The ITO, Ward-8(3), Surat V. M/s. Pramukh International, Surat

ITA 68/AHD/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0846 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 14-07-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 11-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RASESH SHAH
• Keywords: Transfer pricing; International transaction; Question of law
• Section: 143(3); 10AA; 80IB; 145; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI S. S. GODARA, JM, & SHRI MANISH BORA D, AM. ITA NO.68/AHD/2011 ASST. YEAR: 2007-08 ITO, WARD 8(3), SURAT. VS. M/S PRAMUKH INTERNATIONAL, 101, YOGI ESTATE, SARTHI INDUSTRIES, VASTA DEVDI ROAD, SURAT. APPELLANT RESPONDENT PAN AAJFP 0695F APPELLANT BY SHRI PRASOON KABRA, SR.DR RESPONDENT BY SHRI RASESH SHAH, AR DATE OF HEARING: 14/7/2016 DATE OF PRONOUNCEMENT: 12/8/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) V, SURAT, DATED 28.10.2010 IN APPEAL NO. CA S-V/227/09-10 PASSED AGAINST ORDER UNDER SECTION 143(3) OF IT ACT , 1961(IN SHORT THE ACT) FRAMED ON 30/12/2009 BY THE JT.CIT, RANGE-8, S URAT. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT ASSESS EE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFAC TURING OF CUT AND POLISHED DIAMONDS LOCATED IN SPECIAL ECONOMIC ZONE (SEZ) SURAT. THIS PARTNERSHIP FIRM CAME INTO EXISTENCE ON 1 ST JANUARY, 2007 BEFORE ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 2 WHICH THE BUSINESS IN THE NAME OF PRAMUKH INTERNATI ONAL WAS BEING RUN AS SOLE PROPRIETARY CONCERN WITH MR. VALLABHBHA I G. GADHIYA. WITH EFFECT FROM 1.1.2007 SHRI V. G. GADHIYA AS PRO PRIETOR JOINED HANDS WITH OTHER PARTNERS AND THE BUSINESS CONTINUE D WITH THE EXISTENCE ASSETS AND LIABILITIES UNDER THE PARTNERS HIP FIRM. RETURN OF INCOME FOR ASST. YEAR 2007-08 WAS FILED ON 31.10.20 07 DECLARING INCOME AT RS.NIL AFTER CLAIMING DEDUCTION U/S 10A O F THE ACT AT RS.1,59,72,013/- BEING 100% PROFITS EARNED FROM RU NNING THE UNDERTAKING IN THE SEZ. DURING THE COURSE OF ASSESS MENT PROCEEDINGS LD. ASSESSING OFFICER OBSERVED THAT ASS ESSEE HAS SHOWN GROSS PROFIT RATE OF 19.76% AND NET PROFIT RATE OF 18.94% WHICH AS PER HIS VIEW WERE ABNORMALLY HIGH IN COMPARISON TO OTHE R ASSESSEES ENGAGED IN SIMILAR TYPE OF BUSINESS. HE ALSO OBSERV ED THAT EXPORT OF GOODS INVOLVED FEW PERCENTAGE OF OWN MANUFACTURED G OODS AND REMAINING WERE EITHER TRADED OR GOT MANUFACTURED FR OM OUTSIDE SOURCE ON JOB WORK BASIS. REPLY BY THE ASSESSEE TO THE OBSERVATION OF LD. ASSESSING OFFICER WAS NOT SATISFYING AND HE ACCORDINGLY WENT AHEAD TO MAKE ADDITIONS BY TAKING TWO VIEWS. FIRSTL Y HE INVOKED PROVISIONS OF SECTION 10AA R.W.S. 80IA(10) OF THE A CT AND CALCULATED REASONABLE PROFITS ELIGIBLE FOR DEDUCTION AT RS.16, 86,590/- U/S SECTION 10AA OF THE ACT AND ALTERNATIVELY ALSO CALCULATED D EDUCTION U/S 10AA OF THE ACT AT RS.1,10,73,625/- ON THE BASIS OF HIS WORKING TOWARDS EXPORT TURNOVER FROM SELF-MANUFACTURED ACTIVITIES A ND DENIED THE DEDUCTION FOR THE REMAINING AMOUNT. IN ALL INCOME W AS ASSESSED AT RS.1,42,78,266/- AFTER ALLOWING DEDUCTION U/S 10AA AT RS. 16,86,590/- BEING REASONABLE PROFITS ESTIMATED BY HIM. ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 3 3. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE LD. CI T(A) AND SUCCEEDED AS THE ADDITIONS MADE BY LD. ASSESSING OF FICER WERE DELETED BY LD. CIT(A) BY OBSERVING AS UNDER :- DECISION: 6. I HAVE CAREFULLY CONSIDERED THE REASONS GIVEN BY ASSESSING OFFICER AS ALSO THE SUBMISSIONS OF THE APPELLANT. AFTER CAREFU LLY ANALYSING THE FACTS OF THE CASE, I FIND THAT ASSESSING OFFICER HAS MADE TH E 1 ADDITION BY INVOKING PROVISIONS OF SECTION 10AA(9) MAINLY ON THE GROUND THAT ASSESSEE HAS SHOWN MUCH HIGHER PROFITS THAN THAT REPORTED BY OTH ER ENTITIES ENGAGED IN SIMILAR LINE OF BUSINESS. IT IS THE MAIN CONTENTION -OF ASSESSING OFFICER THAT ASSESSEE HAS NOT FULLY BOOKED ALL THE EXPENDITURE R EQUIRED FOR CARRYING ON THE BUSINESS ACTIVITY AND FOR MAKING SUCH A CONTENT ION, HE PLACED RELIANCE ON THE G.P & N.P RATIOS OF CERTAIN ENTITIES. IN THI S CONTEXT, IT HAS BEEN ARGUED BY APPELLANT THAT THE RESULTS OF SAID ENTITI ES ARE NOT COMPARABLE AS SAID ENTITIES TIRE CARRYING OUT THE BUSINESS ACTIVI TY IN DOMESTIC TARIFF AREA AND NOT IN SEZ. FURTHER, APPELLANT IN HIS LETTER DA TED 28/12/2Q09 ALSO ASKED ASSESSING OFFICER TO ALLOW HIM TO INSPECT THE RECORDS OF VARIOUS ENTITIES REFERRED TO IN THE SHOW CAUSE NOTICE OF AS SESSING OFFICER. HOWEVER, IT IS SEEN THAT ASSESSING OFFICER HAS NOT SUPPLIED ANY SUCH DATA TO APPELLANT NOR ALLOWED INSPECTION OF THE RECORDS OF SUCH ENTIT IES. I AM OF THE OPINION THAT CONCLUSION CANNOT BE DRAWN PURELY ON THE BASIS ; OF G.P & N.P RATIOS OF OTHER ENTITIES WITHOUT SUPPLYING COMPLETE 1 DETAILS OF SAID ENTITIES. IF ASSESSING OFFICER WANTS TO PLACE RELIANCE UPON SAID DATA IN THAT CASE, IT IS VERY MUCH NECESSARY TO SUPPLY COMPLETE DATA O F COMPARABLE CASES TO ASSESSEE. IN THIS REGARD, I FIND THAT THE DECISION OF HONOURABLE SUPREME COURT IN CASE OF DHAKESWARI COTTON MILLS LTD. V. CIT - 26 ITR 775 IS SQUARELY APPLICABLE. IN THIS CASE. HONOURABLE SUPREME COURT HAS MADE FOLLOWING OBSERVATIONS:- \ 'THE ESTIMATE OF THE GROSS RATE OF PROFIT ON SALES, BOTH BY THE ITO AND THE TRIBUNAL, SEEMS TO BE BASED ON SURMISES, SUSPICIONS AND CONJE CTURES. IT IS SOMEWHAT SURPRISING THAT THE TRIBUNAL TOOK FROM THE REPRESEN TATIVE OF THE DEPARTMENT A STATEMENT CF GROSS PROFIT RATES OF OTHER COTTON MIL LS WITHOUT SHOWING THAT STATEMENT, TO THE ASSESSEE AND WITHOUT GIVING HIM AN OPPORTUNITY TO SHOW THAT THAT STATEMENT HAD NO RELEVANCE WHATSOEVER TO THE CASE OF THE MILL IN QUESTION. IT IS NOT KNOWN WHETHER THE MILLS WHICH HAD DISCLOSED THESE RATES WERE SITU ATE IN BENGAL OR ELSEWHERE, AND WHETHER THIS MILLS WERE SIMILARLY SITUATED AND CIRC UMSTANCED. NOT, ONLY DID THE TRIBUNAL NOT SHOW THE INFORMATION GIVEN BY THE REPR ESENTATIVE OF THE DEPARTMENT TO THE APPELLANT, BUT IT REFUSED EVEN TO LOOK AT THE T RUNK LOAD OF BOOKS AND PAPERS WHICH ASSESSEE PRODUCED BEFORE THE ACCOUNTANT MEMBER IN H IS CHAMBER. NO HARM WOULD HAVE BEEN DONE IF AFTER NOTICE TO THE DEPARTMENT TH E TRUNK HAD BEEN OPENED AND SOME TIME DEVOTED TO SEE WHAT IT CONTAINED. THE ASS ESSMENT IN THIS CASE AND IN THE ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 4 CONNECTED APPEAL, WE ARE TOLC 1 , WAS ABOVE THE FIGURE OF RS. 55 LAKHS AND IT WAS MEET AND PROPER WHEN DEALING WITH A MATTER OF THIS MAGNITUDE NOT TO EMPLOY UNNECESSARY HASTE AND SHOW IMPATIENCE, PARTICULARLY WHEN IT WAS KNOWN TO THE DEPARTMENT THAT THE BOOKS OF THE ASSESSEE WERE IN T IE CUSTODY OF THE SUB-DIVISIONAL OFFICER, BOTH THE ITO AND THE TRIBUNAL IN ESTIMATIN G THE GROSS PROFIT RATE ON SALES DID NOT ACT ON ANY MATERIAL BUT ACTED ON PURE GUESS AND SUSPICION.' 'THOUGH IT IS AGREEABLE THAT THE ITO IS NOT FETTERE D BY TECHNICAL RULES OF EVIDENCE AND PLEADINGS, AND THAT HE IS ENTITLED TO ACT ON MATERI AL WHICH MAY NOT BE ACCEPTED AS EVIDENCE IN & COURT OF LAW, BUT THERE THE AGREEMENT ENDS; BECAUSE IT IS EQUALLY CLEAR THAT IN MAKING THE ASSESSMENT UNDER SUB-S. (3) OF S . 23, THE ITO IS NOT ENTITLED TO MAKE A PURE GUESS AND MAKE AN ASSESSMENT WITHOUT RE FERENCE TO ANY EVIDENCE OR ANY MATERIAL AT ALL. THERE MUST BE SOMETHING MORE T HAN BARE SUSPICION TO SUPPORT THE ASSESSMENT UNDER S. 23(3).' IT IS SEEN THAT IN THE INSTANT CASE, ASSESSING OFFI CER HAS NOT SUPPLIED COMPLETE DATA OF VARIOUS ENTITIES RELIED UPON BY HI M AND AS SUCH PRIMA FACIE RELIANCE CANNOT BE PLACED ON THE SAME FOR MAK ING ANY ADDITION. BESIDES THIS, IT IS ALSO SEEN THAT THERE IS VARIATI ON IN PROFIT MARGIN OF ALLEGED COMPARABLE CASES CONSIDERING THE FACT THAT IN CASE OF M/S MANGUKIA BROTHERS, HUGE DECLARATION HAS BEEN MADE IN THE COU RSE OF SURVEY & THIS INDICATES THAT IT IS NOT POSSIBLE TO LAY DOWN ANY S TANDARD PROFIT MARGIN IN THIS LINE OF ACTIVITY. . AS REGARDS EXPENDITURE PATTERN OF M/S PRAMUKH. GEMS SISTER CONCERN OF ASSESSEE, I AGREE WITH THE CONTENTION OF APPELLANT THAT COMPARISON OF SELLING, ADMINISTRATIVE AND FINANCIAL EXPENSES CANN OT BE MADE AS VARIOUS FACTORS AFFECTING THE BUSINESS, CAPITAL STRUCTURE, POLICY DECISION ETC. ARE NOT THE SAME. AS REGARD OPERATING EXPENSES, IT IS SEEN THAT DIFFERENCE-IS ONLY OF 6.53% AND THEREFORE, IN ABSENCE OF ANY EVIDENCE ON RECORD, THE ABOVE EXPENDITURE RATIOS CANNOT BE TAKEN AS THE BASIS FOR ESTIMATING THE N.P ONLY TO THE EXTENT OF 2% AS AGAINST 18.94%. BESIDES THE ABOVE, THE APPELLANT HAS ALSO POINTED OUT THAT AVERAGE SELLING PRICE OF ASSESSEE IS MUCH HIGHER THAN T.IAT OF M/S PRAMUKH GEMS & THEREFORE, IT IS Q UITE OBVIOUS THAT IF EXPENSES ARE COMPUTED AS % OF SALES/ THE SAME IN CASE OF ASSESSE E WIN BE ON LOWER SIDE. ABOVE ALL, IT IS NOT THE CASE WHERE ASS ESSEE HAS ARRANGED TRANSACTION WITH SISTER CONCERN IN SUCH A MANNER WHICH HCIS RES ULTED IN HIGHER PROFIT TO ASSESSEE. ; IN MY CONSIDERED OPINION THE QUESTION OF ESTIMATING THE PROFIT ON THE BASIS OF COMPARABLE CASES CAN. ARISE ONLY WHEN BOOK RESULTS OF ASSESSEE ARE NOT CAPABLE OF ANY INDEPENDENT VERIFICATION EIT HER BECAUSE OF SUBSTANTIAL DEFECTS IN THE SAME OR BECAUSE THE SAME ARE NOT SUPPORTED BY PROPER BILLS, VOUCHERS AND OTHER DOCUMENTS. HOWEVER, SAME IS NOT AT ALL THE CASE AS IT IS SEEN THAT NO DEFECT WHATSOEVER IN THE MAINTENANCE OF ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 5 BOOKS OF ACCOUNTS AND OTHER RECORDS HAVE BEEN POINT ED OUT. AS SUCH BOOK RESULTS ARE REQUIRED TO BE ACCEPTED & IN FACT IT IS SEEN THAT ASSESSING OFFICER HAS ALSO NOT REJECTED THE SAME BY INVOKING PROVISIONS OF SECTION 145 OF THE ACT. I ALSO FIND THAT THIS IS ALSO NOT THE CASE WHERE AS SESSEE HAS ARRANGED ITS AFFAIRS WITH SISTER CONCERN IN SUCH A MANNER WHICH HAS RESULTED IN MORE THAN ORDINARY PROFIT TO ASSESSEE. THE PROVISIONS OF SECTION 10AA(9) REFERS TO THE PROVISIONS OF SECTION 80IA(10 ) OF THE ACT AND SAID SECTION IS REPRODUCED HEREUNDER: 'WHERE IT APPEARS TO THE ASSESSING .OFFICER THAT, O WING T O THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSIN ESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPEC TED TO ARISE IN SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFIT AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY HE REASONABLY DEEMED TO HAVE BEEN DERIVED THERE FROM.' . PERUSAL OF ABOVE PROVISIONS CLEARLY INDIC ATES THAT IF THE ASSESSEE HAS CLAIMED INFLATED PROFIT IN THAT CASE IT NATURAL LY FOLLOWS I THAT THE OTHER ENTITY HAS CLAIMED INFLATED EXPENDITURE. HENCE, THE RE SHOULD BE AT LEAST SOME MATERIAL WHICH PROVES THE ABOVE FACT & MERELY BECAUSE THERE IS CLOSE CONNECTION BETWEEN ASSESSEE WITH OTHER ENTITY ON THE GROUND THAT THEY ARE SISTER CONCERNS, IT DOES NOT LEAD TO THE C ONCLUSION THAT PROFITS HAVE BEEN INFLATED BY ASSESSEE. I AM OF THE OPINION THAT THERE IS NO COGENT EVIDENCE WHICH INDICATES THAT ASSESSEE HAS INFLATED PROFIT BY ARRANGING TRANSACTIONS WITH GROUP CONCERNS IN SUCH A MANNER W HICH RESULTS IN HIGHER PROFIT TO ASSESSEE. EVEN OTHERWISE, THE ADDITION IN SUCH A CASE CAN BE MADE ONLY IN RESPECT OF TRANSACTIONS CARRIED OUT, W ITH SISTER CONCERN AND NOT IN RESPECT OF ENTIRE BUSINESS. IN MY OPINION TH E PROVISIONS OF SECTION 80IA(10) CAN BE INVOKED ONLY IF THERE ARE DEFINITE EVIDENCES WHICH INDICATES THAT TRANSACTIONS DONE WITH GROUP CONCERN S ARE NOT AT ARMS LENGTH PRICE & NO SUCH TRANSACTIONS HAVE EVEN BEEN REFERRED TO. IN THIS REGARD, I FIND THAT RATIO OF HONOURABLE ITAT AHMEDA BAD BENCH DECISION IN CASE OF M/S D. JAVANTILAL EXPORTS ITA NO. 1647/A/08 DATED 19/12/2008 IS DIRECTLY APPLICABLE TO THE FACTS OF THE CASE. IN THAT CASE ALSO, THE DEPARTMENT'S CONTENTION WAS THAT ASSESSEE HAS CLAIM ED INSUFFICIENT EXPENSES & THEREBY SHOWN HIGHER PROFIT WHICH WAS CL AIMED AS DEDUCTION U/S 10A OF THE ACT. FURTHER ADDITION IN SAID CASE W AS MADE BY INVOKING PROVISIONS OF SECTION 10A(7) WHICH REFERS TO PROVIS IONS OF SECTION 80IA(10) OF THE ACT AND IT WAS HELD THAT THE SAME WAS NOT VA LID AS NO MATERIAL WAS BROUGHT ON RECORD REGARDING ALLEGED CONNECTION BETW EEN ASSESSEE AND ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 6 CUSTOMERS LEAVING APART ESTABLISHING ANY CLOSE CONN ECTION BETWEEN THESE TWO PERSONS. AS SUCH RATIO OF SAID DECISION IS DIRE CTLY APPLICABLE TO THE INSTANT CASE AS NO SUCH CLOSE CONNECTION BETWEEN AS SESSEE AND SISTER CONCERN HAS BEEN ESTABLISHED WHICH RESULTED INTO HI GHER PROFIT FOR ASSESSEE. FURTHER, COMPARISON OF EXPENDITURE RATIO CANNOT BE REGARDED AS SOLE BASIS FOR COMING TO THE CONCLUSION THAT SINCE ASSESSEE HAS CLAIMED LOWER EXPENSES AS COMPARED TO ITS COMPETITORS THE P ROVISIONS OF SECTION 80IA(10) ARE ATTRACTED. PROFITABILITY OF VARIOUS UN ITS DEPENDS UPON SEVERAL FACTORS WHICH SELDOM REMAIN COMMON VIS-A-VIS DIFFER ENT ENTITIES. AFTER GOING THROUGH THE ENTIRE FACTS & CIRCUMSTANCES OF T HE CASE, I AM OF THE CONSIDERED OPINION THAT THERE IS NO COGENT BASIS FO R CURTAILING DEDUCTION U/S 10AA BY INVOKING PROVISIONS OF SECTION 80IA(10) OF THE ACT & THERE IS NO JUSTIFICATION IN ESTIMATING N.P AT 2%. ACCORDINGLY, ADDITION MADE BY ASSESSING OFFICER IS HEREBY DELETED AND THIS GROUND OF APPEAL IS ALLOWED. AS REGARDS THE ALTERNATE CONTENTION OF ASSESSING OF FICER THAT DEDUCTION U/S 10AA SHOULD BE ALLOWED ONLY ON THE EXPORT OF GOODS WHICH HAS BEEN MANUFACTURED BY ASSESSEE ON HIS OWN, I FIND THAT TH ERE IS NO PROHIBITION UNDER THE ACT THAT IN ORDER TO CLAIM DEDUCTION U/S 10AA OF THE ACT ENTIRE MANUFACTURING ACTIVITY MUST BE CARRIED OUT BY ASSES SEE HIMSELF. IT IS QUITE NORMAL THAT IN THE COURSE OF BUSINESS, IT MAY NOT B E POSSIBLE TO CARRY OUT ENTIRE MANUFACTURING ACTIVITY IN-HOUSE & HELP OF OU TSIDE JOB WORKERS MIGHT HAVE TO BE TAKEN. IN ABSENCE OF ANY SPECIFIC PROVIS ION IN THE ACT, IT IS NOT POSSIBLE TO CURTAIL THE CLAIM OF ASSESSEE. BESIDES THIS, I FIND THAT CASE LAWS RELIED UPON BY LEARNED AR ALSO INDICATES THAT SUCH DISALLOWANCE CANNOT BE MADE. IN CASE OF ADDL. CIT V. A. MUKHERJEE & CO. (P ) LTD. - 113 ITR 718 (CAL.), THE ASSESSEE WAS A PUBLISHER OF BOOKS AND W AS NOT HAVING PRINTING PRESS. THE PRINTING WAS ENTRUSTED TO A PRESS AND BI NDING WAS ALSO DONE BY OUTSIDE BOOK BINDERS. IN THAT CASE, IT WAS HELD THA T; PRINTER IS A MERE CONTRACTOR AND ASSESSEE WAS HELD TO BE ENGAGED IN M ANUFACTURING OR PROCESSING OF GOODS. SIMILARLY, IN CASE OF.CIT V. A NGLO FRENCH DRUG CO. LTD. -191 ITR 92 (BOM), ASSESSEE WAS A PHARMACEUTIC AL COMPANY WHICH GOT ITS PRODUCTS MANUFACTURED FROM AN ASSOCIATE CON CERN & IT WAS HELD THAT ASSESSEE WAS ENGAGED IN MANUFACTURING OF ARTICLES. IN VIEW OF THESE JUDICIAL PRONOUNCEMENTS AND THE ABOVE DISCUSSION, I AM OF THE OPINION THAT DEDUCTION U/S 10AA OF THE ACT IS REQUIRED TO BE ALL OWED ON ENTIRE EXPORT PROCEEDS CONSEQUENTLY THE ACTION OF ASSESSING OFFIC ER IN WORKING OUT THE ELIGIBLE AMOUNT AT RS.1,10,73,625/- ONLY ON THE EXP ORT VALUE OF GOODS MANUFACTURED BY ASSESSEE ON HIS OWN IS NOT TENABLE. HENCE, THE DEDUCTION U/S 10AA OF THE ACT IS TO BE ALLOWED AS P ER THE CLAIM MADE IN THE RETURN OF INCOME AND ADDITION MADE IS HEREBY DELETE D AND THIS GROUND OF APPEAL IS ALLOWED. ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 7 4. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE T RIBUNAL BY TAKING FOLLOWING GROUNDS :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE ID. C1T(A) HAS ERRED IN DELETING THE ADDITION OF RS. 1,42.85.423/- MADE BY THE A.O. ON ACCOUNT OF DISALLOWANCE OF DEDUCTION U/S 10 AA OF ME ACT DESPI TE THE FACT THAT THE MAJOR PART OF THE MANUFACTURING ACTIVITY WAS CARRIED OUT THROUGH ITS SISTER CONCERNS SITUATED OUTSIDE THE SEZ AREA IN CONTRAVENTION OF SECTION 10 AA. THE DEDUCTION CANNOT BE GRANTED TO 'OUTSOURCED MANUFACTURING' OUTSIDE THE SEZ PREMISES . THAT WOULD HE IN CLEAR CONTRAVENTION OF INCENTIVE SCHEME FOR SEZ. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW. THE ID. C'1T(A) HAS ERRED IN DELETING THE ADDITION OF RS.1.42.85.423/- MADE B \ THE A.O. ON ACCOUNT OF DISALLOWANCE OF DEDUCTION U/S 10 AA DESPITE THE FAC T THAT ASSESSES HAD RETURNED ABNORMALLY HIGHER PROFITS IN COMPARISON TO OTHER CO NCERNS ENGAGED IN THE SIMILAR LINE OF BUSINESS IN ORDER TO CLAIM HIGHER DEDUCTION U/S 10 AA OF THE I.T. ACT. 3. IT IS THEREFORE. PRAYED THAT THE ORDER OF THE ID. C IT (A) BE SET ASIDE AND THE ASSESSING OFFICER'S ORDER DATED 30712/2009 BE RESTORED. 5. LD. DR SUBMITTED THAT - THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URING OF CUT & POLISHED DIAMONDS AND ITS UNIT IS SITUATED IN SEZ SACHIN, WH ICH HAS FORMED W.E.F. 01.01.2007. THE ASSESSEE HAS CLAIMED DEDUCTION U/S. 10AA OF THE ACT ON THE INCOME EARNED FROM THE SEZ SURAT UNIT. DURING THE C OURSE OF ASSESSMENT PROCEEDINGS, THE A.O. FOUND THAT THE ASSESSEE HAS I MPORTED ROUGH DIAMONDS AND MANUFACTURED CUT AND POLISHED DIAMONDS. HOWEVER , ON VERIFICATION OF STOCK REGISTER, IT WAS NOTICED THAT ONLY A SMALL PART OF ROUGH DIAMONDS WERE MANUFACTURED BY THE ASSESSEE. MAJORITY DIAMONDS WER E POLISHED BY HIS SISTER CONCERNS THROUGH JOB WORK. 2. BESIDES, THE AO FOUND THAT THE ASSESSEE HAS DISC LOSED G P @ 19.76% AND N P @ 18.94% WHEREAS IN THE LINE OF BUSINESS AVERAGE GP @ 5% TO @ 6% AND NP @ 2% TO @ 3% IS DISCLOSED BY VARIOUS ASSESSES. THER EFORE, THE AO ISSUED SHOW CAUSE NOTICE ON 22.12.1999 ASKING THE ASSESSEE AS T O WHY CLAIM OF DEDUCTION U/S. 10AA SHOULD NOT BE RESTRICTED TO THE EXTENT OF 2% AS AGAINST 18.94% I.E. EXCESS NP @ 16.94% SHOULD NOT BE DISALLOWED AS PER EXPLANATION TO SECTION 10AA (4) OF THE I.T. ACT. 3. THE ASSESSEE COMPLIED WITH THE SHOW CAUSE NOTICE AND REQUESTED TO ALLOW DETAILED INSPECTION OF THE CASE RECORDS IN ORDER TO ANALYZE THE DIFFERENCE IN FACTS OF HIS CASE. HE ALSO CONTENDED THAT THE PROVISION O F SECTION 10AA (9) ARE NOT APPLICABLE TO HIS CASE. THE ARGUMENTS PUT FORTH BY THE ASSESSEE WERE NOT ACCEPTED BY THE ASSESSING OFFICER ON THE GROUND THA T AS PER SECTION 801A (10) ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 8 THE A.O. CAN RECOMPUTE PROFIT IN THE CASE OF BUSINE SS TRANSACTIONS OF THE ASSESSEE, WHO PRODUCES MORE PROFIT THAN ORDINARY PR OFIT IN THE LINE OF BUSINESS. 4. THE A O ALTERNATIVELY WORKED OUT THE DEDUCTION U /S 10AA OF THE ACT TO THE EXTENT OF RS. 16,86,590/- AS AGAINST RS. 1,10,73,59 0/- CLAIMED BY THE ASSESSEE. THE A.O. RELIED UPON THE JUDGEMENT OF THE HON'BLE S UPREME COURT IN THE CASE OF STRELING FOODS VS CIT 237 ITR 579 AND CAMBAY ELECTR IC SUPPLY IND COMPANY 113 ITR 84 HELD THAT THE DEDUCTION CLAIMED BY THE ASSESSEE IS CONFIRMED TO THE EXTENT IT HAS MANUFACTURED THE DIAMONDS IN THE SEZ AS PER STOCK REGISTER. ACCORDINGLY, THE A.O. WORKED OUT THE TOTAL INCOME A T RS. 1,42,35,423/-. 5. ON APPEAL, THE LD CIT (APPEALS) HELD THAT THERE IS NO PROHIBITION UNDER THE ACT THAT IN ORDER TO CLAIM DEDUCTION U/S. 10AA OF THE A CT, ENTIRE MANUFACTURING ACTIVITY MUST BE CARRIED OUT BY THE ASSESSEE HIMSELF. MOREOV ER, CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE, THERE IS NO JU STIFICATION IN ESTIMATING THE NP @ 2% AS THERE IS NO COGENT BASIS ON THE PART OF THE ASSESSING OFFICER FOR CURTAILING DEDUCTION U/S. 10AA BY INVOKING PROVISIO NS OF SECTION 801A (10) OF THE ACT. THE LD CIT ( APPEALS) ALLOWED THE APPEAL OF TH E ASSESSEE AND DELETED THE ADDITION MADE BY THE A.O. 6. THE DECISION OF THE CIT (APPEALS) IS NOT ACCEPTA BLE. THE LD CIT (APPEALS) HAS NOT CONSIDERED THE FACTS OF THE CASE AS MENTIONED I N THE ASSESSMENT ORDER BY THE A.O. AS WELL AS THE JUDGEMENTS OF THE HON'BLE S UPREME COURT IN THE FOLLOWING CASES :- 1. STERLING FOODS VS. CIT 237 ITR 579 2. CAMBAY ELECTRIC SUPPLY IND COMPANY 113 ITR 84 7. THE LD. CIT (A)V, SURAT ERRED IN ALLOWING DEDUCT ION U/S. 10AA OF I.T. ACT OF RS. 1,42,85,423/- DESPITE THE ASSESSEE WAS NOT ENGAGED IN THE MANUFACTURING ACTIVITY AND PAID LABOUR/JOB CHARGES TO OUT SIDERS DURING THE YEAR. SECONDLY, THE ASSESSEE SHOWN HIGH PROFITS AS COMPARED TO OTHER CO NCERNS WHO ARE ENGAGED IN THE SIMILAR BUSINESS. THEREFORE, THE ASSESSING OFFI CER CORRECTLY RE-COMPUTED THE WORKING OF DEDUCTION U/S. 10AA OF I.T. ACT AND THES E FACTS WERE NOT CONSIDERED BY THE LD. CIT (A)V, SURAT. THEREFORE, TO KEEP THE ISSUE ALIVE, THE DECISION OF THE CIT(A) REQUIRES TO BE CHALLENGE BEFORE THE HON'BLE ITAT, AHMEDABAD AS PER THE GROUNDS OF APPEAL. 6. ON THE OTHER HAND LD. AR RELIED ON THE FINDINGS OF LD. CIT(A) AND SUBMITTED THAT AS FAR AS INVOKING OF PROVISIONS OF SEC.10AA(9) OF THE ACT IS CONCERNED IT IS TO BRING TO NOTICE THAT ASSE SSEE HAS NOT ENTERED INTO ANY BUSINESS TRANSACTION WITH THE SISTER CONCE RN IN SUCH A ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 9 MANNER SO AS TO SHOW MORE PROFITS. FURTHER NO MATER IAL WAS BROUGHT ON RECORD REGARDING ALLEGED CONNECTION BETWEEN THE ASSESSEE AND THE CUSTOMERS SO AS TO PROVE THAT GOODS WERE SOLD A T HIGHER RATES OR PURCHASED AT LOWER PRICE. LD. AR REFERRED AND RELIE D ON FOLLOWING TWO JUDGMENT AND DECISION :- 1. CIT VS. SCHMETZ INDIA (P) LTD. [IT APPEAL NO.450 8/2010 9BOM)] 26 TAXMANN.COM 336 (BOM) 2012; AND 2. A.K.KEARNEY INDIA (P) LTD. V/S ACIT, RANGE-1 (DE L-ITAT) 50 TAXMANN.COM 26 (DEL-TRI)2014 FURTHER AS REGARDS THE ISSUE RELATING TO NOT TREATI NG THE GOODS MANUFACTURED ON JOB WORK BASIS AS MANUFACTURED GOOD S, IT HAS BEEN HELD IN SEVERAL JUDGMENTS AND DECISIONS THAT GOODS GOT MANUFACTURED ON JOB WORK BASIS ARE DULY COVERED UNDER MANUFACTUR ING ACTIVITIES. IN SUPPORT OF HIS SUBMISSIONS LD. AR REFERRED AND RELI ED ON THE FOLLOWING JUDGMENTS :- 1. ACIT VS. MUKHERJEE & CO. (P) LTD. 113 ITR 0718 (CAL ) 2. CIT VS. ANGLO FRENCH DRUG CO.(EASTERN) LTD.191 ITR 0092 (BOM) 3. RAJIV BHATNAGAR VS DCIT ITA NO.1026/DEL/2011 4. CIT VS VIKRAK PLASTICS -239 ITR 0161 (GUJ) 5. ALUMNINI INDUSTRIES (P) LTD. VS. CIT 80 TAXMAN 0184 (GAU) 6. ITO VS. SKYJET AVIATION (P) LTD. 66 TTJ 0211 (AHD.I TAT) 7. CIT VS. PRUTHVIRAJ BHOORCHAND [IT REF.NO.50/1994] (GUJ-HC) 152 TAXMAN 375 (GUJ) 2006. 8. ITO VS. MAKERS MART (ITA NO.333/JODH/2013(JODH-ITAT ) 50 TAXMANN.COM 106 (JODH-TRI) 2014) 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. SOLITARY GRIEVANCE OF THE REVENUE IN THI S APPEAL IS AGAINST THE ACTION OF LD. CIT(A) DELETING THE DISALLOWANCE U/S 10AA OF THE ACT ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 10 AT RS. 1,42,85,423/- ON PROFITS EARNED FROM RUNNING THE UNIT UNDER SEZ. WE FIND THAT REVENUE HAS RAISED TWO GROUNDS WH ICH ARE INTER CONNECTED AGAINST THE ORDER OF LD. CIT(A) WHEREIN I T HAS BEEN HELD THAT BOTH THE ALTERNATIVES NAMELY INVOKING OF PROVI SIONS OF SECTION 10AA(9) R.W.S. 80IA(10) OF THE ACT WAS NOT JUSTIFIE D ON THE PART OF ASSESSING OFFICER AND SECONDLY GOODS MANUFACTURED F ROM OUTSIDE LABOURERS ON JOB WORK BASIS ARE ALSO TO BE DEEMED A S MANUFACTURED GOODS BY UNITS RUNNING IN SEZ. WHILE EXAMINING THE FIRST ISSUE WE OBSERVE THAT LD. ASSESSING OFFICER HAS NOT OBJECTE D TO THE ELIGIBILITY OF ASSESSEE TOWARDS DEDUCTION U/S 10AA OF THE ACT WHIC H UNDOUBTEDLY PROVES THAT ASSESSEE HAS COMPLIED WITH ALL THE BASI C CONDITIONS REQUIRED FOR CLAIMING DEDUCTION U/S 10AA OF THE ACT . THE ISSUE RAISED IS ONLY TOWARDS THE QUANTUM OF DEDUCTION U/S 10AA O F THE ACT. WE FIND THAT LD. ASSESSING OFFICER GATHERED INFORMATIO N RELATING TO GROSS PROFIT RATES AND NET PROFIT RATES OF OTHER ASSESSEE S ENGAGED IN SIMILAR KIND OF BUSINESS ACTIVITIES RELATING TO MANUFACTURI NG AND EXPORT OF CUTTING AND POLISHED DIAMONDS AND OBSERVED GREAT V ARIATION IN RELATION TO GP AND NP RATES AS WELL AS OPERATING EX PENDITURE. ON THE BASIS OF THESE STATISTICS OF LD. ASSESSING OFFICER WAS OF THE BELIEF THAT ASSESSEE INTENTIONALLY TRIED TO SHOW HUGE PROFITS I N ORDER TO FORM CAPITAL AS THE PROFITS ARE DEDUCTIBLE @ 100% FROM T HE UNDERTAKING WORKING UNDER SEZ. IT WAS FOR THIS REASON THAT HE I NVOKED THE PROVISIONS OF SECTION 10AA(9) R.W.S. 80IA(10) OF TH E ACT AND ACCORDINGLY ESTIMATED THE NP @ 2% OF THE TOTAL TURN OVER AS AGAINST 18.94% DECLARED BY THE ASSESSEE AND CALCULATED THE DEDUCTION U/S 10AA AT RS.16,86,590/-. ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 11 7.1 WE FURTHER OBSERVE THAT THERE IS NO IOTA OF EVI DENCE PUT FORTH BY THE REVENUE WHICH INDICATES THAT BOOK RESULTS ARE D EFECTIVE OR CERTAIN EXPENSES HAVE BEEN INCURRED OUTSIDE THE BOOKS OR EX CESS REVENUE HAS BEEN ACHIEVED FROM THE FOREIGN BUYERS. IT SEEMS THAT LD. ASSESSING OFFICER HAS MADE PRESUMPTION BY APPLYING RESULTS OF OTHER INDUSTRIES/SISTER CONCERN ON AN ESTIMATE BASIS WITH OUT POINTING OUT ANY DEFECT IN THE BUSINESS TRANSACTION ENTERED BY T HE ASSESSEE. 7.2 WE FURTHER FIND THAT IN THE CASE OF CIT VS. SCH METZ INDIA (P) LTD. (2012) 26 TAXMANN.COM 336 (BOM) HAS HELD AS UN DER :- WITH REGARD TO THE FIRST ISSUE IT IS FOUND THAT THE TRIBUNAL HAS CONSIDERED THE ENTIRE EVIDENCE AND ON FACTS COME TO THE CONCLUSION THAT THE PROFIT S EARNED BY KANDLA DIVISION OF THE ASSESSEE IS NOT ABNORMALLY HIGH DUE TO ANY ARRANGEMENT BETWE EN THE ASSESSEE AND ITS GERMAN PRINCIPAL. THE TRIBUNAL CORRECTLY HELD THAT EXTRAOR DINARY PROFITS CANNOT LEAD TO THE CONCLUSION THAT THIS IS AN ARRANGEMENT BETWEEN THE PARTIES. THIS WOULD PENALIZE EFFICIENT FUNCTIONING. FURTHER, THE AUTHORITIES HAVE ALSO REC ORDED A FINDING THAT THE INDUSTRIAL SEWING MACHINE NEEDLES IMPORTED AND TRADED BY THE MUMBAI D IVISION ARE DIFFERENT FROM THOSE MANUFACTURED AND EXPORTED BY (HE KANDLA DIVISION. C ONSEQUENTLY, THIS ALSO NEGATIVES ANY ARRANGEMENT BETWEEN THE PARTIES TO SHOW EXTRAORDINA RY PROFITS IN RESPECT OF ITS KANDLA DIVISION SO AS TO CLAIM DEDUCTION UNDER SECTION 10A . THESE ARE FINDINGS ONE OF FACT. THE REVENUE HAVE NOT BEEN ABLE TO SHOW THAT THE FINDING S ARE PERVERSE OR ARBITRARY. IN THE CIRCUMSTANCES, ISSUES RAISED BY THE REVENUE DO NOT RAISE SUBSTANTIAL QUESTIONS OF LAW IN THE INSTANT FACTS AND ARE, THEREFORE, DISMISSED. [PARA 8] 7.3 WE OBSERVE THAT THE CO-ORDINATE BENCH, DELHI IN THE CASE OF A.T. KEARNEY INDIA (P) LTD. VS. ADDL. CIT, RANGE-1, NEW DELHI IN IT APPEAL NO.348(DELHI) OF 2013 FOR ASST. YEAR 2009-10 (2014) 50 TAXMANN.COM 26 (DELHI-TRIB) DEALT WITH SIMILAR ISS UE AND WHILE DECIDING THE SAME HAS HELD AS UNDER :- 11 . ADVERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THAT THE AO SIMPLY RELIED ON THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE TO FORM A BE DROCK FOR THE DISALLOWANCE OF THE PART OF THE AMOUNT OF DEDUCTION U/S 10A, WITHOUT FIRSTLY SH OWING THAT THERE EXISTED ANY ARRANGEMENT BETWEEN THE ASSESSEE AND ITS OVERSEAS RELATED PARTY , BY WHICH THE TRANSACTIONS WERE SO ARRANGED AS TO PRODUCE MORE THAN THE ORDINARY PROFI TS IN THE HANDS OF THE ASSESSEE. THE ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 12 ASSESSMENT YEAR UNDER CONSIDERATION IS 2009-10. NEI THER THE PROVISO TO SUB-SECTION (10) EXISTED AT THAT TIME, NOR SUCH A PROVISO CAN BE APP LIED AS WE ARE DEALING WITH AN INTERNATIONAL TRANSACTION AND NOT SPECIFIED DOMESTIC TRANSACTION. UNDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE IMPUGNED ORDER UPHOLDIN G THE INVOCATION OF SUB-SEC. (10) OF SEC. 80-1A CANNOT BE COUNTENANCED TO THIS EXTENT. ERGO, IT IS HELD THAT THE ID. CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE MADE BY THE ASSESSING O FFICER BY RESTRICTING THE AMOUNT OF DEDUCTION U/S 10A OF THE ACT TO RS. 2.63 CRORE AS A GAINST RS. 8.22 CRORE CLAIMED BY THE ASSESSEE. THE IMPUGNED ORDER ON THIS ISSUE IS OVERT URNED AND IT IS DIRECTED TO ALLOW DEDUCTION AS CLAIMED. 8. NOW GOING INTO THE ASPECTS RAISED IN SECOND GROU ND AS TO WHETHER ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10AA FOR GOODS MANUFACTURED FROM OUTSIDE SOURCE ON JOB WORK BASIS BY WAY OF SENDING RAW MATERIAL FOR CUTTING AND POLISHING AND IN THE CASE OF SEZ, WE FIND THAT THERE ARE SOME PRACTICAL ASPECTS ATTAC HED WITH THE SEZ. UNITS OF SPECIAL ECONOMIC ZONE ARE NORMALLY LOCATED LITTLE FAR FROM THE MAIN CITY WHICH HAPPENS TO BE SO IN THE CASE OF ASSESSEE WHERE THE SEZ WAS LOCATED AT 20-22 KMS. AWAY FROM SURAT C ITY. IT IS WELL EVIDENT THAT BUSINESS IS GENERALLY CENTRED IN THE M AIN TOWN WITH SKILLED LABOURERS HAVING THEIR SMALL PLACE OF BUSIN ESS. IN THE CASE OF SEZ UNITS WHEN THE ENTREPRENEURS COME ACROSS SUCH A SITUATION WHERE THE EXPORT ORDERS HAVE TO BE MET BEFORE A PAR TICULAR DEAD LINE AND THE STAFF AVAILABLE IN THE UNIT MAY NOT BE SUFF ICIENT TO COPE UP WITH SUCH A SITUATION, THEN THE ONLY OPTION AVAILABLE W ITH THE ASSESSEE IS TO SEND THE RAW MATERIAL TO OUTSIDE LABOUR PARTIES FOR GETTING THEM MANUFACTURED IN A FINISHED FORM. IT IS ALSO KNOWN T HAT THE SEZ IS A CUSTOM BOUND AREA AND EVERY MOVEMENT OF GOODS/ MATE RIAL/ASSET HAS TO PASS THROUGH THE CHECK OF OFFICER OF THE CEN TRAL EXCISE AND CUSTOMS DEPARTMENT DEPUTED AT THE GATES AND THE DET AILS OF SUCH GOODS/RAW MATERIAL/ASSET ARE ENTERED THEREIN. THERE FORE, HAD THERE BEEN ANY VIOLATION OF SEZ RULES THEN SUCH MOVEMENT WOULD HAVE ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 13 BEEN RESTRICTED. FURTHER IN ORDER TO EXAMINE THIS A SPECT THAT WHETHER THE GOODS WHICH ARE MANUFACTURED ON JOB WORK BASIS ARE COVERED UNDER THE MANUFACTURING ACTIVITIES. LD. AR HAS RELI ED ON THE DECISION OF THE TRIBUNAL (DELHI) IN THE CASE OF RAJIV BHATNA GAR VS. DCIT ITA NO.1026/DEL/2011 WHEREIN SIMILAR ISSUE HAS BEEN DEA LT WITH AND WHILE DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE THE CO-ORDINATE BENCH VIDE ITS ORDER DATED 17.12.2012 HAS OBSERVED AS UNDER :- 12. AFTER HAVING CONSIDERED THE FACTS, MATERIAL ON RECORD AND OTHER RELEVANT DETAILS, WE FIND THAT ALL THE CONDITIONS TO QUALIFY FOR DEDUCTION U/S 80IB OF THE ACT IS FOUND TO HAVE BEEN FULFILLED BY THE ASSESSEE, IN ASMUCH AS, FIRST CONDITIONS OF EMPLOYING 10 OR MORE LABOUR WHEN USE OF POWER IS NO T DISPUTED HAS BEEN FULFILLED BECAUSE COURTS HAVE HELD THAT CONTRACT LABOUR ALSO QUALIFIES FOR DEDUCTION AS ENVISAGED UNDER RELEVANT PROVISIONS AND USEFUL REFE RENCE CAN BE MADE BY THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. PRITHVIRAJ BHOORCHAND, 280 ITR 94, HEAD NOTES OF WHICH ARE AS UNDER: INDUSTRIAL UNDERTAKING- SPECIAL DEDUCTION UNDER SEC TION 801-CONDITION PRECEDENT -EMPLOYMENT OF SPECIFIED NUMBER OF EMPLOYEES-WORKER S ENGAGED ON CONTRACT LABOUR BASIS - FINDING THAT ASSESSEE CONTROLLED THE WORK AND THE MANNER OF DOING IT-WORKERS WERE EMPLOYEES FOR PURPOSES OF SECTION 8 0-1-LT. ACT, 1961, S.80-1'. SIMILARLY, IT IS ALSO SETTLED POSITION OF LAW THAT OUTSOURCING OF SOME OF THE PROCESSES WILL NOT DISQUALIFY THE ASSESSEE FROM CLA IMING OR ALLOWING DEDUCTION IF END PRODUCT IS OTHERWISE ELIGIBLE FOR DEDUCTION. SO FAR AS DEDUCTION U/S 80IB OF MANUFACTURING OF CARD BOARD BOXES FROM KRAFT PAPER IS CONCERNED, IT IS SETTLED LAW THAT TRANSFORMING IN THE CORRUGATED SHEETS AFTER HA VING TRANSFORMED IN THE SHAPE OF A BOX AND THE BOX IS AGAIN IN A FLAT POSITION FO R EASY TRANSPORTATION WHEN FLAT POSITION PAPER CORRUGATED BOXES ARE THE FINAL PRODU CTS WHICH IS ELIGIBLE FOR DEDUCTION AND OUR THIS VIEW CAN BE FORTIFIED BY HON 'BLE MADRAS HIGH COURT DECISION IN THE CASE OF CIT VS. M/S ZAINAB TRADING PVT. LTD. IN TAX CASE APPEAL NOS.1204, 1205 & 1206 AND AMP 1207 OF 2010 DATED 7 TH FEBRUARY, 2011 IN WHICH IT HAS BEEN HELD AS UNDER: 'THE REVENUE HAS COME FORWARD WITH THESE APPEALS AN D SEEKS TO RAISE THE FOLLOWING QUESTION OF LAW AS SUBSTANTIAL QUESTI ON OF LAW: & QUOT;E : WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 80IB OF THE ACT, TREATING THE PRODUCTION OF CORRUGA TED BOXES FROM KRAFT SHEETS AS MANUFACTURE FOR THE PURPOSE OF SECTION 80 IB OF THE ACT, IS VALID? ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 14 2. TO APPRECIATE THE STAND OF THE APPELLANT, IT IS NECESSARY TO REFER TO THE BRIEF FACTS OF THE CASE. THE RESPONDENT/ASSESSEE CO MPANY CLAIMS THAT IT IS ENGAGED IN THE ACTIVITY OF MANUFACTURING OF PAPER C ORRUGATED BOXES AND ON THAT BASIS CLAIMED DEDUCTION UNDER SECTION 80IB OF THE INCOME-TAX ACT, ON THE PROFITS DERIVED IN ITS BUSINESS. ACCORDING TO T HE RESPONDENT/ASSESSES, IT PROCURES PAPER CORRUGATED SHEETS OF DIFFERENT SI ZES, WHICH IS ITS RAW MATERIAL, PUT THEM INTO THE DESIGNED MACHINES FOR C HISELING THEM AT THE REQUIRED PLACES IN ORDER TO FOLD THOSE SHEETS AND P IN THEM AT THE FOLDED POINTS AND AFTER PINNING AT THE FOLDED POINTS AND A FTER THE SHEET GOT TRANSFORMED IN THE SHAPE OF A BOX, THE BOX IS AGAIN KEPT IN A FLAT POSITION FOR EASY TRANSPORTATION. THAT FLAT POSITIONED PAPER CORRUGATED BOXES ARE THE FINAL PRODUCTS OF THE RESPONDENT ASSESSEE. 3. ACCORDING TO THE APPELLANT, SINCE THE CORRUGATED SHEET IN THE PROCESS OF BEING FOLDED INTO A BOX, IT HAS NOT LOST ITS ORIGIN AL CHARACTERISTICS OF CORRUGATED SHEET, NO MANUFACTURING ACTIVITY HAD TAK EN PLACE AND THEREFORE, THE INGREDIENTS OF SECTION 80IB OF THE ACT, ARE NOT ATTRACTED. 4. THE COMMISSIONER OF INCOME-TAX (APPEALS) HOWEVER DIFFERED FROM THE ASSESSING AUTHORITY AND TOOK THE VIEW THAT THE CORR UGATED SHEETS ONCE ARE SHAPED INTO CORRUGATED BOXES, THAT WOULD AMOUNT TO A 'MANUFACTURING ACTIVITY* AND THEREFORE, THE RESPONDENT/ASSESSEE WA S ENTITLED FOR DEDUCTION UNDER SECTION 801B OF THE ACT. THE COMMIS SIONER OF INCOME- TAX (APPEALS) THEREFORE DIRECTED THE ASSESSING OFFI CER TO ASCERTAIN THE EXACT QUANTUM OF DEDUCTION AFTER MAKING PROPER VERI FICATION TO GRANT THE RELIEF. 5. THE TRIBUNAL ALSO TOOK THE SAME VIEW AND HELD TH AT THE CONVERSION OF CORRUGATED SHEETS INTO BOXES WOULD AMOUNT TO 'MANUF ACTURE' HAVING NOTED THE NATURE OF ACTIVITY OF THE RESPONDENT/ASSESSEE, WHICH DISCLOSE THAT THE PLAIN CORRUGATED SHEETS ARE PUT INTO THE DESIGNING MACHINE IN ORDER TO CHISEL THEM INTO DIFFERENT SHAPES AND PIN THEM AT T HE FOLDED POINTS TO CONVERT THE PLAIN SHEETS INTO CORRUGATED BOXES. 6. WE ARE ALSO CONVINCED THAT SUCH AN ACTIVITY OF T RANSFORMING THE PLAIN CORRUGATED SHEETS INTO A DIFFERENT PRODUCT OF BOXES , THOUGH TO GAIN SPACE FOR TRANSPORTATION, SUCH BOXES ARE KEPT IN A FOLDED POSITION, ONE CANNOT SAY THAT THE BOXES CONTINUE TO RETAIN ITS ORIGINAL CHARACTERISTICS OF CORRUGATED SHEETS. THEREFORE, THERE IS NO SCOPE TO TAKE A DIFFERENT VIEW THAN WHAT HAS BEEN STATED BY THE COMMISSIONER OF IN COME-TAX (APPEALS), AS CONFIRMED BY THE TRIBUNAL. SUCH DETERMINATION CA ME TO BE MADE BY BOTH THE AUTHORITIES BASED ON THE FACTS PLACED BEFO RE THEM AND WITH REFERENCE TO WHICH, WE DO NOT FIND ANY SERIOUS LEGA L LACUNA, THERE IS NO SCOPE TO INTERFERE WITH THE SAME, INASMUCH AS THERE IS NO QUESTION OF LAW, MUCH LESS SUBSTANTIAL QUESTION OF LAW INVOLVED. ' ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 15 14. SINCE ALL THE CONDITIONS LAID DOWN UNDER THE RE LEVANT PROVISIONS HAVE BEEN COMPLIED WITH, THEREFORE, WE ARE OF THE VIEW THAT T HE ACTION OF THE AUTHORITIES BELOW IN NOT ALLOWING THE CLAIM OF THE ASSESSEE U/S 801B IS UNWARRANTED AND UNCALLED FOR. AS SUCH, WHILE ACCEPTING THE APPEAL O F THE ASSESSEE, WE DIRECT TO GRANT DEDUCTION U/S 801B OF THE ACT AS CLAIMED BY T HE ASSESSEE. 9. WE FURTHER OBSERVE THAT LD. AR HAS RELIED ON THE DECISION OF HON. BOMBAY HIGH COURT IN THE CASE OF CIT VS. ANGLO FRENCH DRUG CO.(EASTERN) LTD.191 ITR 0092 (BOM), WHEREIN IT HAS BEEN HELD AS UNDER :- IT IS NOT NECESSARY THAT THE MANUFACTURING COMPANY MUST MANUFACTURE THE GOODS BY ITS OWN PLANT AND MACHINERY AT ITS OWN FACTORY. IF, IN SUBSTANCE, THE MANUFACTURING COMPANY HAS EMPLOYED ANOTHER COMPANY FOR GETTING THE GOODS MANUFACTURED BY IT UNDER ITS OWN SUPERVISION OR CONTROL, THE ASSESSEE CAN BE CONSIDERED AS A COMPANY ENGAGED IN MANUFACTU RING OF GOODS AND, THUS, AN INDUSTRIAL COMPANY. IT IS NOT ABSOLUTELY NECESSARY THAT THE ASSESSEE MUST DEPUTE THE SUPERVISORY STAFF OR EXERCISE DIRECT SUPERVISION OVER THE MANUF ACTURING PROCESS. IT IS SUFFICIENT IF, ON AN OVERAL L VIEW OF THE MATTER, IT IS FOUND THAT IT WAS THE ASS ESSEE-COMPANY WHICH WAS THE REAL MANUFACTURER AND THE ASSESSEE HAD MERELY EMPLOYED THE AGENCY OF SOMEONE ELSE THROUGH WHOM THE GOODS WERE CAUSED TO BE MANUFACTURED. IT IS ALSO NOT NECE SSARY THAT THE ASSESSEE MUST PAY THE WAGES OF THE WORKERS EMPLOYED IN THE MANUFACTURING PROCES S.CIT VS. NEO PHARMA PVT. LTD. (1982) 28 CTR (BOM) 223 : (1982) 137 ITR S79 (BOM) : TC24R.21 0 FOLLOWED. 10. WE ALSO OBSERVE THAT HON. CALCUTTA HIGH COURT I N THE CASE OF ADDL.CIT VS. A. MUKHERJEE & CO. (P) LTD. 113 ITR 07 18 (CAL) HAS HELD AS UNDER :- THE ARGUMENT IS THAT UNLESS AN ASSESSEE OWNS A MANU FACTURING PLANT, HE CANNOT BE A MANUFACTURER AND SIMILARLY UNLESS HE HIMSELF DOES T HE BINDING OR PACKING HE CANNOT BE A MANUFACTURER. IN ORDER THAT A PUBLISHER OF BOOKS SH OULD BE A MANUFACTURER OF BOOKS IT IS WHOLLY UNNECESSARY FOR HIM EITHER TO BE AN OWNER OF A PRIN TING PRESS OR TO BE A BOOK-BINDER HIMSELF. A PAPER IS NOT A BOOK, THOUGH IT IS PRINTED ON PAPERS . A PUBLISHER MAY GET THE BOOKS PRINTED FROM ANY PRINTER BUT THE PRINTER IS NOT THE MANUFACTURER BUT A MERE CONTRACTOR. THE FINDINGS OF THE TRIBUNAL CONCLUSIVELY SHOW THAT THE ASSESSEE WAS CA RRYING ON THE ACTIVITY OF MANUFACTURING AND ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 16 ALSO OF PROCESSING OF BOOKS WHICH ARE ALSO GOODS.C IT VS. CASINO (P) LTD. (1973) 91 ITR 289 (KER) : TC24R.272#1 CONCURRED WITH; CIT VS. COMMERCIAL LAWS OF INDIA PVT LTD. (1977) 107 ITR 822 (MAD) : TC24R.246 DISSENTED FROM. 11. RESPECTFULLY FOLLOWING THE JUDGMENT OF HON. BOM BAY HIGH COURT AND THAT OF CALCUTTA HIGH COURT AND ALSO THE DECISI ON OF THE CO- ORDINATE BENCH AND IN VIEW OF OUR ABOVE DISCUSSION WE ARE OF THE CONSIDERED VIEW THAT ASSESSEE IN THE COURSE OF RUNN ING ITS UNDERTAKING IN SEZ IS ALLOWED TO SEND RAW MATERIAL OUTSIDE THE SEZ AREA FOR GETTING IT IN A FINISHED FORM ON JOB WORK BASIS THROUGH OUTSIDE LABOURERS AND FURTHER THIS ACTIVITY OF GETTING GOOD S MANUFACTURED THROUGH OUTSIDE SOURCES IS DULY COVERED UNDER THE M ANUFACTURING ACTIVITIES. 12. WE HAVE ALSO COME ACROSS THE ASSESSMENT ORDERS U/S 143(3) OF THE ACT IN THE CASE OF ASSESSEE FOR ASST. YEARS 2008-09, 2009-10 & 2010-11 AND OBSERVE THAT NO DISALLOWANCE HAS BEEN MADE IN THE DEDUCTION CLAIMED U/S 10AA OF THE ACT AND GP RATES OF 19.92%, 17.84% AND 16.46% AND NP RATES OF 14.47%, 13.64% AN D 13.73% RESPECTIVELY HAVE BEEN ACCEPTED BY THE ASSESSING OF FICER AND NO PROPORTIONATE DISALLOWANCE HAS BEEN MADE FOR PROFIT S EARNED FROM GOODS MANUFACTURED FROM OUTSIDE SOURCE ON JOB WORK BASIS. 13. SUMMARIZING BOTH THE ISSUES WE ARE OF THE VIEW THAT LD. ASSESSING OFFICER WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 10AA(9) OF THE ACT AS THERE WAS NO MATERIAL EVIDENCE PUT ON RECORD AND A SPECIFIC FINDING TO WORK OUT THE BASIS TO ESTIMATE REASONABLE PROFITS BY VEHEMENTLY APPLYING NET PROFI T RATE AT 2% AS ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 17 AGAINST 18.94% DECLARED BY THE ASSESSEE WITHOUT APP RECIATING THE FACTS THAT BUSINESS HOUSE HAVING A SIMILAR TYPE OF ACTIVITY CANNOT END UP AT A SIMILAR LEVEL OF GP/NP AS MUCH DEPENDS ON T HE BUSINESS STRATEGY, QUALITY OF GOODS SOLD, RATES NEGOTIATED W ITH THE BUYERS AND OPTIMUM UTILIZATION OF THE RESOURCES INCLUDING THE EMPLOYEES AND MACHINES. WE DO NOT FIND ANY REASON TO INTERFERE WI TH THE FINDING OF LD. CIT(A). WE UPHOLD THE SAME. ACCORDINGLY, GROUND NO.1 IS DISMISSED. 14. SECONDLY, THE ALTERNATE VIEW TAKEN BY LD. ASSES SING OFFICER FOR PROPORTIONATELY DENYING DEDUCTION U/S 10AA OF THE ACT FOR GOODS MANUFACTURED FROM OUTSIDE PARTIES CANNOT STAND FOR IN VIEW OF OUR ABOVE DISCUSSION AND THE JUDGMENTS OF HON. BOMBAY & CALCUTTA HIGH COURTS AND DECISION OF THE CO-ORDINATE BENCH DELHI IN THE CASE OF RAJIV BHATNAGAR VS. DCIT (SUPRA) AND IT IS WELL DEC IDED THAT SUCH ACTIVITIES OF GETTING MANUFACTURED GOODS FROM OUTSI DE SOURCES ON JOB WORK BASIS ARE ALSO COVERED UNDER MANUFACTURING ACT IVITIES. WE FIND NO REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) ON THIS ISSUE ALSO. GROUND NO.2 IS DISMISSED. 15. IN THE RESULT, BOTH THE GROUNDS OF APPEAL OF RE VENUE ARE DISMISSED DISMISSED. 13. GROUND NO.3 IS OF GENERAL NATURE, WHICH NEEDS N O ADJUDICATION. 14. IN THE RESULT, APPEAL FILED BY THE REVENUE IS D ISMISSED. ITA NO. 68/AHD/2011 ASST. YEAR 2007-08 18 ORDER PRONOUNCED IN THE OPEN COURT ON 12 AUGUST, 2 016 SD/- SD/- (S. S. GODARA) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 12/8/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 11/08/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 12/08/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 12/8/16 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: