ASSEMBLING AND CONSEQUENTLY NOT MANUFACTURING, WHICH ENTITLED THE ASSESSEE FOR DEDUCTION/S 80-IC OF THE ACT. WE FIND THAT NO MATE RIAL HAS BEEN BROUGHT BEFORE US TO DISPUTE THE SUBMISSIONS OF THE ASE THAT THE RFID, WHICH IS THE FINISHED PRODUCT OF THE ASSESSEE S INDUSTRIAL UNDERTAKING AT PARWANOO UNIT IN H.P. IS DISTINCT A ND DIFFERENT FROM THE VARIOUS COMPONENTS ON ASSEMBLING OF WHICH THE SAME IS PRODUCED. 11 FURTHER, IT IS ALSO OBSERVED THAT THE D.R CO ULD NOT DISPUTE THE SUBMISSIONS OF THE ASSESSEE THAT THE USE IN WHICH R FID IS USED CANNOT BE UNDERTAKEN BY THE VARIOUS COMPONENTS. WE ARE THEREFORE, OF THE VIEW THAT RFID IS AN ARTICLE OR THING DISTIN CT FROM THE VARIOUS COMPONENTS USED IN PRODUCING THE SAME AND THE COMPO NENTS CANNOT BE USED FOR THE PURPOSE FOR WHICH THE RFID IS USED. THEREFORE, IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT I N THE CASE OF ORACLE SOFTWARE INDIA (SUPRA) WHEREIN IT WAS HELD T HAT IF AN OPERATION / PROCESS RENDERS A COMMODITY OR ARTICLE FIT FOR US E FOR WHICH IT IS M/S.GEMINI COMMUNICATION LTD 32 OTHERWISE NOT FIT, THE OPERATION/ PROCESS FALLS WIT HIN THE MEANING OF THE WORD 'MANUFACTURE'. 12. FURTHER, THE MAIN THRUST OF THE REVENUE IS THAT AS THE PROCESS UNDERTAKEN BY THE ASSESSEE IN ITS INDUSTRIA L UNDERTAKING IS ASSEMBLING AND THEREFORE, IT IS NOT MANUFACTURING, CANNOT BE SUPPORTED IN VIEW OF THE DECISION OF THE HONBLE AL LAHABAD HIGH COURT FIN THE CASE OF CIT VS. UP STATE OF AGRO CORPORATIO N 188 ITR 370 WHEREIN THE ACTIVITY OF ASSEMBLING IMPORTED COMPONE NT PARTS INTO A TRACTOR HAS BEEN HELD TO BE MANUFACTURING. 13. SIMILARLY, RECENTLY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. JACKSON ENGINEERING LTD. [2012] 341 ITR 518(DEL.) HAS ALSO HELD THAT THE ACTIVITY OF ASSEMBLING GEN S ETS FROM VARIOUS COMPONENTS WAS MANUFACTURE. 14. WE FIND THAT NO SPECIFIC ERROR IN THE ORDER O F THE CIT(A) COULD BE POINTED OUT BY THE D.R. IN THE ABSENCE OF ANY SPEC IFIC ERROR BEING POINTED OUT IN THE ORDER OF THE CIT(A), WE DO NOT FIND ANY GOOD AND M/S.GEMINI COMMUNICATION LTD 33 JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF T HE COMMISSIONER OF INCOME TAX(A). IT IS CONFIRMED. THE GROUNDS OF APP EAL OF REVENUE ARE DISMISSED. 15. IN RESPECT OF CROSS OBJECTION OF THE ASSESSEE , IN ABSENCE OF ANY SERIOUS ARGUMENTS MADE BY THE A.R. ON THE GROUN DS OF CROSS OBJECTION TAKEN BY THE ASSESSEE, THE SAME ARE DISMI SSED. 16. IN THE RESULT, THE APPEALS OF REVENUE AS WEL L THE C.O. OF ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON FRIDAY , THE 9 TH NOVEMBER, 2012 AT CHENNAI. SD/- SD/- (S.S.GODARA) (N.S.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 9 TH NOVEMBER, 2012. K S SUNDARAM. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE