M/s Laila Nutraceuticals, Vijayawada V. The ACIT, Circle-2(1), Vijayawada, Vijayawada

ITA 400/VIZ/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80209 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 07-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 22-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K V N CHARYA
• Keywords: Difference of opinion; Change of opinion; Reassessment proceedings
• Section: 143(3); 133A; 133(6); 10B; 147; 148

Judgement Text

1 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER SL.NO. ITA NO. AY APPELLANT RESPONDENT 1 398/V12 2006-07 LAILA NUTRACEUTICALS, VIJAYAWADA PAN AACFL 3855A ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 2(1), VIJAYAWADA 2 399/V/12 2007-08 -DO- -DO- 3 400/V/12 2008-09 -DO- -DO- 4 401/V/12 2009-10 -DO- -DO- 5 462/V/12 2006-07 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2(1), VIJAYAWADA LAILA NUTRACEUTICALS, VIJAYAWADA PAN AACFL 3855A 6 463/V/12 2007-08 -DO- -DO- 7 464/V/12 2008-09 -DO- -DO- 8 465/V/12 2009-10 -DO- -DO- AND SL.NO. C.O. AY CROSS OBJECTOR RESPONDENT 9 7/V/13 (IN ITA NO. 462/V/12 2006-07 LAILA NUTRACEUTICALS, VIJAYAWADA PAN AACFL 3855A DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2(1), VIJAYAWADA 10 8/V/13 (IN ITA NO. 463/V/12 -DO- -DO- -DO- 11 9/V/13 (IN ITA NO. 464/V/12 -DO- -DO- -DO- 12 10/V/13 (IN ITA NO. 465/V/12 -DO- -DO- -DO- ASSESSEE BY : SHRI G.V.N. HARI REVENUE BY : SHRI K.V.N. CHARYA DATE OF HEARING : 09-07-2014 DATE OF PRONOUNCEMENT : 30-07-2014 2 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA O R D E R PER BENCH.: THESE ARE THE CROSS APPEALS DIRECTED AGAINST DIFFER ENT ORDERS OF THE CIT(A) FOR THE ASSESSMENT YEARS 2006-07 TO 2009 -10. THE ASSESSEE ALSO FILED CROSS OBJECTIONS FOR ALL THE ASSESSMENT YEARS UNDER CONSIDERATION. AS THE ISSUES ARE IDENTICAL IN THESE APPEALS AND C.OS., THE SAME WERE CLUBBED AND HEARD TOGETHER AND, THERE FORE, THESE APPEALS AND C.OS. ARE DISPOSED OF BY WAY OF THIS CO MMON ORDER FOR THE SAKE OF CONVENIENCE. 2. TO DISPOSE OF THESE APPEALS, WE REFER TO THE FAC TS FROM AY 2006- 07 IN ITA NO. 398/V/12. BRIEFLY THE FACTS OF THE CA SE ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM AND 100% EXPORT ORI ENTED UNDERTAKING (EOU), ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADE OF BIOLOGICAL PRODUCTS, PHARMACEUTICALS, AYURVEDIC PRO DUCTS AND HERBAL EXTRACTS. THE ORIGINAL ASSESSMENT FOR AY 2006-07 WA S COMPLETED ON 17/12/2008, ALLOWING DEDUCTION U/S 10B OF THE ACT. SUBSEQUENTLY, SURVEY OPERATION U/S 133A OF THE ACT WAS CARRIED OU T BY DY. DIRECTOR OF INCOME TAX (INV.), VIJAYAWADA AND BASED ON THE FIND INGS DURING THE SURVEY, THE ASSESSMENT WAS REOPENED U/S 147 OF THE ACT, AFTER DULY RECORDING THE REASONS THEREFOR. THEREAFTER, THE REA SSESSMENT WAS COMPLETED ON AN INCOME OF RS. 23,03,43,847/- AFTER DENYING THE EXEMPTION CLAIMED U/S 10B OF THE ACT. THE MAIN REAS ONS FOR DENYING DEDUCTION U/S 10B OF THE ACT, WAS THAT A) MACHINERY WAS NOT INSTALLED DURING THE FY 2005-06 RELEVANT TO AY 2006-07, B) AS SOME PART OF THE MANUFACTURING ACTIVITY WAS GIVEN ON JOB WORK TO M/S LAILA IMPEX, THAT THE AO DOUBTED THE CLAIM OF THE ASSESSEE THAT IT IS CARRYING OUT MANUFACTURING ACTIVITY WITHIN THE PREMISES OF THE A SSESSEE AND C) THE ASSESSEE IS NOT CARRYING OUT ANY MANUFACTURING ACTI VITY. 2.1 THE MANUFACTURING PROCESS OF THE APPELLANT FIRM INVOLVES THE FOLLOWING SIX STEPS: STEP 1: PROCESS OF SOLUTION: HERBAL RAW MA TERIALS ARE TAKEN INTO EXTRACTOR, THEN WATER/HYDRO ALCOHOL (WHICH IS REQUIRED FOR 3 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA EXTRACTION) IS ADDED AND THEN THE RAW MATERIALS ARE HEATED IN AT 70 TO 80 DEGREES CENTIGRADE FOR ONE TO ONE AND HALF -HOUR BY USING OF STEAM AND THEN CIRCULATE THE SOLUTION THRO UGH PUMP FOR 2 TO 3 HOURS. STEP 2: PROCESS OF CONCENTRATION: THE SOLUTION AS P ER THE ABOVE PROCESS IS TAKEN INTO THE REACTOR AND MIXED WITH THE REQUIRED CHEMICALS LIKE ACTIVATED CARBON, POTAS SIUM HYDROXIDE, SODIUM HYDROXIDE ETC. THEREAFTER, THE SOLUTION IS FILTERED WITH THE AID OF FILTER TO REMOVE THE HERBAL PARTICLES AND CONCENTRA TE THE FILTRATE BY USING OF VACCUM (REMOVING OF EXCESS WATER, HYDRO ALCOHOL) AND THIS PROCESS IS REPEATED TILL TH ICK PASTE OR RESIDUE IS OBTAINED. STEP 3: PROCESS OF DRYING: THE ABOVE THICK PASTE IS DRIED IN SINPLAST DRIER/SPRAY DRIER. AFTER DRYING, PASTE WILL BECOME SOLID DRY FLAKES. STEP 4: PROCESS OF PULVERIZATION: THE DRIED FLAKES ARE MILLED IN MULTI MILL AND THEREBY IT BECOMES POWDER. STEP 5: PROCESS OF SIEVING: THE MILLED POWDER IS S IEVED ON SIFTER BY USING REQUIRED MESHES TO GET FINE POWDER AS PER REQUIREMENT OF THE CUSTOMERS. THESE PRODUCTS HAVE A SEPARATE NAME AND ENTITY IN THE MARKET. STEP 6: PACKING: THE ABOVE POWDERED EXTRACT IS PACKED INTO AIR TIGHT HOPE CARBOYS HAVING DOUBLE POLYTHENE BAGS IN DIFFERENT SIZES AS PER REQUIREMENT OF THE BUYERS. 2.2 THE APPELLANT FIRM TOOK PERMISSION VIDE LETTER DT.! 4 TH OCTOBER, 2005 TO SEND ITS RAW MATERIAL TO ITS SISTER CONCERN LAILA IMPEX FOR JOB WORK. AS PER CUSTOMS REGULATIONS, SUBCONTRACTING OF BOTH PRODUCTION AND PRODUCTION PROCESSES MAY BE UNDERTAKEN WITHOUT ANY LIMIT THROUGH OTHER EOU. LAILA IMPEX IS ALSO AN EOU AS EVIDENCED BY APP ROVAL LETTER DT,3 RD JUNE, 2005. 2.3 THE DDIT (INV) CONDUCTED A SURVEY AT THE FACTO RY PREMISES ON 17 TH SEPTEMBER, 2009 AND ON EXAMINATION OF THE INFORMATION SUBMITTED 4 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA BY THE APPELLANT FIRM HE NOTICED CERTAIN DISCREPANCIES WITH REGARD TO BILLS FOR FABRICATION CHARGES ISSUED BY THREE CONTRACTORS FOR THE A.Y.2006-07. WHEN THE INSPECTOR OF INCOME TAX WAS SENT FOR ENQUI RY, THE FABRICATORS WERE NOT FOUND AT THE ADDRESSES MENTIONED IN THE BI LLS ISSUED BY THEM. 2.4 FURTHER, DDIT ANALYSED THE INFORMATION SUBMITTE D TO HIM AND FOUND THE FOLLOWING FROM THE INFORMATION FOR THE A.Y.2006-07: A) THAT OUT OF THE MANUFACTURING EXPENSES OF RS.4 ,65,34,414 A SUM OF RS.4,35,04,675 WAS INCURRED BY LAILA IMPEX AND THIS WORKS OUT TO 96.56% OF THE TOTAL MANUFACTURING EXPE NSES AND THAT 90.4% OF THE TOTAL MANUFACTURING EXPENSES IS P AID TO LAILA IMPEX TOWARDS JOB WORK CHARGES. B) OUT OF MANUFACTURING & ESTABLISHMENT EXPENSES OF RS.16,10,643 A SUM OF RS.1,57,715 WAS TOWARDS MONTH LY SALARIES OF THE ASSESSEE FIRM AND THE BALANCE WAS BORNE BY LAILA IMPEX. C) OUT OF POWER & FUEL OF RS.65,28,127 A SUM OF RS.54,95,037 WAS TOWARDS DIESEL FOR GENERATORS AND ONLY THE BALANCE OF RS.10,38,090 WAS TOWARDS POWER BILLS. D) OUT OF THE SIX STAGES, ONLY THE FIRST TWO STAG ES CAN BE CONSIDERED AS MANUFACTURING AND OUT OF THIS STAGE 1 IS CARRIED OUT BY LAILA IMPEX. 2.5 THUS, THE DDIT (INV) WAS OF THE VIEW THAT THE A PPELLANT FIRM IS NOT ENTITLED TO CLAIM EXEMPTION U/S 10B OF THE ACT AND THE SAME THING WAS INFORMED TO THE ASSESSING OFFICER IN HIS REPORT ADDRESSED TO THE ASSESSING OFFICER. 2.6 THE ASSESSING OFFICER FOLLOWED THIS REPORT OF T HE DDIT(INV.) IN HIS ORDER. THE FINDING OF THE DDIT(INV.) BECAME THE FI NDING OF THE AO IN THE ASSESSMENT ORDER. 3. ON APPEAL, THE LEARNED CIT(A) HELD AS FOLLOWS: 1. ON THE ISSUE AS TO WHETHER THE ASSESSEE IS IN PO SSESSION OF THE MACHINERY TO CARRY ON MANUFACTURING ACTIVITI ES DURING THE FY 2005-06 RELEVANT TO AY 2006-07, HE RELIED ON THE CERTIFICATES ISSUED BY ASST. COMMISSIONER OF CUSTOMS AND CENTRAL EXCISE AS WELL AS REGISTRATION/PERMISSIONS FROM THE VARIOUS G OVERNMENTAL AUTHORITIES AND HELD THAT THE ASSESSEE WAS IN POSSE SSION OF MACHINERY AND CARRIED OUT MANUFACTURING ACTIVITY IN FY 2005-06. 5 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 2. ON THE ISSUE OF SUB-CONTRACTING PART OF WORK, TH E LEARNED CIT(A) HELD THAT NOT ONLY MANUFACTURING EXPENSES HA VE TO BE CONSIDERED BY THE AO TO ARRIVE AT THE PERCENTAGE OF OUTSOURCING, BUT, ALL OTHER MANUFACTURING EXPENDITURES LIKE RAW- MATERIAL, CHEMICALS, FUEL, MANUFACTURING ESTABLISHMENT, ETC., HAVE ALSO TO BE CONSIDERED. THUS, ON FACTS HE HELD THAT OUTSOURC ING OF JOB IS ONLY ABOUT 21.27% AND NOT 90% AS HELD BY THE AO. HE REFERRED TO CERTAIN JUDICIAL DECISIONS AND GRANTED RELIEF TO TH E ASSESSEE. 3. THEREAFTER, THE LEARNED CIT(A) ON THE GROUND THA T THE ASSESSEE HAS NOT COMPLETELY PROVED THAT ITS EMPLOYE ES HAVE, IN FACT, SUPERVISED THE JOB WORK, WHICH WAS OFF LOADED , HELD THAT, PROFIT ON THE TURNOVER ATTRIBUTABLE TO JOB WORK I.E . 21.27% OF THE TOTAL TURNOVER SHOULD BE ASCERTAINED AND THAT SUCH PROFITS SHOULD BE EXCLUDED FROM CLAIM OF DEDUCTION U/S 10B OF THE ACT. 4. AGGRIEVED, THE REVENUE IS IN APPEAL ON THE DECIS ION OF THE LEARNED CIT(A) THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10B. THE ASSESSEE IS IN APPEAL AGAINST THE DIRECTION OF THE LEARNED C IT(A) THAT PROFITS ON 21.27% OF THE TOTAL TURNOVER BEING JOB WORK SHOULD BE COMPUTED AND EXCLUDED FROM THE COMPUTATION OF ELIGIBLE PROFIT FO R DEDUCTION U/S 10B. 5. GROUNDS OF APPEAL OF THE REVENUE, WHICH ARE COMM ON, IN ALL ITS APPEALS, ARE EXTRACTED BELOW FOR READY REFERENCE: A. THE CIT(A) ERRED BOTH IN LAW AND IN FACTS OF THE CASE. B. THE ID. CIT(A) HAS ERRED IN ACCEPTING THE CONTENTIO N OF THE ASSESSES BASED ON THE MACHINERY VERIFICATION CERTIFICATE ISSUE BY THE SUPERINTENDENT OF CUSTOMS & CENTRA L EXCISE WHICH LACKS CLARITY AS TO THE NATURE OF MACHINERY USED WHETHER OLD OR NEW AND AS TO ITS SPECIFICATION. C. THE ID. CIT(A) HAS ERRED IN ALLOWING EXEMPTION U/S.LO B EVEN THOUGH THE ASSESSEE HAS FAILED TO FULFIL THE CONDITIONS LA ID DOWN U/S.LOB(2) OF THE ACT. D. THE ID. CIT(A) HAS ERRED IN PRESUMING THAT THE M ACHINERY PURCHASED WAS NEW EVEN THOUGH IT WAS NOT KNOWN WHET HER THE MACHINERY PURCHASED WAS NEW OR OLD. 6 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA E. THE ID. CIT(A) HAS ERRED IN ACCEPTING THE CONTENTIO N OF THE ASSESSEE THAT THE LABOUR CONTRACTORS ARE AVAILABLE AND ACCEPT ING THE CONFIRMATIONS SUBMITTED BY THE LABOUR CONTRACTORS THROU GH THE ASSESSEE, WHO ARE NOT AVAILABLE TO THE DEPARTMEN T FOR SERVING THE NOTICES. F. THE ID. CIT(A) HAS ERRED IN ALLOWING EXEMPTION U/S.L OB BY CONCLUDING THAT MACHINERY WAS INSTALLED EVEN THOUGH THE ASSESSEE HAS NOT INSTALLED MACHINERY FULLY DURING THE FIRST YEAR OF THE MANUFACTURING I.E. AY 2006-07 AND PURCH ASED FURTHER MACHINERY IN THE SUBSEQUENT YEARS. G. THE ID. CIT(A) HAS ERRED IN ACCEPTING THE CONTENTIO N OF THE ASSESSEE THAT SUPERINTENDENT OF CUSTOMS & CENTRAL EXCISE HAS SUBMITTED A REPORT TO VSEZ THAT MACHINERY WAS INSTA LLED EVEN THOUGH VSEZ HAS DENIED THAT NO SUCH REPORT WAS REC EIVED FROM DEPARTMENT OF CUSTOMS & CENTRAL EXCISE. H. THE ID. CIT(A) FAILED TO NOTE THAT OUT OF MANUFA CTURING ESTABLISHMENT EXPENSES OF RS.18,77,6897-, ONLY RS.1,57,715/- WAS INCURRED BY THE ASSESSEE AND THE BALANCE OF RS.16,10,643/- IS BORNE BY M/S.LAILA IMPEX WHICH IS EVIDENT FROM THE DEBIT NOTES RAISED BY THEM. (PARA 2 OF PA GE 3 OF ASSESSMENT ORDER ). I. THE ID. CIT(A) FAILED TO OBSERVE THAT OUT OF RS.10, 38,090/- TOWARDS POWER, THE ASSESSEE HAS ACTUALLY EXPENDED ONLY RS.30/- WHILE THAT INCURRED BY M/S.LAILA IMPE X AS PER THE DEBIT NOTES RAISED BY THEM WAS RS.6,65,873/- AND AN AMOUNT OF RS.3,67,187/- IS PAD BY THE ASSESSEE ON BEHALF OF OTHERS AND NOT FOR ITSELF, (PARA 3 OF PAGE 3 OF ASSESSMENT ORDER) J. THE ID, CIT(A) OUGHT TO HAVE CONSIDERED T HE MANUFACTURING ESTABLISHMENT EXPENSES, DIESEL AND ELECTRICITY EXPENSES AS JOB WORK CHARGES WHILE ARRIVING AT THE % OF JOB WORK CHARGES IN TOTAL MFG. EXPENSES AT 21.27%. K. THE ID. CIT(A) ERRED IN CALCULATING THE % OF JOB WO RK CHARGE IN TOTAL MANUFACTURING EXPENSES AT 21,27% AS AGAINS T 96.56% WORKED OUT BY THE A.O. L. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME OF HEARING. 7 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 6. GROUNDS OF APPEAL OF THE ASSESSEE, WHICH ARE COM MON, IN ALL ITS APPEALS, ARE EXTRACTED BELOW FOR READY REFERENCE: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS), VIJAYAWADA IS CONTRARY TO THE FACTS AND ALSO THE LAW APPLICABLE TO THE FACTS OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD THAT THE NOTICE ISSUED U/S 148 NOT A V ALID NOTICE IN AS MUCH AS THE ASSESSING OFFICER DID NOT FURNISH THE REASONS RECORDED BY HIM DESPITE REPEATED REQUES TS ON THE PART OF THE APPELLANT. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD THAT THE NOTICE ISSUED U/S 148 IS NOT A VALID NOTICE IN AS MUCH AS THE NOTICE WAS ISSUED ON MERE 'CHANGE OF OPINION' MORE SO WHEN THE EXEMPTION U/S 10B WAS ALLOWED IN THE ORIGINAL ASSESSMENT COMPLETED U/ S 143(3) OF THE ACT AFTER MAKING NECESSARY ENQUIRIES. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE QUASHED THE ENTIRE REASSESSMENT PROCEEDINGS AS VOID-AB-INITIO IN AS MUCH AS THE NOTICE ISSUED U/S 148 IS NOT A VALID NOTICE. 5. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED COMM ISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFIED IN RESTRIC TING THE EXEMPTION U/S JOB TO 78.73% OF THE TOTAL CLAIM OF RS.23,03.43,847 MADE BY THE APPELLANT. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFIED IN HOLDING THAT THE APPELLANT COULD NOT P ROVE THAT THE JOB WORK WAS CARRIED OUT UNDER THE SUPERVISION OF THE APPELLANT. 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAVING HELD THAT THAT THE SALARIES OF THE PERSONS SUPERVIS ING THE JOB WORK IS TO BE ALLOWED, COULD NOT HAVE IN THE SA ME BREATH HELD THAT THE JOB WORK WAS NOT SUPERVISED BY THE APPELLANT. 8. IN ANY EVENT, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFIED IN DISALLOWING THE EXEMP TION U/S 1 OB WITH REGARD TO 21.27% OF THE TURNOVER IN AS MUCH AS THERE IS NO PROVISION IN THE ACT TO DIVIDE TO TURNO VER ON SALE OF FINISHED GOODS IN THE MANNER DONE BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS). 9. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAVING HELD THAT THE APPELLANT FULFILLED THE REQUISITE CON DITIONS OF S.10B, OUGHT TO HAVE FULLY ALLOWED THE EXEMPTION U/ S 10B. 8 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 7. THE LEARNED DR SHRI K.V.N. CHARYA REFERRED EXTEN SIVELY TO THE ORDER OF THE AO AND SUBMITTED THAT CONSEQUENT TO SU RVEY, IT CAME TO THE NOTICE OF THE DEPARTMENT THAT MACHINERY WAS NOT INS TALLED DURING FY 2005-06. HE REFERRED TO PARA 3.3 OF THE ASSESSMENT ORDER AND SUBMITTED THAT THE CLAIMING FABRICATION WORK FROM T HREE PARTIES COULD NOT BE CROSS-VERIFIED. NOTICES U/S 133(6) WERE RETU RNED UNSERVED BY THE POSTAL AUTHORITIES. INCOME-TAX INSPECTORS CONDUCTED ENQUIRIES AND IT WAS FOUND THAT NO SUCH ADDRESS IS TRACEABLE. THE AS SESSEE WAS ASKED TO PRODUCE THESE FABRICATORS, WHICH IT FAILED TO DO SO. HE POINTED OUT THAT ALL THE THREE BILLS FROM 1) RAGHAVENDRA ENGG. WORKS, 2) RAMANA ENGG. WORKS, AND 3) PRAVEEN ENGG. WORKS WERE ENTERE D ON 09/03/2006 AND THERE WERE DISCREPANCIES BETWEEN INVOICES AND T HE ENTRIES IN THE BOOKS AS APPEARING IN PAGE 7 OF THE ASSESSMENT ORDE R. REFERRING TO THE INSTALLATION OF MACHINERY ETC. CERTIFICATE ISSUED B Y THE DEPARTMENT OF CUSTOMS AND CENTRAL EXCISE, HE SUBMITTED THAT NATUR E OF THE MACHINERY USED, SPECIFICATION, ETC. WAS NOT STATED THEREIN. H E REFERRED TO THE FACT THAT THE ASSESSEE HAS OUTSOURCED ITS MANUFACTURING ACTIVITY AND ARGUED THAT THE AO HAS COME TO THIS FACTUAL CONCLUSION BAS ED ON THE MATERIAL GATHERED AND THE EVIDENCE PROVED THAT NO MANUFACTUR ING ACTIVITY HAS TAKEN PLACE IN THE ASSESSEES PREMISES FOR THE AY 2 005-06 AS THERE WAS NO MACHINERY. 8. ON THE ISSUE OF JOB WORKS, HE RELIED ON THE ORDE R OF THE AO AND SUBMITTED THAT MAJOR PORTION OF THE WORK IS CARRIED OUT BY JOB WORKS OUTSIDE THE PREMISES OF THE FIRM AND UNDER SUCH CIR CUMSTANCES, IT CANNOT BE SAID THAT THE FIRM UNDERTOOK ANY MANUFACT URING ACTIVITY ON ITS OWN DURING THE YEAR. 9. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI G.V.N. HARI, ON THE OTHER HAND, RELIED HEAVILY ON THE ORDER OF THE LEAR NED CIT(A) AND SUBMITTED THAT A REMAND REPORT WAS CALLED FROM THE AO AND BASED ON VARIOUS UNCONTROVERTED EVIDENCES CONFIRMATIONS/REGI STRATIONS AND CERTIFICATES FROM VARIOUS GOVERNMENTAL AGENCIES, TH E LEARNED CIT(A) HAS RIGHTLY COME TO THE CONCLUSION THAT THE ASSESSE E WAS IN POSSESSION OF THE PLANT AND MACHINERY DURING FY 2005-06 AND TH AT THE ASSESSEE HAS, IN FACT, MANUFACTURED HERBAL PRODUCTS DURING T HAT FY AND, HENCE, 9 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA ITS CLAIM OF DEDUCTION U/S 10B WAS TO BE ALLOWED. H E FILED PAPER BOOKS AND TOOK IN THROUGH SEVERAL PAGES THEREIN TO PROVE HIS POINT ON THE ISSUE OF INSTALLATION OF MACHINERY, COMMENCEMENT OF MANUFACTURING ACTIVITY AND ALSO THE PERCENTAGE OF JOB WORK OFF LO ADED JOB WORK. HE REFERRED TO PARA 4.9 OF THE LEARNED CIT(A)S ORDER AND SUBMITTED THAT PERCENTAGE OF JOB WORK CHARGES IN TOTAL MANUFACTURI NG EXPENSES COMES TO 21.27% AND, THUS, THE CONCLUSION OF THE AO THAT NO MANUFACTURING ACTIVITY WAS CARRIED OUT BY THE ASSESSEE IS FACTUAL LY INCORRECT. 9.1 HE RELIED ON THE FOLLOWING DECISIONS FOR THE PR OPOSITION THAT GETTING A PART OF MANUFACTURING DONE ON JOB WORK BA SIS DOES NOT IN ANY WAY AFFECT THE CLAIM OF DEDUCTION U/S 10B: 1. ITO VS. TECHDRIVE INDIA (P) LTD., [2010] 124 ITD 249 (DEL.) 2. CIT VS. CONTINENTAL ENGINES LTD., [2011] 338 ITR 290 3. TAURUS MERCHANDISING (P) LTD. VS. ITO [2012] 138 ITD 204 (DEL) 10. REFERRING TO THE ISSUE OF WHETHER THERE IS MANU FACTURE, HE SUBMITTED THAT THE AO HAS ACCEPTED STEP 1 & STEP 2, OUT OF SIX STAGES AS MANUFACTURING ACTIVITY. HE ARGUED THAT OTHER 4 S TEPS ARE ALSO TO BE CONSIDERED AS MANUFACTURING PROCESS. 11. ON THE ASSESSEES APPEAL, THE LEARNED COUNSEL S UBMITTED THAT REDUCTION OF THE ELIGIBLE DEDUCTION CLAIM U/S 10B O N THE GROUND THAT PART OF THE WORK IS DONE THROUGH JOB WORKS AND HENCE THE PROFIT ATTRIBUTABLE TO SUCH JOB WORK IS NOT ELIGIBLE FOR DEDUCTION IS N OT PERMISSIBLE. HE RELIED ON THE DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF M/S GEBBS INFOTECH LTD. VIDE ITA NO. 3370 AND OTHERS, DATED 1 3 TH OCTOBER, 2010 FOR THIS PROPOSITION. HE EMPHASISED THAT THE DIRECT ION GIVEN BY THE CIT(A) TO THE AO TO COMPUTE PROFIT ON THE TURNOVER DONE THROUGH JOB WORK AND EXCLUDE THE SAME WHILE COMPUTING THE ELIGI BLE DEDUCTION U/S 10B, IS LEGALLY INCORRECT. ON THE ISSUE OF REOPENI NG, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED HIS CONTENTIONS MADE BEFORE THE CIT(A). 10 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 12. THE LEARNED DR SHRI K.V.N. CHARYA CONTROVERTED THE ARGUMENTS OF THE ASSESSEE AND SUBMITTED THAT PROFITS ATTRIBUT ABLE TO THE TURNOVER DONE THROUGH JOB WORK IS NOT ELIGIBLE FOR GRANT OF DEDUCTION U/S 10B. ON THE ISSUE OF REOPENING, HE RELIED ON THE ORDER OF T HE FIRST APPELLATE AUTHORITY. 13. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND GONE THROUGH THE ORDERS OF THE REVENUE A UTHORITIES AS WELL AS THE CASE LAW CITED. ON A CAREFUL CONSIDERATION O F THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD AS FOLLOWS: 14. ON THE ISSUE WHETHER THE UNIT WAS ACTUALLY IN E XISTENCE IN THE PREVIOUS YEAR RELEVANT TO AY AND WHETHER IT STARTED MANUFACTURE AND PROCESS OF HERBAL EXTRACTS, THE LEARNED CIT(A) AT P ARA 13 TO 13.8 OF HIS ORDER HELD AS FOLLOWS: 13. WHETHER THE UNIT WAS ACTUALLY IN EXISTENCE IN THE PREVIOUS YEAR AND WHETHER IT HAD STARTED MANUFACTURING THE PRODUCTS (HERBAL EXTRACTS)? 13.1 THE APPELLANT HAS BEEN RECOGNIZED AS A 100% EO U AND AUTHORIZED TO MANUFACTURE HERBAL EXTRACTS AS PE R STATUTORY APPROVALS DULY GIVEN BY VSEZ. THE APPELLA NT HAS PURCHASED MACHINERY TO THE TUNE OF RS.1,07,31,4 82/- DURING THE YEAR, WHICH INCLUDES MACHINERY PURCHASES OF RS.99,77,802/- AND LABOUR CHARGES OF RS.7,53,680/-. TO VERIFY THE GENUINENESS OF THE EXPENDITURE CLAIMED O N ACCOUNT OF MACHINERY PURCHASED, THE APPELLANT WAS ASKED TO PRODUCE ORIGINAL BILLS ALONG WITH EVIDENCE OF PA YMENT FOR PURCHASE OF MACHINERY. THE APPELLANT HAD PRODUC ED THE ENTIRE SET OF INVOICES RELATING TO MACHINERY AN D THE RELEVANT PAYMENT DETAILS WHICH SHOW THAT THE MACHIN ERY HAS BEEN PURCHASED ON VARIOUS DATES DURING THE PREV IOUS YEAR AND THE PAYMENTS TOWARDS THE SAME HAVE BEEN DO NE THROUGH BANKING CHANNELS. AN EXTRACT OF MACHINERY PURCHASED, WHERE THE INDIVIDUAL ITEMS EXCEED RS.5 L AKHS EACH DURING THE YEAR ARE GIVEN BELOW : S. NO NAME OF THE VENDOR INV NO DATE AMOUNT (RS.) NAME OF THE BANK CHEQUE NO. 1 SHREYANS METAL (INDIA) 37 16.05.2005 7,50,589.00 HDFC, VJA 448312 2 JAYPEE STEEL 3194 08.06.2005 5 , 57,700.00 HDFC, 448306 3 PADMINI STEELS 7 01.06.2006 1 0 , 64,596.00 HDFC, 448307 4 STEE L FAB 368 23.07.2005 668,304.00 HDFC, 448315 5 S.R.LNDUSTRIES 36 26.03.2006 1,631,250.00 HDFC, 660058 6 S.R. INDUSTRIES 37 28.03.2006 1,181,250.00 HDFC, 555987 11 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 13.2. AS SEEN FROM THE ABOVE, THE MACHINERY HAS BEE N PURCHASED ON VARIOUS DATES, INCLUDING AS EARLY AS O N 16.05.2005. THERE HAVE BEEN REGULAR PURCHASES OF MA CHINERY THROUGHOUT THE YEAR. AS PER THE INVOICES, THERE IS NO INDICATION THAT THE MACHINERY IS A USED OR OLD MACHINERY AND THEREFORE, HAS TO BE PRESUMED ONLY AS A NEW MACHINERY. 13.3. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICE R HAS STATED THAT INFORMATION U/S.133(6) OF THE ACT WAS CALLED F OR BY THE DDIT (INV.), DATED 16.10.2009 FROM 3 LABOUR CONTRACTORS I.E. PRAVEEN ENGINEERING WORKS, RAGHAVENDRA ENGINEERING WORKS AN D RAMANA ENGINEERING WORKS, WHO WERE PARTLY INVOLVED IN FABR ICATION OF MACHINERY. THE INSPECTOR WHO WAS AUTHORIZED TO SERV E THE NOTICES, COULD NOT SERVE THE NOTICE AND GAVE A REPORT THAT T HERE ARE NO SUCH PARTIES AND NO SUCH ADDRESSES. THE APPELLANT HAD CO NTENDED THAT THE DUE TO LONG AFFLUX OF TIME OF ABOUT 4 YEARS, TH E FABRICATORS BEING SMALL CONTRACTORS MIGHT HAVE CLOSED THEIR BUSINESS AND MOVED AWAY. HOWEVER, SUBSEQUENTLY CONFIRMATION LETTERS WE RE FILED BY 3 PERSONS REPRESENTING THE ABOVE LABOUR CONTRACTORS. AN EXTRACT OF LETTER RECEIVED FROM SRI K.L.V.RAMANA, FILED BEFORE THE ASSESSING OFFICER AND PLACED IN THE ASSESSMENT FOLDER IS GIVE N BELOW : 'TO THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE I, VIJAYAWADA. DEAR SIR, SUB : FABRICATION & ERECTION OF SS304, 3KL REACTORS - REG. I AM A QUALIFIED MECHANICAL ENGINEER WITH B.TECH DEGREE. I WORKED AS A MECHANICAL ENGINEER ON SALARY BASIS IN M/S.SRI SRINIVASA FABRICATOR, VIJAYAWADA, AUTONA GAR DURING THE YEAR 1997 - 2003. AFTER CLOSURE OF THE F IRM DUE TO THE EXPIRY OF THE PROPRIETOR, I WANTED TO ESTABLISH MY OWN FABRICATION UNIT BY PROCURING ORDERS. I KEPT AN OFF ICE AT HYDERABAD AND TRIED TO GET THE ORDERS. DURING THIS PERIOD, M/S.LAILA NUTRACEUTICALS GAVE M E AN ORDER TO FABRICATE 2 NOS. OF 3KL REACTORS, 2 NOS. O F CONDENSER SHELLS AND RECEIVERS. THE MATERIAL FOR TH E ABOVE WORK WAS SUPPLIED BY THE CUSTOMER AND I WAS PAID ON LY LABOUR CHARGES FOR THE ABOVE WORK. MY WORK IS TO PROCURE LABOUR AND TO FABRICATE THE EQUIPMENT. ACCORDINGLY, I PROVIDED THE LABOUR AND E XECUTED THE WORK AT THE PREMISES OF THE CUSTOMER M/S.LAILA NUTRACEUTICALS, VJA AND ERECTED THE EQUIPMENT. FOR THE ABOVE WORK, I WAS PAID AN AMOUNT OF RS.2,31,500/- A S LABOUR CHARGES AFTER COMPLETION OF THE WORK. EVENTH OUGH MY OFFICE IS AT JEEDIMETLA, I USED TO WORK AT THE R ESPECTIVE WORK SITES. 12 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA SINCE THE MARGIN OF THE PROFIT WAS NOT ADEQUATE EVE N TO MEET THE LABOUR PAYMENTS AND HEAVY COMPETITION, LAB OUR AND LACK OF ORDERS I COULD NOT ABLE TO WITHSTAND IN THE BUSINESS AND STOPPED MY ACTIVITIES IN THE YEAR 2006 . HENCE, I AM NOT AVAILABLE AT JEEDIMETLA SINCE THAT TIME. PRESENTLY I AM DEALING IN REAL ESTATE TRANSACTIONS AND TOURING AROUND HYDERABAD, VIZAG & VIJAYAWADA. WHAT IS STATED ABOVE IS TRUE TO THE BEST OF MY KNOWLEDGE AND BELIEF. YOURS FAITHFULLY, (K.L.V. RAMANA) 939223913 13.4. FURTHER CONFIRMATIONS WERE FILED BEFORE THE A SSESSING OFFICER BY MR.V.VENKATESWARLU AND MR.G.CHITTIBABU, CONFIRMI NG THEIR ROIE IN INSTALLATION OF MACHINERY IN THE PREMISES OF THE AP PELLANT. THE CONCERNED LETTERS ARE IN THE ASSESSMENT FOLDER. THO UGH, THE PARTIES HAVE CLEARLY CONFIRMED THAT THEY HAVE CARRIED OUT T HE LABOUR WORKS AND ALSO PROVIDED THEIR MOBILE NUMBERS, YET, NO FUR THER ENQUIRIES WERE DONE BY THE ASSESSING OFFICER, WHO MERELY RELI ED ON THE REPORT OF THE DOIT (INV.), WHICH QUESTIONED THE INSTALLATI ON OF MACHINERY ON THE GROUND THAT LETTERS WRITTEN U/S.133(6) OF THE A CT TO THREE OF LABOUR CONTRACTORS, WERE 'RETURNED UNSERVED. 13.5. AS MENTIONED ABOVE, THE PAYMENTS FOR PURCHASE OF MACHINERY HAVE BEEN MADE THROUGH BANKING CHANNELS AND THE MAC HINERY HAVE BEEN PURCHASED AT VARIOUS PERIODS OF TIME, RIGHT FR OM THE FIRST QUARTER OF THE FINANCIAL YEAR. IT IS UNLIKELY THAT THE MACHINERY WHICH HAS BEEN PURCHASED OVER THE PERIOD WOULD HAVE BEEN KEPT UNUTILIZED AND NO ACTIVITY TAKEN UP THEREON. FURTHER, IT SHOUL D BE NOTED THAT CONFIRMATION LETTERS FROM MACHINERY SUPPLIERS HAVE BEEN FILED AND NO DOUBT HAS BEEN EXPRESSED IN THE ASSESSMENT ORDER AS REGARDS THEIR GENUINENESS. IN ABSENCE OF CONTRARY EVIDENCE, IT CA N BE REASONABLY PRESUMED THAT THE MACHINERY HAS BEEN INSTALLED AND UTILIZED DURING THE YEAR. THIS APART, THERE ARE OTHER EVIDENCES, WH ICH CLEARLY GO TO SHOW THAT THE MACHINERY HAS IN FACT BEEN PURCHASED AND UTILIZED DURING THE YEAR, SUCH AS THE FOLLOWING : I. INSPECTION REPORT DATED 06.10.2005 FROM SUPERINT ENDENT OF CENTRAL EXCISE & CUSTOMS, RANGE-LV, VIJAYAWADA, ADDRESSED TO THE DEVELOPMENT COMMISSIONER, VSEZ, CONFIRMING THE INSTALLATION AND UTILIZATION OF THE MACHINERY IN THE PREMISES OF THE APPELLANT AT SHED NOS.6 AND 7, PHASE-ILL, JAWAHAR AUTONAGAR, VIJAYAWADA. AN EXTRAC T OF THE LETTER IS REPRODUCED BELOW ; 13 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 'OFFICE OF THE SUPERINTENDENT OF CENTRAL EXCISE & CUSTOMS, RANGE-IV, C.R. BUILDINGS, M.G.ROAD, VIJAYAWADA-2. O.C. NO. 618/2005 DT. 06/10/2005 TO THE DEVELOPMENT COMMISSIONER, VEPZ DUVVADA, VISAKHAPATNAM SUB: INTIMATION OF INSPECTION REPORT REG. REF.: YOUR L.O.P. NO. 273/EOU/VSEZ/2005, DT. 22/03/ 2005 OF M/S LAILA NUTRACEUTICALS. WITH REFERENCE TO THE ABOVE, IT IS TO INFORM YOU THAT, WE HAVE INSPECTED THE PREMISES OF M/S.LAILA NUTRACEUTICALS, REGISTERED UNDER 100% EXPORT ORIENT ED UNIT SITUATED AT SHED NO.6 AND 7, PHASE III, JAWAHA R AUTONAGAR, VIJAYAWADA-7 AND PHYSICALLY VERIFIED THE ERECTED MACHINERY AT THE TIME OF INSPECTION AS FOLL OWS. 1. REACTORS 3 NOS. 2. FILTERS 3 NOS 3. CALENDRIA 1 NO 4. DRIER 1 NO 5. PULVERIZER 2 NOS. 6. SIEVER 2 NOS ALL THE ABOVE MACHINERY HAS BEEN INSTALLED AND COMMENCED THE MANUFACTURING OPERATIONS ON 05-10-2005. THIS IS FOR YOUR KIND INFORMATION. YOURS FAITHFULLY, SD/- SUPERLNTENDENT CUSTOMS & CENTRAL EXCISE RANGE IV VIJAYA WADA COPY SUBMITTED TO THE ASSISTANT COMMISSIONER, C.EX, VIJAYAWADA FOR INFORMATION. COPY TO M/S.LAI!A NUTRACEUTICALS, SHED NO.6 & 7, JA WAHAR AUTONAGAR, VIJAYAWADA.' 14 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA II. A COPY OF THE ABOVE INSPECTION REPORT WAS SENT TO THE DDIT (INV.), VIJAYAWADA, VIDE LETTER DATED 30.11.2009 FROM ASSISTANT COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX, VIJAYAWADA, CONFIRMING THE ERECTION A ND UTILIZATION OF THE MACHINERY FROM 05.10.2005. III. PERMISSION LETTER FOR MANUFACTURE OF HERBAL EXTRACT S UNDER EOU SCHEME DATED 22/03/2005 FROM DEVELOPMENT COMMISSIONER, VSEZ. IV. CENTRAL EXCISE REGISTRATION CERTIFICATE DATED 06/10/2005. V. INBOND MANUFACTURING SANCTION ORDER DATED 06.10 .2005 FROM THE ASST.COMMISSIONER OF CUSTOMS AND CENTRAL E XCISE, VIJAYAWADA. VI. CERTIFICATE OF IMPORTER-EXPORTER CODE (IEC) NU MBER DATED 09.09,2005 FROM DEVELOPMENT COMMISSIONER, VSE Z. VII. VAT REGISTRATION CERTIFICATE W.E.F. 01.04.200 5 FROM COMMERCIAL TAXES DEPARTMENT, GOVERNMENT OF ANDHRA PRADESH. VIII. LETTER DATED 20.10.2009 FROM ASST. DEVELOPMEN T COMMISSIONER, VSEZ, CERTIFYING THE COMMENCEMENT OF PRODUCTION ON 05.10.2005. AN EXTRACT OF THE SAID LETTER IS GIVEN BELOW : (EMPHASIS OURS) 'GOVERNMENT OF INDIA MINISTRY OF COMMERCE & INDUSTRY OFFICE OF THE DEVELOPMENT COMMISSIONER V/SAKHAPATNAM SPECIAL ECONOMIC ZONE ADMINISTRATIVE BUILDING, DUVVADA V/SAKHAPATNAM - 530 046 A. P. (INDIA) PH: 0891-2587382 FAX:[phone] E-MAIL: [e-mail] NO. 8/EOU/322/VSEZ/2009/0631 DT. 20/10/200 9 TO WHOM IT MAY CONCERN THIS IS TO CERTIFY THAT M/S.LAILA NUTRACEUTICALS, A 100% EXPORT ORIENTED UNIT AT SY NO.484, D.NO.54-11- 9, PHASE-/!/, SHED NO.6 & 7, JAWAHAR AUTHONAGAR, V//AYAWADA-530 007 AND ADDITIONAL LOCATION AT SY. NO.1S1/4B, 181/3, 181/2, JRD TATA INDUSTRIAL ESTATE , KANURU VILLAGE, AUTONAGAR, VL/AYAWADA-7, MANUFACTURERS AND EXPORTERS OF HERBAL EXTRACTS HAD COMMENCED PRODUCTION ON 05.10.2005 AND EFFECTING EXPORTS. 15 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA THIS IS ISSUED TO THE UNIT AS DESIRED TO FURTHER SU BMIT THE SAME TO INCOME TAX AUTHORITIES. SD/- (B. RAJA BABU) ASST. DEVELOPMENT COMMISSIONER (EMPHASIS OURS) TO M/S.LAILA NUTRACEUTICALS, 40-15-14, BRINDAVAN COLONY, VIJAYAWADA-520 010' IX) CERTIFICATE OF LICENCE TO MANUFACTURE AYURVEDIC DRUGS RECEIVED FROM DEPARTMENT OF AYURVEDA, YOGA & NATURO PATHY, UNANI, SIDDHA AND HOMEO (AYUSH), GOVT. OF ANDHRA PRADESH. X) CERTIFICATE OF GOOD MANUFACTURING PRACTICE DATED 31.12.2005 RECEIVED FROM DEPARTMENT OF AYUSH, GOVERNMENT OF ANDHRA PRADESH. XI) ANNUAL PERMISSION DATED 14.10,2005 TO SEND GOO DS TO M/S.LAILA IMPEX FOR JOB WORK RECEIVED FROM ASST. COMMISSIONER OF CUSTOMS & CENTRAL EXCISE, VIJAYAWAD A. XII. ESI INSPECTION REPORT DATED 03.04.2006 CONFIRM ING ENGAGEMENT OF LABOUR IN MANUFACTURING AND SALE OF H ERBAL EXTRACTS AT THE APPELLANT'S UNIT. 13.6. IN VIEW OF THE SUBSTANTIAL EVIDENCES FROM VAR IOUS GOVERNMENTAL DEPARTMENTS ABOVE AND FURTHER IN VIEW OF THE FACT THAT THE CONFIRMATIONS LETTERS HAVE BEEN FILED WITH REGARD TO THE MACHINERY PURCHASED AND THE PAYMENT HAVING BEEN MAD E THROUGH BANKING CHANNELS, I HAVE NO HESITATION IN HOLDING T HAT THE MACHINERY HAS BEEN INSTALLED AND MANUFACTURING ACTIVITY WAS U NDERTAKEN DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07, AT THE PREMISES OF THE APPELLANT . (EMPHASIS OURS) 13.7. FURTHER, ON EXAMINATION OF THE BALANCE SHEETS OF M/S.LAILA IMPEX FOR THE EARLIER YEARS, INCLUDING THE ASSESSME NT YEAR UNDER CONSIDERATION, IT IS SEEN THAT NO PORTION OF THE PL ANT & MACHINERY HAS BEEN TRANSFERRED TO THE APPELLANT'S UNIT OR ANY OTHER UNIT BY WAY OF SALE, TRANSFER OR ANY OTHER MODE. THIS IS EVIDEN CED BY THE FACT THAT THERE ARE NO DELETIONS IN THE PLANT & MACHINER Y ACCOUNT IN THE BALANCE SHEET OF M/S.LAILA IMPEX. IN FACT, THERE IS NO OTHER EVIDENCE WHATSOEVER, WHICH INDICATES THAT THE MACHINERY INST ALLED IN THE APPELLANT'S PREMISES IS NOT A NEW MACHINERY. IN VIE W OF THE SAME, THE ASSESSING OFFICER IS NOT JUSTIFIED IN MAKING CONTEXTUAL REFER ENCE 16 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA TO THE APPELLANT BY HIS OBSERVATION IN PAGE 9 OF THE ASSESSMENT ORDER THAT '100% EOU SHOULD BE A NEW BUSINESS UNIT/ENTITY AND NOT A CLONE OF EXISTING BUSINESS. IN OTHER WORDS, IT SH OULD NOT BE LIKE OLD WINE IN NEW BOTTLE.' 13.8. IN VIEW OF THE ABOVE, I WOULD HOLD THAT THE A PPELLANT HAS INSTALLED MACHINERY AND COMMENCED OPERATION DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07 AND TH E PLANT & MACHINERY INSTALLED IS A NEW PLANT & MACHINERY, WHI CH HAS NOT BEEN HITHERTO UTILIZED. 15. WE AGREE WITH THESE FACTUAL FINDINGS OF THE LEA RNED CIT(A). THESE FACTUAL FINDINGS ARE SO CLEAR THAT WE NEED NO T REPEAT OR FURTHER ELABORATE ON THEM. ANY HOW WE ENUMERATE SOME OF TH EM. A. THERE ARE MANY LICENSES ISSUED BY THE GOVERNMENT AL AUTHORITIES IN THE NAME OF THE ASSESSEE FIRM AND TH E AGENCIES CONFIRM INSTALLATION AND COMMENCEMENT OF MANUFACTURING. B. INSPECTION WAS CONDUCTED BY THE ASST. COMMISSION ER OF CENTRAL EXCISE AND CUSTOMS AND THE MACHINERY IS CERTIFIED AS HAVING BEEN INSTALLED AND MANUFACTURIN G ACTIVITY COMMENCED ON 5 TH OCTOBER, 2005. C. THE DISTRICT DEVELOPMENT COMMISSIONER OF VISAKHAPATNAM SPECIAL ECONOMIC ZONE CERTIFIED COMMENCEMENT OF MANUFACTURING ACTIVITY ON 5/10/2005 . D. OUT OF THE TOTAL MACHINERY OF RS. 1,07,31,482/-, MACHINERY TO THE EXTENT OF RS. 99,77,805/- WAS PURCHASED BY ISSUE OF ACCOUNT PAYEE CHEQUES AND THE AO OR THE DIT(INV.) HAVE NOT RAISED ANY QUESTIONS I N THIS REGARD. E. THE FACTUM OF PURCHASES ARE NOT IN DISPUTE. ON T HE BALANCE OF RS. 7,53,680/- CONFIRMATION LETTERS WERE FILED BEFORE THE DIT(INV.) F. NO PART OF THE MACHINERY FROM THE SISTER CONCERN M/S LAILA IMPEX WAS TRANSFERRED TO THE ASSESSEE AS EVID ENT FROM THE EXAMINATION OF THE BALANCE SHEETS. G. ALL THE SIX STEPS INVOLVED IN THE MANUFACTURE OF HERBAL EXTRACTS AS LISTED OUT AT PARA 3.2 OF THE ASSESSMEN T ORDER AT PAGE 5 & 6 ARE PART OF THE MANUFACTURING 17 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA ACTIVITY. THE CONCLUSION OF THE AO THAT ONLY 2 STE PS INVOLVED IN MANUFACTURING ACTIVITY AND THAT REMAINI NG 4 STAGES I.E. DRYING, POWDERING, SIEVENGE AND PACKAGI NG ARE NOT PART OF MANUFACTURING ACTIVITY, IS NOT FACT UALLY CORRECT. H. THE AO RECORDS THAT ONLY STEP 1 OF THE MANUFACTU RING PROCESS I.E. PROCESS OF SOLUTION, WAS OUTSOURCED AN D THAT STEP 2 TO STEP 6 WERE CARRIED OUT BY THE ASSES SEE ITSELF. IT IS WELL SETTLED THAT WHEN THE ASSESSEE I S ENTITLED TO OUTSOURCES PART OF THE MANUFACTURING ACTIVITY ON JOB WORK BASIS IT IS ELIGIBLE FOR CLAIM OF DEDUCTION U/ S 10B OF THE ACT. 16. THESE FACTUAL RECORDINGS BY THE CIT(A) COULD NO T BE CONTROVERTED BY THE LEARNED DR WITH EVIDENCE. THE INFERENCES DRA WN BY THE DDIT (INV.), WHICH ARE REFLECTED IN THE ASSESSMENT ORDER , ARE DEVOID OF MERIT. THUS, WE UPHOLD THESE FINDINGS OF THE LD. CIT(A) AN D DISMISS GROUNDS NO. A TO G OF THE REVENUE APPEAL. 17. GROUND NOS. H TO K ARE ON THE ISSUE OF OUTSOURC ING OF MANUFACTURING ACTIVITY ON JOB WORK BASIS TO M/S LAI LA IMPEX. 18. THE LEARNED CIT(A) HAS AT PARA 14 TO 14.6 HELD AS FOLLOWS: 14. WHETHER OUTSOURCING PART OF THE PRODUCTION PROC ESS BY WAY OF JOB WORK AMOUNTS TO MANUFACTURE BY THE APPELLA NT? 14.1 PART OF THE WORK COMPRISING OF THE ENTIRE FIRS T STAGE OF MANUFACTURING WAS GIVEN BY WAY OF JOB WORK BY THE A PPELLANT TO M/S LAILA IMPEX. THE AO HAS HELD THAT THE APPELLANT HAS CONTRAVENED THE PROVISIONS OF CLAUSE (A)(II) OF CHA PTER 6.14 OF THE FOREIGN TRADE POLICY, WHICH STATES THAT THE UNITS M AY CONTRACT UP TO 50% OF OVERALL PRODUCTION IN VALUE TERMS IN DOME STIC TARIFF AREA (DATA) WITH PERMISSION OF CUSTOMS AUTHORITIES. THE APPELLANT HAS CONTENDED THAT CLAUSE (B)(III) OF CHA PTER 6.14 OF FTP IS APPLICABLE IN IT'S CASE AND NOT CLAUSE (A)(II) OF F TP AS HELD BY THE ASSESSING OFFICER. 18 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 14.2. CLAUSE (B)(III) OF CHAPTER 6.14 OF FTP READ S AS UNDER : (III) SUBCONTRACTING OF BOTH PRODUCTION AND PRODUC TION PROCESSES MAY ALSO BE UNDERTAKEN WITHOUT ANY LIMIT THROUGH OTHER EOU/EHTP/STP/SEZ/BTP UNITS, ON THE BASIS OF RECORDS MAINTAINED IN UNIT.' 14.3. IN COURSE OF THE APPEAL PROCEEDINGS, THE APPE LLANT HAS FILED CERTIFICATES OF BOTH ITSELF AND M/S.LAILA IMPEX TO THE EFFECT THAT THEY ARE RECOGNIZED AS 100% EOUS AND HAS ALSO STATED THA T COMPLETE RECORDS IN BOTH UNITS REGARDING THE JOB WORK ARE MA INTAINED, DULY VERIFIED BY THE CONCERNED AUTHORITIES OF CENTRAL EX CISE / SEZ, FROM TIME TO TIME. THEREFORE, I AM IN AGREEMENT WITH THE CONTENTION OF THE APPELLANT THAT SUB-CLAUSE (B)(III) OF CHAPTER 6.14 OF FTP ARE APPLICABLE IN IT'S CASE. 14.4. THE MANUFACTURING PROCESS OF THE APPELLANT INVOLVES THE FOLLOWING STAGES: A) PROCESS OF SOLUTION B) PROCESS OF CONCENTRATION C) PROCESS OF DRYING D) PROCESS OF PULVARISATION E) PROCESS OF SIEVING F) PROCESS OF PACKING 14.5. EACH OF THE ABOVE PROCESSES HAVE BEEN DEALT W ITH IN DETAIL IN THE WRITTEN SUBMISSIONS FILED BY THE APPELLANT, WHI CH HAVE BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS. THE FIRST S TAGE OF THE MANUFACTURING PROCESS IS CARRIED OUT BY M/S.LAILA IMPEX, ON JOB WORK BASIS. THE REMAINING 5 STAGES ARE CARRIED OUT BY THE APPELLANT IN IT'S PREMISES. 14.6. UNLESS, ALL THE ACTIVITIES IN THE FIRST 5 STA GES ARE CARRIED OUT, THE MANUFACTURE OF THE FINISHED PRODUCT CANNOT BE S AID TO BE COMPLETED IN THE APPELLANT'S CASE. EVEN THE 6 E STAGE OF PACKING IN THE APPELLANT'S CASE IS A NECESSARY ADJUNCT TO THE PROCESS OF MANUFACTURE, IN AS MUCH, THE PACKING WOULD HAVE TO BE SPECIALIZED KEEPING IN VIEW THE NEED FOR LONG PRESERVATION AND QUALITY REQUIREMENTS IN EXPORT PROCESS AND THE ATTENDANT DISCLOSURES REGARDING PRODUCT AS REQUIRED UNDER LOCAL LAWS IN T HE COUNTRY TO WHICH THE PRODUCT IS EXPORTED . 19. THEREAFTER, AT PARA 14.9 TO 14.11, THE LEARNED CIT( A) HELD AS FOLLOWS: 19 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 14.9. THE ASSESSING OFFICER HAS HELD THAT SUBSTANTI AL PORTION OF THE MANUFACTURING ACTIVITY HAS BEEN OUTSOURCED BY TAKING INTO ACCOUNT THE RATIO OF THE MANUFACTURING EXPENSES AND THE MANUFACTURING ESTABLISHMENT EXPENDITURE TO THE AMOU NT OF JOB WORK OUTSOURCED TO M/S.LAILA IMPEX. ACCORDINGLY, HE HELD THAT AROUND 90.4% OF TOTAL MANUFACTURING EXPENSES HAS BEEN PAID TO M/S.LAILA IMPEX. SIMILARLY, WITH REGARD TO MANUFACT URING ESTABLISHMENT EXPENSES, HE HAS HELD THAT 91.1% HAS BEEN INCURRED BY M/S.LAILA IMPEX. THE EXPENDITURE HAS BE EN SUBSEQUENTLY REIMBURSED TO M/S.LAILA IMPEX. THE APP ELLANT HAS CONTESTED THE FINDINGS STATING THAT THE ACTUAL RATI O REGARDING MANUFACTURING EXPENSES SHOULD BE CALCULATED BASED O N THE COMPLETE EXPENDITURE INVOLVED, INCLUDING RAW MATERI AL AND INCIDENTAL EXPENDITURE AND HAS ACCORDINGLY ARRIVED AT THE FOLLOWING RATIO : (RS. IN CRORES) DESCRIPTION PAID BY APPELLANT DIRECTLY REIMBURSED TO M/S. LAILA IMPEX (JOB WORK) TOTAL RAW MATERIALS 7.72 0.00 7.72 CHEMICALS 6.01 0.00 6.01 PACKING MATERIALS 0.58 0.00 0.58 FUEL AND POWER 0.58 0.07 0.65 MANUFACTURING EXPENSES 4.51 0.14 4.65 MANUFACTURING ESTABLISHMENT 0.16 0.02 0.18 TOTAL 19.56 0.23 19.79 % OF REIMBURSEMENT 1.16% JOB WORK CHARGES INCLUDED IN MFG. EXPENSES 4.21 % OF JOB WORK CHARGES IN TOTAL MFG. EXPENSES 21.27% 14.10. WHILE WORKING OUT PERCENTAGE OF JOB WORK TO MANUFACTURING EXPENSES, IT WOULD BE LOGICAL TO INCL UDE ENTIRE MANUFACTURING COST, COMPRISING OF RAW MATERIALS, CH EMICALS, PACKING MATERIAL, FUEL AND POWER, MANUFACTURING EXP ENSES AND MANUFACTURING ESTABLISHMENT, SINCE ALL THESE EXPEND ITURE CONSTITUTE THE ACTUAL MANUFACTURING EXPENDITURE INCURRED. THIS IS ALL THE MORE REQUIRED SINCE THE ENTIRE RAW MATERIAL , CHEMICALS AND PACKING MATERIAL AND PART OF THE OTHER EXPENDIT URE IS DIRECTLY INCURRED BY THE APPELLANT ITSELF. THE RAW MATERIAL AND CHEMICALS ARE PURCHASED BY THE APPELLANT AND THEN LATER GIVEN FOR JOB WORK. THEREFORE, IT WOULD STAND TO REASON THAT WHILE WORK ING OUT PERCENTAGE OF JOB WORK EXPENDITURE TO TOTAL MANUFAC TURING COST, THE ENTIRE MANUFACTURING COST INCLUDING RAW MATERIA LS, CHEMICALS ETC., SHOULD BE TAKEN INTO ACCOUNT. IN THIS CONTEXT , AS MENTIONED ABOVE, ONLY THE FIRST STAGE OF MANUFACTURING I.E. T HE 'PROCESS OF SOLUTION' HAS BEEN GIVEN ON JOB WORK TO M/S.LAILA I MPEX AND ALL THE OTHER STAGES OF MANUFACTURING PROCESS, INCLUDING THE PROCESS 20 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA OF CONCENTRATION, PROCESS OF DRYING, PROCESS OF PULVERIZING, PROCESS OF SIEVING AND PROCESS OF PACKING ARE DONE BY THE APPELLANT ITSELF. HOWEVER, AS HELD BY VARIOUS JUDIC IAL PRONOUNCEMENTS MENTIONED IN THE PRECEDING PARAGRAPH S, THE APPELLANT IS NOT PRECLUDED FROM CARRYING OUT THE PA RT OF THE STAGE OF MANUFACTURING THROUGH JOB WORK. 14.11. APART FROM THE ABOVE, THE APPELLANT CONTENDE D THAT THE POWER AND FUEL EXPENDITURE HAS LARGER COMPONENT OF DIESEL, WHICH IS MANDATED BY FREQUENT POWER CUTS, NECESSITA TING USE OF GENERATOR FOR MANUFACTURING ACTIVITIES. THOUGH, THE ASSESSING OFFICER HAS COMMENTED ON THIS ISSUE IN THE ASSESSME NT ORDER, HE HAS NOT BROUGHT OUT ANY EVIDENCE TO SHOW THAT GE NERATOR HAS NOT BEEN UTILIZED FOR MANUFACTURING PROCESSES BY TH E APPELLANT. THEREFORE, SINCE THE GENERATOR EXPENDITURE HAS BEEN INCURRED EXCLUSIVELY BY THE APPELLANT AND FORM SIGNIFICANT P ART OF THE TOTAL EXPENDITURE ON POWER AND FUEL, IT CAN BE PRES UMED THAT THE SAME HAS BEEN UTILIZED DURING THE MANUFACTURING ACTIVITY IN THE LAST 5 STAGES CARRIED OUT BY THE APPELLANT. 20. THESE FACTUAL FINDINGS COULD NOT BE CONTROVERTE D BY THE LEARNED DR. IN OUR VIEW, THE AO ERRED IN CONSIDERING ONLY M ANUFACTURING EXPENSES FOR THE PURPOSE OF ARRIVING AT RATIO OF OU TSOURCING BY WAY OF JOB WORK OF MANUFACTURING ACTIVITY. THIS IS ILLOGIC AL. THE LEARNED CIT(A), IN OUR VIEW, HAS CORRECTLY CONSIDERED RAW MATERIAL COST, COST OF CHEMICALS, PACKING MATERIALS, FUEL AND POWER MANUFA CTURING EXPENSES AS WELL AS MANUFACTURING ESTABLISHMENT EXPENSES AS TOTAL COST OF MANUFACTURING AND THE AMOUNT PAID TOWARDS JOB WORKS AS A PERCENTAGE OF THIS EXPENDITURE AND THEREAFTER ARRIVING AT 21.2 7% AS THE PERCENTAGE OF JOB WORK THAT WAS OUT SOURCED FROM THE TOTAL MAN UFACTURING COST. THIS DEMONSTRATES THAT THE CONCLUSION OF THE AO THAT MAJ OR PORTION OF MANUFACTURING ACTIVITY IS NOT CONDUCTED IN THE ASSE SSEE PREMISES, IS FACTUALLY INCORRECT. IN FACT LAILA IMPEX IS ALSO A N EOU. THUS, WE UPHOLD THESE FINDINGS OF THE FIRST APPELLATE AUTHORITY AND DISMISS THE GROUNDS RAISED IN THIS REGARD. 21. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 22. WE NOW TAKE UP THE ASSESSEES APPEALS. 23. ON THE ISSUE OF DIRECTIONS OF THE LEARNED CIT(A ) TO THE AO TO COMPUTE THE PROFIT OF 21.27% OF THE TURNOVER, AS TH E SAME IS 21 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA ATTRIBUTABLE TO THE OUTSOURCING OF MANUFACTURE THRO UGH JOB WORKS AND, THEN TO EXCLUDE SUCH PROFITS FROM THE PROFITS ELIGI BLE FOR DEDUCTION U/S 10B, WE HOLD THAT THE SAME IS CONTRARY TO LAW. NO SUCH EXCLUSION IS CONTEMPLATED IN THE ACT. WE ARE SUPPORTED BY THE P ROPOSITIONS LAID DOWN BY THE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF JT. CIT(OSD) VS M/S GEBBS INFOTECH LTD., VIDE ITA NOS. 3370 & 7738 /MUM/07 AND 7196/MUM/08 FOR AYS 2003-04 TO 2005, ORDER DATED 13 TH OCTOBER, 2010, WHEREIN IT WAS HELD AS FOLLOWS: THE GROUND NO. 3 IS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN NOT UPH OLDING THE ACTION OF THE AO IN NOT ALLOWING DEDUCTION U/S 10B OF THE ACT ON PROPORTIONATE AMOUNT WORKED OUT AT RS. 1,74,34,738/ -. 15. COMING TO GROUND NO. 3, THE AO OBSERVED THAT TH E PAYMENTS OF R.13,69,950/- WAS MADE TO CERTAIN COMPANIES ON A CCOUNT OF JOB WORK AND CONCLUDED THAT AS THE ASSESSEE IS NOT A MANUFACTURER TO THAT EXTENT, THE EXEMPTION U/S 10B SHOULD BE WORKED OUT ON PROPORTIONATE BASIS. THE LEARNED DR S UBMITTED THAT WHAT WAS GOT DONE BY THE ASSESSEE BY (OF) LOAD ING CERTAIN WORKS TO JOB WORK CONTRACTORS, IS AN INTERMEDIATE P RODUCT. HE CONTENDS THAT WHAT WAS GIVEN BY THE JOB WORK CONTRA CTORS WAS AN END PRODUCT BY ITSELF. HE SUBMITS THAT THE PRODUCT IS A MODULE BY ITSELF AND NOT A PART OF OVERALL MODULE. ON A QUER Y FROM THE BENCH, HE SUBMITTED THAT IN A SOFTWARE INDUSTRY THE FULL WORK FOR DEVELOPMENT OF SOFTWARE IS UNDERTAKEN BY ONE DEVELO PER. HE RELIED ON THE ORDER OF THE AO AND SUBMITTED THAT TH E AOS FINDING THAT THE ASSESSEE SHOULD GET PROPORTIONATE DEDUCTIO N IS TO BE UPHELD. 16. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, SUBMITTED THAT THERE IS NO FINDING WHATSOEVER IN TH E ASSESSMENT ORDER THAT WHAT WAS CONTRIBUTED TO THE ASSESSEE COM PANY BY THE JOB WORK CONTRACTORS, WAS PART OF A MODULE AND NOT THE MODULE ITSELF. HE ARGUED THAT THERE IS NO PROHIBITION LAID DOWN IN THE ACT FOR GETTING JOBS DONE ON JOB WORK BASIS. HE CONTEND ED THAT THE SOFTWARE DEVELOPMENT CYCLE CONSISTS OF MORE THAN 20 DIFFERENT PARTS AND ONLY PART OF THE SOFTWARE DEVELOPMENT WAS OUTSOURCED. HE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH CO URT IN THE CASE OF CIT VS. PENWALT INDIA LTD. 196 ITR 813 (BOM .) AS WELL AS ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. NEW PHARMA PRIVATE LTD. 137 ITR 879 (BOM.). SIMILARLY HE RELIED ON THE DECISION IN THE CASE OF CIT VS. AN GLO FRENCH DRUG CO. (EASTERN) LTD. 191 ITR 92 (BOM.). 17. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL O F THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW A S WELL AS THE CASE LAWS CITED, WE ARE OF THE CONSIDERED OPINION T HAT THE ORDER 22 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA OF THE FIRST APPELLATE AUTHORITY ON THIS ISSUE HAS TO BE UPHELD FOR THE FOLLOWING REASONS. 18. NOWHERE IN THE ASSESSMENT ORDER, THE AO HAS GIV EN A FINDING, THAT WHAT IS GOT BY THE ASSESSEE FROM THE JOB WORK CONTRACTORS IS A PRODUCT BY ITSELF. THE ASSESSEE HAD IN FACT CONTE NDED BEFORE AO THAT ONLY A PART WORK WAS DONE THROUGH JOB WORK CONTRACTS. THE AO, IN OUR CONSIDERED VIEW, WAS WRONG IN COMING TO A CONCLUSION THAT IN THE CASE OF MANUFACTURE OF SOFTW ARE, NO PART JOB CAN BE OUTSOURCED, AS IN THE CASE OF OTHER MANU FACTURING ACTIVITIES. OUT OF A TOTAL RECEIPT ON ACCOUNT OF SA LE OF SOFTWARE OF 13.11 CRORES, THE OUTSOURCING BILLING WAS RS.1.36 C RORES. A SOFTWARE PRODUCT, CONTAINS WITHIN ITS NUMEROUS SUB SOFTWARE PROGRAMMES WHICH ARE INTEGRATED. ON THESE FACTS WE UPHOLD THE FOLLOWING FINDING OF THE CIT(APPEALS): AS HAS BEEN STATED IN THE EARLIER PART OF THE ORDE R, DEDUCTION U/S 10B IS TO BE ALLOWED ON SUCH PROFITS AND GAINS WHIC H ARE DERIVED FROM THE UNDERTAKING AND WHICH FULFILLS DIFFERENT P ARAMETERS. IT GOES WITHOUT DISPUTE IN THE CASE OF THE APPELLANT T HAT THE UNIT IS A 100% EXPORT UNIT AND THE PROFITS AND GAINS DERIVED PERTAIN TO SUCH EXPORTS. IT IS NOT THE REQUIREMENT OF THE SECT ION THAT THE DEDUCTION WHICH HAVE BEEN CLAIMED IN THE CASE OF AN ASSESSEE IS NOT ADMISSIBLE WHERE A PART OF THE SOFTWARE DEVELOP MENT PROGRAMME HAS BEEN CARRIED OUT AS JOB WORK BY OTHER PARTIES. IT IS NOT THE CASE OF THE A.O. THAT THE DEDUCTION HAS BEEN CLAIMED BY THE APPELLANT ON THE EXPORT OF SOFTWARE WHICH HA S BEEN MANUFACTURED BY OTHER INDEPENDENT CONCERNS AND ENTI TIES AND THAT THE APPELLANT HAS INCLUDED THE EXPORT PROCEEDS GENERATED OUT OF SUCH SOFTWARE PROGRAMMES WHICH DO NOT BELONG TO IT AND ON WHICH IT HAD CLAIMED EXEMPTION U/S 10B OF THE I. T. ACT. NO EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE A.O. IN THIS REGARD. THE FACT IS THAT THE APPELLANT THROUGH ITS 100% EXP ORT UNIT EXPORTED COMPUTER SOFTWARE AND THE PROFITS ON WHICH DEDUCTION HAS BEEN CLAIMED IS DERIVED FROM THE UNIT/UNDERTAKI NG. IF PART OF THE WORK HAS BEEN DONE BY OUTSIDE PARTIES, IT CANNO T BE CONCLUDED THAT THE PROFIT HAS NOT BEEN DERIVED BY T HE APPELLANT FROM THE UNDERTAKING. IT IS NOT IN DISPUTE THAT THE ENTIRE PROFIT OF 100% IS ONLY OUT OF THE EXPORT UNDERTAKING. UNDER T HE CIRCUMSTANCES, THE STAND OF THE A.O. CANNOT BE SUST AINED. THIS GROUND IS THEREFORE ALLOWED IN FAVOUR OF THE APPELL ANT. 19. WE ALSO HOLD THAT THIS DECISION IS IN LINE WITH THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS . PENWALT INDIA LTD. 196 ITR 813 (BOM.). (EMPHASIS OURS) 24. CONSISTENT WITH VIEW TAKEN BY THE TRIBUNAL, WE UPHOLD THE DIRECTIONS OF THE LEARNED CIT(A) AS IN THIS CASE AL SO, WHAT WAS OUTSOURCED WAS A PART OF THE JOB OF MANUFACTURING I .E. STEP 1 OUT OF THE 6 STEPS OR STAGES OF MANUFACTURING ACTIVITY. 23 ITA NOS. 398/V/12 AND OTHERS AND C.OS. 7 TO 10/VI Z/13 LAILA NUTRACEUTICALS, VIJAYAWADA 25. AS REGARDS CROSS OBJECTIONS FILED BY THE ASSESS EE, WE FIND THAT THEY ARE IN SUPPORT OF THE ORDER OF CIT(A). 25.1 THE AO IN OTHER YEAR HAS SIMPLY FOLLOWED HIS O RDER FOR AY 2006- 07. HE HELD THAT IF EXEMPTION IS NOT ALLOWED FOR AY 2006-07, THE BALANCE EXEMPTION CANNOT BE ALLOWED IN THE SUBSEQUE NT YEARS. THUS, OUR DECISION FOR THE A.Y. 2006-07 APPLIES FOR ALL O THER ASSESSMENT YEARS. 25.2 IN VIEW OF OUR DECISION IN AY 2006-07, THERE IS NO NEED TO SEPARATELY DISPOSE OF THESE CROSS OBJECTIONS. IN TH E RESULT, THE SAME ARE DISMISSED AS INFRUCTUOUS. 26. IN THE RESULT, ALL THE REVENUE APPEALS ARE DISM ISSED, ASSESSEES APPEALS ARE PARTLY ALLOWED AND THE C.OS. FILED BY T HE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 30.07.2014. SD/- SD/- (SAKTIJIT DEY) (J. SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER VISAKHAPATNAM, DATED: 30 TH JULY, 2014 KV COPY TO:- 1) M/S LAILA NUTRACEUTICALS, D.NO. 40-15-14, SUDARS HAN APARTMENTS, BRINDAVAN COLONY, LABBIPET, VIJAYAWADA 2) ACIT, CIRCLE 2(1), VIJAYAWADA 3) CIT(A), VIJAYAWADA 4) CIT, VIJAYAWADA 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., VIZA G