ACIT, Bangalore V. M/s Prerana Engineering works, Bangalore

ITA 702/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63679 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-08-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 01-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUNDER RAJAN
• Assessee Lawyers: P A GHATAGE
• Keywords: Bad and doubtful debts
• Section: 143(3); 142(1); 133A; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE SHRI N. BARAT H VAJA SANKAR, VICE - PRESIDENT A ND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NOS.702 & 703/BANG/2011 (ASSESSMENT YEARS: 2004-05 & 2006-07) ASST. COMMISSIONER OF INCOME - TA X, CIRCLE 6(1), BANGALORE. APPELLANT VS. M/S.PRERANA ENGINEERING WORKS, B - 207, 2 ND STAGE, 5 TH :MAIN, KSIIDC INDUSTRIAL ESTATE, PEENYA II STAGE, BANGALORE - 560 058. RESPONDENT PAN:AAGFP 7543P A PPELLANT BY: SHR I SUNDER RAJA N, JCIT. RESPONDENT BY : SHRI P.A.GHATAGE, C.A. DATE OF HEARING: 02 - 08 - 2012. DATE OF PRONOUNCEMENT: 31 - 08 - 2012. O R D E R PER N. BARATHVAJA SANKAR, VP: THESE ARE APPEALS PREFERRED BY THE REVENUE FOR THE ASSESSMENT YEARS 2004-05 AND 2006-07 AGAINST THE RE SPECTIVE APPELLATE ORDERS OF THE CIT(A)-III, BANGALORE, IN R ESPECT OF M/S.PRERANA ENGINEERING WORKS, BANGALORE. 2. THE ONLY ISSUE BROUGHT BEFORE US FOR ADJUDICATI ON IS WHETHER THE CIT(A) HAD ERRED IN LAW IN HOLDING THAT THE ASSESSEE ITA NOS.702&703/BANG/2011 PAGE 2 OF 13 HAVING DERIVED INCOME FROM CARRYING OUT MANUFACTURI NG ACTIVITY IS ENTITLED TO DEDUCTION U/S 80-IB OF THE INCOME-TA X ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT']. THE RELEVA NT GROUNDS OF APPEAL READ AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN LAW IN HOLDING THAT THE ASSESSEE HAVING DERIVED INCOME FROM CARRYING OUT MANUFACTURING ACTIVITY IS ENTITLED TO DEDUCTION U/S 80IB OF THE INCOME-TAX ACT, 1961. 2. THE CIT(A) HAS FAILED TO APPRECIATE THAT THE ASSESSEE HAS DONE THE PROCESS OF TURNING, MILLING, DRILLING AND GRINDING AS PER THE SPECIFICATIONS GIVEN BY THE CUSTOMER ON THE FORGED ITEMS SENT BY THE CUSTOMER ON JOB WORK BASIS AND HAS RETURNED THE SAME TO THE CUSTOMER AND THIS DOES NOT AMOUNT TO MANUFACTURING ACTIVITY. 3. THE CIT(A) OUGHT TO HAVE APPRECIATED THE QUESTION WHETHER THERE IS ANY PROCESS WHICH AMOUNTS TO MANUFACTURE HAS TO BE DECIDED ON THE FACTS OF THE PARTICULAR CASE AND THE RATIO OF JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE IN SUPPORT OF ITS CLAIM FOR SEC.80IB DEDUCTION IS MISPLACED. 4. FOR THESE AND OTHER GROUND THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 3. THE BRIEF FACTS OF THE CASE ARE THAT M/S.PRERAN A ENGINEERING WORKS, BANGALORE, FILED ITS RETURN OF I NCOME FOR ASSESSMENT YEAR 2006-07 DECLARING INCOME OF `64,26,360/-. A SURVEY U/S 133A WAS CONDUCTED ON 28-11-2006. SUBSEQ UENT NOTICES U/S 143(2) AND 142(1) WERE ISSUED AND SERVE D ON THE ASSESSEE AND THE ASSESSEES REPRESENTATIVE WAS HEAR D AND THE ASSESSMENT WAS PROCESSED U/S 143(3) OF THE ACT. TH E AO, WHILE ITA NOS.702&703/BANG/2011 PAGE 3 OF 13 FRAMING THE ASSESSMENT U/S 143(3) NOTICED FROM THE STATEMENT OF INCOME FILED BY THE ASSESSEE THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80-IB AMOUNTING TO `21,42,120/-. THE ASSESSEE WAS ASKED TO FILE DETAILS FOR THAT CLAIM. THE ASSES SEES REPRESENTATIVE BY HIS LETTER DATED 24-4-2007 SUBMIT TED DETAILED SUBMISSIONS WHICH ARE INCORPORATED IN THE ASSESSMEN T ORDER. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEES REPRESENTATIVE, THE AO REJECTED THE CLAIM FOR DEDUC TION U/S 80-IB IN A SUM OF `21,42,120/- OBSERVING AS UNDER: TO SUM UP MY FINDINGS ON THE ISSUE ARE AS UN DER: (A) DEPLOYMENT OF MACHINERY IN THE PROCESS ALO N E IS NOT SU F F IC I E NT TO HOLD THAT THE ASSESSEE I S INVOLVED IN THE ACTIVITY OF MANUFA C TURING AND PROD UCTION OF AN ARTICLE OR THING . TO BECOME ELIGIBLE FOR DEDU C TION UND E R S E C TION 80-IB I T IS ALSO ONE OF THE NECESSARY CONDITIONS THAT THE ASSESSEE SHOUL D MANUFACTURE OR PRODUCE AN ARTICLE OR THING OF TH E NATURE SP EC IF IED UND E R SECTION 80- IB(2) (III). (B) PROCESS AS STATED BY THE ASSESSEE AS TURNING, MILLING . G R INDING , DR ILLI NG ETC. , ARE NOT ACTIVITIES OF MANUFACTURE OR PRODUCTION OF AN AR T ICLE O R T H I N G WITHIN THE MEANING OF SECTION 80 -I 8 )2 ( (III) . (C) THE REQUIREMENT THAT WHETHER AN A C TIVITY AMO U NTS TO AC T I V IT Y O R PRODUCTION OF AN ARTICLE OR THING IS THAT THE RAW MATERIAL MUST BE IN T H E FI R S T I NSTANCE , SUBJECT E D TO A PROCESS OF SUCH A NATU R E THAT IT CA NN O T B E TERM E D TO BE THE SAME AS THE END PRODUCT AFTER THE RAW MATERIAL UNDERG OES T H E PROCESS OF MANUFA C TURE AND TO PUT IT DIFFERENTLY TH E FINAL P R ODUCT DOES NOT RETAIN THE IDENTITY OF RAW MATERIAL AFTER IT HAS U NDERGONE T HE P R O CESS OF MANUFACTURE. REFER E NCE FOR THIS PURPOSE C AN BE MADE TO TH E FO L L OWING DECISIONS: (I) BRAKES INDIA LTD. V . SUPDT . OF CENTRAL E X CISE [1997] 10 SCC 717; (II) CCE V. S.R. TISSUES P . LTD . [2005] 5 RC 280; 197C T R 43 7 ( SC ) ; ITA NOS.702&703/BANG/2011 PAGE 4 OF 13 (III) CIT V. GEM INDIA MANUFACTURING CO. [2001] 249 ( ITR 307(SC) ; (IV) CIT V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS P. LTD . [ 2006] 282 ITR 568 (GUJ); (D) IN ORDER TO BECOME ELIGIBLE FOR DEDUCTION UNDE R SECTION 80- IB IT I S ONE O F THE NECESSARY CONDITIONS THAT THE ASSESSEE SHOULD MANUFACTURE OR PR O DUCE AN ARTICLE OR THING OF THE NATURE SPECIFIED UNDER SECTION 80 - 18 ( 2 ) ( I II) . T HE PROCESS OF TURNING , MILLING! DRILLING , GRINDING ETC. , ARE N O T ACTIVITI ES OF MANUFACTURE OR PRODU C TION OF AN ARTICLE OR THING W ITHI N T H E M EAN I NG O F SECTION 80- IB (2) (III) . IF THE 'CHARACTER OR USES ' TEST I N APPLI E D THER E WAS N O CHANGE IN THE BASIC CHARACT E RISTICS OF FORGING PRODU C T SHEET S AN D SO CA LL ED FINISHED PRODUCT AS GIVEN ABOVE . THE PRODUCT DID NOT U NDERGO A NY C H ANGE ON ACCOUNT OF VARIOUS PROCESSES STATED TO BE C ARRIED ON BY TH E ASSESSEE AND THUS NO MANUFACTURING ACTIVITY INV O LVED. T HE A S S ESSEE WERE NOT ENTITLED TO THE SPECIAL DEDUCTION UNDER SECTION 8 0- IB. (E) AS A RESULT OF AFORESAID DISCUSSION, I HAVE NO HESI T AT I ON IN CO M ING T O T H E CONCLUSION THAT THE ACTIVITY OF THE ASSESSEE FALLS SHORT OF TH E MANUFACTURING P ROCESS AND IT DOES NOT AMOUNT TO MANUFACTURING O R P R ODU C I N G ANY ARTICLE OR THING WITHIN THE MEANING OF SECTION 80IB OF THE INCOME TAX ACT, 1961. (F) REGARDING THE ASSESSEE REFERENCE TO THE DE C ISION OF CIT V S NORTHE R N AROMATICS LTD (2005) 6(1)ITCL 411 (DEL-HC) WHEREIN IT IS S TATED T O BE HELD THAT THE ACTIVITY OF DOING JOB WORK FOR OTHERS TO MANUFACTURE P R ODU C T IS TO B E TREATED AS MANUFACTURING ACTIVITY, THE MAIN QUESTION INVOLVE D I N T H E ASSESSEE'S CASE IS WHETHER THE ACTIVITY OF THE ASSESSEE I S OF MANUFACTURE OR NOT . SINCE, THE ASSESSEE HAS FAILED IN THE TEST AND IT I S PROVED BE YO N D DO U BT THAT THE ACTIVITY IS NOT THAT OF MANUFACTURING, THE QUESTI ON OF APP L ICA B ILI TY O F THE SAID CASE DOES NOT AR I SE . EVEN OTHERWISE, THE APPLICABILITY OF DEDUCTION UNDE R SECTION 80 I B F O R U NIT S ENGAGED UNDER JOB/LABOUR CONTRACT IS A DEBAT A BLE ISSUE . T H I S B E ING J O B WORK, IS NOT ENTITLED TO THE BENEFIT, BECAUSE THE ASSESSEE I S RE CE IVIN G O N LY LABOUR CHARGES AND THEREBY LOSES THE CHARACTER OF A MANUFACTU RE , MUC H LES S , A REAL MANUFACTURER AND THE REAL MANUFACTURE IS ONLY PRAGATHI AU TOMA TIO N PRIVATE LIMITED, WHICH HAS BEEN CLAIMING THE SAID D E DUCT I ON. THE P U NJ AB AND ITA NOS.702&703/BANG/2011 PAGE 5 OF 13 HARYANA HIGH COURT HAS ADMITTED A REFERENCE PETITIO N OF THE DE P ARTM EN T UNDER SECTION 80I, IN THE CASE OF LIBERTY GROUP MARKETING DIVI SI O N VS. CIT (294 1TR 61) REGARDING THE ALLOWABILITY OF DEDUCTION UNDE R SE C TION 8 0 R F OR GETTING GOODS MANUFACTURED BY THIRD PARTY. ON THE SAME LINE, T H E Q UE S TI O N O F ALLOWABILITY OF DEDUCTION UNDER SECTION 8018 FOR T HE UNITS DOING JOB W ORK I S ALSO , DEBATABLE. HENCE, IN THE ABSENCE OF ANY JUDGMENT OR VI E W E X P R E S SE D EITHER BY THE HON ' BLE SUPREME COURT OR BY THE JURISDICTIONAL HIGH CO URT , T HE DEDUCTION IS DISALLOWED ON THIS ACCOUNT ALSO. (G) THE ASSESSEE WAS ASKED T O PRODUCE ACQUAINTANC E R O LL T O CONFI RM IT S COMPLIANCE TO SUB-CLAUSE (IV) TO CLAUSE 2 OF SECTION 1 0IB RE GA RD ING EMPLOYMENT OF TEN OR MORE WORKS IN THE MANUFACTU R ING PR O C E S S I F TH E MANUFACTURING ACTIVITY IS CARRIED OUT. THE ASSESSEE HAS ADMITTED IN H I S L E T T E R DATED 6.11 . 2007 THAT IT IS NOT MAINT AI NING ANY ACQUAINTANC E ROLL AND GAVE A LIST OF DESIGNATION OF EMPLOYEES AND WAGES PAID FOR EACH O F THE EMPLOY E E S A S PER BOOKS OF ACCOUNTS. HOWEVER, NEITHER TH E PAYMENT VOUCHER S NOR TH E NA ME OF THE EMPLOYEES ARE FURNISHED. FROM THE LIST IT I S SEEN THAT DURING T HE Y E A R THE ASSESSEE HAS EMPLOY E D 9 OPERATORS, 1 SUP E RVISOR 1 ENGI NEE R A ND 3 HELPERS . THOUGH ACCORDING TO THE ABOVE DETAILS, THE NUMBER EMPLOYEES ARE MORE THAN 10, THE ASSESSE E HAS NOT COVERED THE EMPLOY E ES U ND ER ESI , W H I CH IS COMPULSORY FOR ANY UNIT IF 10 OR MORE EMPLOYEES ARE EMPLOYED . D U R I N G SURVEY ON 28 . 4.2006, A STATEMENT WAS TAKEN FROM THE SUPERVISO R SR I . ARUN KUMAR, WHO HAS STATED THAT THE NUMBER OF EMPLOYEES W ORKING I N TH E PREMISES IS 9 (REPLY TO QUESTION NO . 3) AND THIS STATEMENT WAS FUR THER CONFIRMED BY THE PARTNER SRI . AJIT R.KUNTE, WHILE REPLYING TO THE Q U E S T I ON DURING HIS STATEMENT FOR THE QUESTION 14. IN ADDITION TO THIS THE STATEM E NT OF EMPLOYEES FURNISHED DOES HAVE ANY ADMINISTRATIVE OR ACCOUN T ING S T AFF, W HIC H IS DIFFICULT TO ACCEPT FOR SUCH A BIG ORGANIZATION . IN THE AB S EN CE OF ACQUAINTANCE ROLL, PAYMENT VOUCHERS AND NAME OF THE EMPLO YE E S , STATEMENT OF EMPLOYEES FURNISHED THROUGH LETTER DAT ED 6.11.2007 BY THE ASSESSEE WAS REJECTED. THE FACT THAT THE ASSESSEE HAS NOT REGISTERED T HE UNIT UNDER ESI CLEARLY SHOWS THAT THE NUMBER OF EMPLOYEES EMPLOYED IN THE MANUFACTURING PROCESS (AS CLAIMED BY THE ASSESSEE) IS LESS THAN 10. THIS IS SUPPORTED BY THE STATEMENT OF THE SUPERVISOR MADE DURING TH E S UR VEY O N 28 . 4.2006. ALL THESE CLEARLY SHOWS THAT THE ASSESSEE HAS N O T F UL FILL E D THE PROVISIONS OF SUB-CLAUSE (IV) TO CLAUSE 2 OF SECTION 10IB, REGARDING THE EMPLOYMENT OF TEN OR MORE WORKERS IN THE MANUFACTURING PRO CESS. H ENCE THE CLAIM OF DEDUCTION OF THE ASSESSEE UNDE R SECTION 80 IB IS BEING DISALL OWED ON THIS ACCOUNT ALSO. IN ITA NOS.702&703/BANG/2011 PAGE 6 OF 13 VIEW OF ABOVE, THE DEDUCTION UNDER SECTION 80IB OF RS.21,42,120/- IS REJECTED. SIMILAR DISALLOWANCE IN A SUM OF ` 9,77,509/- WAS MADE FOR THE ASSESSMENT YEAR 2004-05 IN THE PROCEEDINGS U/S 143( 3) READ WITH SEC.148 OF THE ACT. 4. AGGRIEVED BY THESE ORDERS, THE ASSESSEE MOVED TH E MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORI TY BEFORE WHOM LEARNED AR OF THE ASSESSEE SUBMITTED AS UNDER: THE MAIN POINT DISPUTED IN THE SAID APPEAL BY THE APPELLANT IN THIS CASE IS THAT THE LEARNED ASSISTANT COMMISSIONE R OF INCOME TAX, ' CIRCLE 6(1) HAS FAILED TO APPRECIATE THE ' FACT THAT THE ASSESSEE IS A MANUFACTURER OF A COMPONENT PARTS OF A TURRET, CALLED THE MAIN FLANGE AND HIRTH COUPLINGS , DESPITE THE ASSESS , GIVING SUFFICIENT EXPLANATIONS AND EVIDENCE TO SHOW THAT VARIOUS PROCESSES WERE , UNDERTAKEN BY IT IN ORDER TO MANUFACTURE THE SAID COMPONENT PART FOR USE IN TURR ETS BY ITS CUSTOMER M/S.PRAGATI AUTOMATION ' PRIVATE LIMITED. SINCE PRAGATI AUTOMATION PRIVATE LIMITED HAS SUPPLIED THE RAW MATERIALS ' R EQUIRED FOR ' THIS MANUFACT U RE ' ONLY LABOUR OR MACHINING CHARGES HAVE BEEN BILLED TO THEM. THIS WA S REQUIRED , IN VIEW ' OF THE RULES UNDER KST ACT. IT IS VERY CLEAR THAT THE INCOME OF THE . ASSESSEE HAS ARISEN DUE TO TH I S MANUFACTURING ACTIVITY ONLY ARID THE MANUFACTURER OF A NEW COMPONENT CALLED GENERALLY AS A COUPLING OR A H IRTH COUPLING WHICH ALONE CAN BE USED I N A TURRET FOR TURRET TO WORK EFFICIENTLY AND UNIFORMLY FOR REHEATED ACCURATE AND EXACT COMPONENT PART WHICH BECOMES USABLE FOR ITS INTENDE D USE AND I S A DISTINCT PART AS COMPARED TO THE RAW FORGED BLO CK. THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX, C IRCLE 6(1) ' HAS DISALLOWED OUR CLAIMS ON THE PRECONCEIVED AND F ALSE PROMISE THAT WE ARE NOT MANUFACTURING ANY INDEPENDE NT ARTICLE WITH A DISTINCT IDENTITY, AND HAVING MARKETABILITY ON ITS OWN. THE REAL FACT OF THE CASE IS THAT WE HAVE PROVIDED INFORMATION WITH VISUAL PRINTS OF THE RAW MATERIAL AND THE FINI SHED COMPONENT ALONG WITH DETAILS OF THE VARIOUS PROCESS ES INVOLVED IN THE MANUFACTURE OF A COMPONENT PART OF A TURRET ITA NOS.702&703/BANG/2011 PAGE 7 OF 13 WHICH IS KNOWN AS THE MACHINE TOOL INDUSTRY AS MAIN FLANGE OR A COUPLING ONLY IN THIS FORM CANT BE USED FOR ITS INTENDED USE AND IS AN ARTICLE OR THING WITH DISTINCT USE AND LO OK THAN THE RAW FORGING PART SUPPLIED BY OUR CUSTOMER. REGARDING OUR NEED TO BILL IN THE FORM , WE WOULD LIKE TO STATE THAT THE BILLING IS MADE AFTER COMPLETION OF ITS 3 OR 4 OF THE PROCESSES BY WHICH ALONE THE COMPONENT PART BECOMES USABLE FOR ITS INTENDED USE AND IS A DISTINCT PART AS COMP ARED TO THE RAW FORGED BLOCK. FURTHER AS PER DETAILED EXPLANATION OF EACH PROCESS GIVEN BY THE TECHNICAL PARTNER IN THE WRITE UP ABOUT PRERANA ENGINEERING WORKS ACTIVITY IT CAN BE SEEN THAT A NEW AND DISTIN CT COMPONENT IS MANUFACTURED BY THE ASSESSEE AND HENCE SATISFIES THE CONDITION LAID DOWN BY SECTION 80 I B 2 (III) OF THE IT ACT . THE CONTENTION OF THE ASSESSING AUTHORITY THAT THE PROCESSES OF TURNING, MILLING, GRINDING ETC. IN THE MECHANICA L ENGINEERING INDUSTRY ARE COMPLICATED PROCESS REQUIRING HIGH TEC HNICAL SKILLS. M/S PRERANA ENGINEERING WORKS HAD TOTAL EMPLOYEE ST RENGTH OF 14 WORKERS FOR ALL THE YEARS WHEREIN SECTION 80 I B HAS BEEN CLAIMED AND THE FIRM HAS ALWAYS USED POWER FOR ITS MACHINES TO OPERATE. THE PROCESS AS EXPLAINED BY THE LEARNED ACIT ARE ON LY DICTIONARY MEANINGS AND ARE MUCH DIFFERENT IN THEIR APPLICATION WHICH IS TECHNICAL AND REQUIRES HIGH ENGINEERING KN OWLEDGE AND OPERATING SKILLS. WE RELY UPON THE FOLLOWING DECISIONS OF THE SUPREME COURT AND HIGH COURTS IN SUPPORT OF OUR CLAIM THAT WE ARE MANUFACTURING A DISTINCT AND NEW COMPONENT PART USE D IN MECHANICAL ENGINEERING INDUSTRY. COMMISSIONER OF INCOME TAX VS. EMPTEE POLY-YARN PRI VATE LIMITED 320 ITR 665(SC) INCOME TAX OFFICER VS . ARIHANT TILES & MARBLES PRIVATE LIMITED. 320 ITR 79 (SC) COMMISSIONER OF INCOME TAX VS. ORACLE SOFTWARE INDI A LIMITED 320 ITR 546 (SC) ITA NOS.702&703/BANG/2011 PAGE 8 OF 13 COMMISSIONER OF INCOME TAX VS. ALFA LAMINATION 329 ITR 348 (GUJ) THERE ARE SOME MORE HIGH COURT & TRIBUNAL DECISIONS WHICH STATE THAT THE MANUFACTURE OF ANY COMPONENT PART OR ARTICLE EVEN WITH MATERIAL SUPPLIED BY THE CUSTOMER IS MANU FACTURE AND ENTITLED TO RELIEF UNDER ' SECTION 80 IB AS CLAIMED. EVEN AS PER INTERPRETATION OF MANUFACTURE IN THE CA SE OF BUDHARAJA AND CO . (1993) 204 ITR 412 CITED BY THE ASSESSING AUTHORITY WE ARE PROCESSING A NEW AND DISTINCT ARTI CLE OR THING AND HENCE ENTITLED TO CLAIM RELIEF UNDE R SECTION 80 I B. WE ARE PRODUCING SOME OF OUR COMPONENTS PARTS IN , THE RAW MATERIAL COMPONENT PARTS IN THE RAW MATERIAL FORM A ND ALSO MANUFACTURED COMPONENT PART OF THE COUPLING FOR YOU R VISUA L INSPECTION AND UNDERSTANDING OF THE MANUFACTURED CO MPONENT PART WHICH IS A DISTINCT ARTICLE WITHIN TH E MEANING OF SECTION 80 LB. AS MENTIONED IN POINT 12 AND 13 REGARDING BAD DEBTS IN THE GROUNDS O F APPEAL FILED EARLIER, THE ASSESSING AUTHORITY HAS DISALLOWED A BAD DEBT CLAIM OF RS. 51,880/- ON THE GROUND THAT DEFECTIVE MATERIAL HAS BEEN SUPPLIED. THE COUPLING SUPPLIED TO THE CUSTOMER IS NOT DEFECTIVE MATERIAL BUT A GOOD W ORKING COUPLING BUT IT DID NOT SUIT THE PURPOSE OF THE CUS TOMER. THE BILL FOR THIS AMOUNT WAS RAISED IN EARLIER PREVIOUS YEAR AND GOODS WERE DELIVERED TO HIM IN THE COURSE OF BUSINESS, IT 'S ONLY IN THE NEXT YEAR HE SAID GOODS ARE NOT SU I TABLE FOR THE BUSINESS AND HENCE DID NOT AGREE TO PAY THE AMOUNT. THUS AMOUNT BECOM I NG IRRECOVERABLE AND ALSO SATISFYING THE PROVISIONS OF SEC 36(2) IN TOTALITY. HENCE THE BAD DEBT SHOULD BE ALLOWED. THE ITEM WAS WRITTEN OFF IN THE PREVIOU S YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07 WHEN THE AM OUNT BECAME IRRECOVERABLE AND WAS ACTUALLY WRITTEN OFF I N TH E BOOKS AND SO IT MUST ALLOWED AS BAD DEBT. ADDITIONAL PROOF OF THE ASSESSEE BEING A MANUFACTUR ER WHO MANUFACTURES AN ARTICLE OR THING I . E. MACHINED COMPONENT PART OF A HIRTH COUPLING IS THE FACT THAT AS PER THE EXC ISE TARIFF RULES FORGED BLOCK (RAW MATERIAL) COMES UNDER TARIF F NO. 7326.19 AND THE MACHINED COMPONENT COMES UNDER TARI FF NO . 8466.93. ITA NOS.702&703/BANG/2011 PAGE 9 OF 13 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE ES REPRESENTATIVE, THE CIT(A) CONCLUDED THAT THE ASSES SEE HAD DERIVED INCOME FROM CARRYING OUT MANUFACTURING ACTI VITY AND THUS ENTITLED TO DEDUCTION U/S 80-IB OF THE ACT. TH US, HE ALLOWED THE CLAIM OF THE ASSESSEE. WHILE ALLOWING THE CLAI M OF THE ASSESSEE, THE CIT(A) HAS OBSERVED AS UNDER: 5.1 I HAVE ALSO GONE THROUGH THE CONTENTIONS OF THE APPELLANT'S AR WHO HAS GIVEN AN ELABORATE EXPLANATI ON ON THE GROUNDS OF APPEAL AS TO HOW THE COMPANY HAS MANUFACTURED COMPONENT PARTS OF AN ARTICLE GENERICA LLY CALLED HIRTH COUPLINGS AND WHICH IS USED IN THE MAN UFACTURE OF TURRETS BY THE MACHINE TOOL INDUSTRY. THE AR HAS ALONG WITH THE TECHNICAL PARTNER MR. DEEPAK JOGLEKAR PROD UCED BEFORE ME THE RAW MATERIAL PART AND ALSO THE FINISH ED PARTS AND HE HAS PRODUCED THE BILLING MADE BY THE PARTY T OWARDS VA RI OUS BILLS WHICH SHOW AT EVERY STAGE A NEW AND DISTI NCT COMPONENT PART IS PRODUCED FOR WHICH ELABORATE BOOK LET EXPLAINING ALL THE TECHNICAL PROCESSES AND HOW WITH THE HELP OF THOSE PROCESSES A NEW COMPONENT PART HAVING A DISTINGUISHED USE IS PRODUCED. 5.2 . THE APPELLANT HAS PLACED RELIANCE ON THE DECISIONS OF VARIOUS HIGH COURTS. I HAVE GONE THROUGH THE SAME A ND IT IS SEEN THAT IN ALL THE CASES THE HON'BLE SUPREME COUR T HAS AGREED THAT MANUFACTURE ' MEANS CONVERSION OF A RAW MATERIAL INTO A DISTINCT ARTICLE WHICH HAS ITS OWN USE DIFFERENT FROM THE USE OF THE RAW MATERIAL AND THE USE OF THA T COMPONENT PART CANNOT BE ACHIEVED WITHOUT THE CONVE RSION. 5.3 IN THE CASE OF COMMISSIONER OF INCOME TAX VS. E MPTEE POLY-YARN PRIVATE LTD, THE ISSUE INVOLVED IS WHETHE R TWISTING AND TEXTURIZING OF PARTIALLY ORIENTED YARN (POY) AM OUNTS TO MANUFACTURE IN TERMS OF SECTION 80 IA OF THE IT ACT , 1961? IT WAS HELD BY THE SUPREME COURT THAT POY IS A SEMI - FINISHED YARN NOT CAPABLE OF BEING PUT IN WARP OR W EFT, IT CAN ONLY BE USED FO R MAKIN G TEXTURIZED YARN , WHICH, IN TURN CAN BE USED IN THE MANUFACTURE OF FABRIC. IN OTHER WORD S, POY CANNOT BE USED DIRECTLY TO MANUFACTURE FABRIC. ACCO R DING T O THE EXPERT, CRIMPS, BULKINESS ETC ARE INTRODUCED BY A PROCESS CALLED T HERM O MECHANICAL PROCESS INTO POY WHICH CONVERTS POY INTO TEXTURIZED YARN. IF ON E EXAMINES THIS ITA NOS.702&703/BANG/2011 PAGE 10 OF 13 THERMO MECHANICAL PROCESS IN DETAIL IT BECOMES CLEAR THAT TEXTURISING AND , TWISTING OF YARN CONSTITUTES 'MANUFACTURE' I N THE CONTEXT OF CONVERSION OF POY INTO TEXTURISED YA RN. ALSO THE JUDGMENT IN THE CASE OF CIT VS. ORACLE SOFTWARE INDIA LTD . WAS REFERRED TO WHICH IS REPRODUCED HEREIN BELOW. 'THE TERM 'MANUFACTURE' IMPLIES THE CHANGE; BUT EVE RY CHANGE IS NOT A MANUFACTURE DESPITE THE FACT THAT E VERY CHANGE IN AN ARTICLE IS THE RESULT O F A TREATMENT OF LABOUR AND MANIPULATION. HOWEVER THIS TEST OF MANUFACTURE NEEDS TO BE ' SEEN IN THE CONTEXT OF THE ABOVE PROCESS IN AN ' OPERATION/PROCESS RENDERS A COMMODITY OR ARTICLE FI T FOR USE FOR WHICH IS OTHERWISE NOT FIT, THE OPERATION/PROCE SS , FALLS WITHIN THE MEANING OF THE WORD 'MANUFACTURE'. ' THE STRUCTURE, CHARACTER, THE USE AND THE NAME OF T HE PRODUCT ARE INDICATION TO BE TAKEN INTO ACCOUNT WHI LE DECIDING THE QUESTION WHETHER THE PROCESS IS A MANU FACTURE OR NOT. WHEN ITEMS LIKE CONVERSION OF BLANK CD INTO RESOURCE CD (CD CONTAINING SOFTWARE PROGRAM) IN THE CASE OF ORA CLE SOFTWARE INDIA LTD . AND TWISTING AND TEXTURISING OF POY IN THE CASE OF EMPTEE POLY YARN PRIVATE LTD. AMOUNTS TO MANUFACTURE IT IS ' APPROPRIATE TO CONSIDER THAT CONVERSION OF RAW MATERIAL IN THE FORM OF FORGING INTO ' FINISHED PRODUCT CALLED HIRTH COUPLING ALSO IS A MANUFACTURE. DURING . THE APPELLATE PROCEEDINGS, SHRI DEEPAK JOGLEKAR, PARTNER ATTENDED ALONG WITH THE RAW MATERIAL AND TH E FINISHED COMPONENT OF THEIR PRODUCTS. THE AR ALSO F URNISHED THE BOOKLET OF THE FIRM HAVING PICTORIAL EVIDENCES OF VARIOUS STAGES OF PRODUCTION, VARIOUS MACHINES INSTALLED AT THE FACTORY PREMISES AS WELL AS THE PICTURES OF RAW MAT ERIAL AND THE FINISHED P R ODUCTS ALONG WITH DETAILED DESCRIPTION OF VARIOUS ACTIVITY WHICH TAKES PLACE IN THE PROCESS OF PRODUCING THE END PRODUCT BY WAY OF AN EXAMPLE IN MANUFACTURING OF MAIN FLANGE, THE FOLLOWING PROCESSES ARE INVOLVED: 1.RAW MATERIAL IS RECEIVED IN A FORM OF FORGING. 2. PRE MACHINING OF THE SAME IS DONE BEFORE IT IS P UT ON CNC LATHE FOR FIRST AND SECOND OPERATION OF TURNING . 3. IT IS TAKEN UP FOR GEAR MILLING ON MACHINING CEN TER. 4. AFTER GEAR MILLING IT IS TAKEN UP FOR DEBURRING AND DRILLING ITA NOS.702&703/BANG/2011 PAGE 11 OF 13 TAPPING ON RADIAL DRILLING MACHINE. 5. MATERIAL IS MOVED ON TO HEAT TREATMENT TO A VEND OR. 6. CASE REMOVAL IS DONE AFTER HEAT TREATMENT ON VER TICAL MACHINING CENTER AND DEBURRING & DRILLING IS PERFOR MED ON RADIAL DRILLING MACHINE. 7. MATERIAL IS MOVED FOR HEAT TREATMENT AGAIN TO A VENDOR. 8. AFTER HEAT TREATMENT MATERIAL IS MOVED FOR BLACK ENING TO DIFFERENT VENDOR . 9. AFTER BLACKENING MATERIAL IS LOADED ON VERTICAL MACHINING CENTER FOR DR I LLING AND TAPPING. 10 . MATERIAL IS THEN MOVED ON TO CYLINDRICAL GRINDING F OR 10 AND FACE GRINDING. 11 . MATERIAL IS MOUNTED ON MANDRILL FOR FURTHER OPERATI ONS ON CYLINDRICAL GRINDING. 12. FINALLY MATERIAL IS LOADED ON GEAR GRINDING MAC HINE FOR GEAR GRINDING ALONG WITH FIXED COUPLING. SIMILARLY, THE AR FILED THE SUBMISSION OF VARIOUS S TAGES OF PRODUCTION FOR FIXED COUPLING, SLIDING COUPLING ETC ., ALONG WITH PICTORIAL EVIDENCES. THE AO HAS FURTHER HELD THAT THE APPELLANT FIRM HAS LESS THAN 10 EMPLOYEES EMPLOYED IN THE MANUFACTURING PROCESS AND HENCE, NOT ELIGIBLE FOR DEDUCTION U/S 80LB OF THE A CT. THE AO HAS FURTHER HELD THAT SINCE THE APPELLANT IS NOT RE GISTERED WITH ESI, THE CONTENTION OF THE APPELLANT THAT THEY HAVE EMPLOYED 9 OPERATORS, 1 SUPERVISOR, 1 ENGINEER AND 3 HELPERS IS ALSO NOT ACCEPTABLE. ON THE OTHER HAND, THE APPELLANT HAS PRODUCED THE L IST OF PEOPLE EMPLOYED IN THE FACTORY DURING THE PERIOD UN DER CONSIDERATION ALONG WITH EVIDENCES OF PAYMENTS MADE TO THEM. FROM THE EVIDENCES MAINTAINED BY THE APPELLAN T, I AM SATISFIED THAT THE APPELLANT HAS EMPLOYED 10 OR MOR E WORKERS IN A MANUFACTURING PROCESS THE AID OF POWER AND HENCE, ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT. ..I AM SATISFIED THAT THE APPELLAN T H AS PRODUCED EVERY TIME THE RAW MATERIAL AND THE FINISHED PRODUCT WHICH IS US ED AS A ITA NOS.702&703/BANG/2011 PAGE 12 OF 13 COMPONENT PART IN OTHER INDUSTRY . ALSO THE POINT THAT THE SA L E OF THE FINISHED PRODUCT IS MADE TO ONLY ONE PARTY OR THE S ISTER CONCERN IS IMMATERIAL. HENCE, I CONCL UDE THA T TH E APPELLANT HAS DERIVED INCOME FROM CARRYING OUT MANU F AC T URING ACTIVITY AND THUS ENTITLED TO DEDUCTION U/S 80IB OF THE IT A CT. ACCORDINGLY, THIS GROUND OF APPEAL IS ALLOWED. AGGRIEVED BY THIS ORDER OF THE CIT(A), THE REVENUE IS ON APPEAL BEFORE US. 6. AT THE TIME OF HEARING, LEARNED DEPARTMENTAL REPRESENTATIVE REITERATED THE CONTENTS OF THE ASSES SMENT ORDER AS HIS SUBMISSIONS. HE ALSO RELIED ON THE GROUNDS OF APPEAL RAISED BEFORE US AS HIS SUBMISSIONS. PER CONTRA, L EARNED AR OF THE ASSESSEE PLACED ON RECORD THE FOLLOWING: I) EXPERT OPINON BY KAMATH S.B. FORMER DIRECTOR, IMTMA DESIGN INSTITUTE, BANGALORE. II) EXTRACTS FROM THE BOOK MARKS STANDARD HANDBOOK FOR MECHANICAL ENGINEERS 11 TH EDITION. III) ANNEXURE 1 - FULL DETAILS OF PLANT AND MACHINERY. IV) PHOTOGRAPHS OF (I) MAIN FLANGE FORGING, MAIN FLANGE AFTER TURNING, MAIN FLANGE AFTER TEETH MILLING AND HEAT TREATMENT AND FINISH MAIN FLANGE, (II) FIXED COUPLING FORGING, FIXED COUPLING AFTER TURNING, FIXED COUPLING AFTER TEETH MILLING AND HEAT TREATMENT AND FINISHED FIXED COUPLING (III) SLIDING COUPLING FORGING, SLIDING COUPLING AF TER TURNING, SLIDING COUPLING AFTER TEETH MILLING AND HEAT TREATMENT AND FINISHED SLIDING COUPLING. V) ANNEXURE OVERVIEW : HIRTH COUPLING STANDARD AND CUSTOM HIRTH COUPLINGS FROM TRANSATLANTIC CONNECTION AND DIVIPREC ETC. BY PLACING THE ABOVE MATERIALS ON RECORD, HE STRONG LY SUPPORTED THE ORDER OF THE CIT(A) AND REITERATED THE CONTENTS OF THE CIT(A) (EXTRACTED ELSEWHERE OF THIS ORDER) AS HIS SUBMISSI ONS. ITA NOS.702&703/BANG/2011 PAGE 13 OF 13 7. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND CIRCUMSTANCES AND THE MATERIALS ON RECORD . WE FIND THAT THE CIT(A) CAME TO THE CONCLUSION THAT THE ASS ESSEE IS ENTITLED TO DEDUCTION U/S 80-IB(3) SINCE IT DERIVED INCOME BY CARRYING OUT MANUFACTURING ACTIVITY AFTER PHYSICALL Y VERIFYING THE RAW MATERIAL PART AND ALSO THE FINISHED PRODUCT ALO NG WITH BILLS RAISED BY THE PARTIES TOWARDS VARIOUS ACTIVITIES AN D CAME TO THE CONCLUSION THAT AT EVERY STAGE A NEW AND FINISHED C OMPONENT PART WAS PRODUCED. HENCE, WE DO NOT FIND ANY INFIRM ITY IN THE ORDER OF THE FIRST APPELLATE AUTHORITY AND AS SUCH CONCURRING WITH THE REASONS RECORDED BY HIM IN THE APPELLATE ORDERS , WE DISMISS THE GROUNDS OF APPEAL OF THE REVENUE. 8. IN THE RESULT, THE REVENUES APPEALS ARE DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 31ST AUGUST, 2012 . SD/- SD/- (GEORGE GEORGE K) JUDICIAL MEMBER (N.BARATHVAJA SANKAR) VICE-PRESIDENT EKS COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE