Sesa Goa Limited, Panaji V. The Joint Commissioner of Income Tax, Panaji

ITA 89/PAN/2012

• Counselvise Citation: 8924114 RSA 2012
• Duration Of Justice: 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 30-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: VINOD BINDAL CA VIJAY GUPTA; G MTAXATION
• Keywords: Capital asset; Recovery proceedings; Business income; Depreciation; Transfer pricing; Business expenditure; Double taxation relief; International transaction; Additional depreciation; Earning of tax free income; Deemed to accrue or arise in india; Retrospective amendment; Question of law; Cost of acquisition; Wholly owned subsidiary; Fair market value; Speculation loss; Competent authority; Commercial expediency; Onus to prove; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 92B; 92A; 10AA; 80HHC; 14A; 37(1); 43(5); 194C; 10B; 144; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 89 /PNJ/201 2 (ASST. YEAR 20 08 - 09 ) SESA GOA LIMITED APPELLANT SESA GHOR, 20, EDC COMPLEX, PATTO, PANAJI GOA 403 001. PAN : AACCS7101B VS JOINT COMMISSIONER OF INCOME - TAX RESPONDENT RANGE 1, PANAJI - GOA APPELLANT BY : VINOD BINDAL, CA VIJAY GUPTA, CA & G.M(TAXATION) RESPONDENT BY : SHRI S.K. AMBASTHA , DR SHRI M.R.BANGARI , DR DATE OF HEARING : 16 / 04 /2013 DATE OF ORDER : 1 7 / 05 /2013 O R D E R PER P.K. BANSAL : 1. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE JOINT COMMISSIONER OF INCOME TAX, RANGE 1, PANAJI DT. 19 . 10 .201 2 PASSED UNDER SECTION 143(3) R/W SECTION 144 C ( 13 ) BY TAKING THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1.1. THE LEARNED ASSESSING OFFICER ERRED IN MAKING AND THE DISPUTE RESOLUTION PANEL IN DIRECTING VIDE THEIR ORDER DATED 30.09.2012, THE ADDITION OF RS. 3,95,27,600/ - PURPORTEDLY AS TRANSFER PRICING ADJUSTMENT AS DETERMINED BY THE TRANSFER PRICING OFFICER (TPO) VIDE HIS ORDER U/S. 92CA OF THE ACT, DATED 31.10.2011. 1.2. THE LEARNED TPO ERRED IN TREATING THE PURCHASE OF COKING COAL FROM M/S. BHP BILLITON MARKETING LTD., AS 'INTERNATIONAL TRANSACTION', ALLEGING THAT THE SAID M/S. 2 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) BHP BILLITON AND THE APPELLANT WERE 'ASSOCIATED ENTERPRISES' WITHIN THE MEANING OF SECTION 92(2) (M) OF THE ACT. THE TPO OUGHT TO HAVE APPRECIATED THAT THERE WAS NO RELATIONSHIP OF MUTUAL INTEREST BETWEEN THE TWO ENTERPRISES EITHER AS PRESCRIBED OR OTHERWI SE, AND HENCE THE TWO COULD NOT HAVE BEEN CONSIDERED AS 'ASSOCIATED ENTERPRISES'. 1.3. THE DRP ERRED IN DIRECTING THE TRANSACTION WITH BHP BILLITON AS 'INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES' 1.4. THE LEARNED TPO ERRED IN INVOKING CLAUS E (M) OF SECTION 92(2) OF THE ACT - WITHOUT APPRECIATING AND REALIZING THAT THE SAME HAS NO APPLICABILITY SINCE NOTHING HAS BEEN PRESCRIBED SO FAR TO MAKE THE SAID PROVISION EFFECTIVE. 1.5. THE LEARNED DRP MADE A MISSTATEMENT THAT NO INFORMATION OR MATERI AL WAS PROVIDED TO SUBSTANTIATE THAT THERE WAS NO RELATIONSHIP OF MUTUAL INTEREST BETWEEN THE ASSESSEE AND THE BHP BILLITON FROM WHOM THE COAL PURCHASE WERE MADE DURING THE IMPUGNED YEAR. THE DRP CLEARLY MADE A FACTUALLY MISSTATEMENT WITHOUT APPRECIATING A ND ACKNOWLEDGING THE VARIOUS INFORMATION AND MATERIAL PUT ON RECORD BEFORE THEM DURING THE COURSE OF PERSONAL HEARING HELD ON 27 TH AUGUST 2012. 1.6. THE LEARNED TPO ERRED IN CONSIDERING THE ALP OF THE 52010 TONS OF COKING COAL PURCHASED BY THE APPELLANT FROM THE SAID M/S. BHP BILLITON, @ US $ 96 PER TON, AS AGAINST THE ACTUAL PRICE PAID BY THE APPELLANT @ US $ 115 PER TON. HE OUGHT TO HAVE APPRECIATED THAT CONSIDERING THE UNDERLYING FACTS PERTAINING TO THE RELEVANT T RANSACTIONS, THE ACTUAL PRICE PAID BY THE APPELLANT FOR THE SAID COKING COAL WAS INFECT THE ALP. 1.7. WITHOUT PREJUDICE TO OTHER ARGUMENTS, THE DRP AND TPO ALSO ERRED IN THEIR JUDGMENT THAT THERE WAS NO CONTRACTUAL OBLIGATION ON PART OF ASSESSEE TO BUY SPILL - OVER (LEFT OVER) QUANTITY OUT OF THE TOTAL QUANTITY AGREED TO BE PURCHASED BY THE ASSESSE (OR TO BE SOLD BY THE SELLER). THEY FAILED TO APPRECIATE THAT IN THE SUCCEEDING YEAR AS WELL, THE ASSESSE HAD TO BUY THE SPILL OVER QUANTITY AND SUCH SPILL OVER QUANTITY WAS ALSO PURCHASED AT THE RATE AGREED FOR THE YEAR TO WHICH SUCH QUANTITY RELATED TO AND NOT AT THE RATE PREVALENT DURING THE YEAR OF ACTUAL SUPPLY - EVEN THOUGH THE PREVALENT RATE WAS MUCH HIGHER. THEY FAILED TO APPRECIATE THAT IT WAS THE NO RMAL PRACTICE AND TRADE OBLIGATION TO LIFT THE ENTIRE QUANTITY AGREED TO BETWEEN THE SELLER AND BUYER. 2.1 THE LEARNED A.O. ERRED IN DISALLOWING AND THE DRP ERRED IN DIRECTING THE DISALLOWANCE OF RS. 7,01,41,535/ - AS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, PURPORTEDLY U/S. 14A OF THE ACT READ WITH RULE 8D OF THE RULES. 2.2 THE LEARNED A.O. ERRED IN HOLDING THAT THE AMOUNT OF RS. 15,44,979/ - ADDED BACK BY THE APPELLANTS THEMSELVES U/S. 14 - A OF THE ACT TOWARDS ADMINISTRATIVE EXPENSES IN RELATION TO THE EXEMPT INCOME, WAS VERY LESS CONSIDERING THE MAGNITUDE OF PURCHASE AND SALE OF INVESTMENTS MADE. HE OUGHT TO HAVE APPRECIATED THAT, 3 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 2.3 HAVING REGARDS TO THE ACCOUNTS OF THE APPELLANT, DETERMINING THE ADMINISTRATIVE EXPENDITURE AT RS. 7,17,06,514/ - AS PURPORTEDLY INCURRED IN RELATION TO THE EXEMPT INCOME OF RS. 65.15 CORES, WAS GROSSLY EXCESSIVE. 2.4 THE LEARNED A.O. OUGHT TO HAVE APPRECIATED THAT THE DIVIDEND DECLARED HAVING SUFFERED TAX UNDER SEC TION 115R OF THE ACT, AND THE GAINS ARISING IF ANY, ON THE REDEMPTION HAVING SUFFERED TAX EITHER ON LONG TERM OR SHORT TERM GAINS, THE PROVISIONS OF SECTION 14A OF THE ACT WOULD NOT BE ATTRACTED. 2.5 WITHOUT PREJUDICE, THE LEARNED AO & DRP ERRED IN HOLDING THAT RULE 8D HAS TO BE APPLIED IRRESPECTIVE WHETHER THERE IS ANY CLEAR FINDING BY THE AO TO THE EFFECT THAT THERE ARE CERTAIN EXPENSED INCURRED IN RELATION TO THE INCURRENCE OF THE EXEMPT INCOME AND THE SAME HAVE NOT BEEN DISALLOWED BY THE ASSESSE. 3.1 THE LEARNED A.O. ERRED IN DISALLOWING AND DRP ERRED IN DIRECTING AN EXPENDITURE OF RS. 1,36,91,148 / - CLASSIFIED IN THE APPELLANT'S DIRECTORS REPORT AS 'EXPENDITURE ON R & D', HOLDING THAT SUCH EXPENDITURE CANNOT BE CONSIDERED UNDER THE DEFINITION OF 'SCIENTIFIC RESEARCH' U/S. 43(4)(1) OF THE ACT. 3.2 THE LEARNED A.O. ERRED IN DISALLOWING THE SAID EXPENDITURE OF RS. 1,36,91,148 / - ALSO FOR THE REASONS THAT THE APPELLANT HAD NOT TAKEN APPROVAL OF THE DESIGNATED AUTHORITY THAT THIS ACTIVITY TANTAMOUNT TO 'SCIENTIFIC RESEARCH. 4.1 THE LEARNED A.O. ERRED IN DISALLOWING AND DRP ERRED IN DIRECTING THE DISALLOWANCE OF AN EXPENDITURE OF RS. 17,72,05,217/ - TOWARDS PAYMENT OF COMMISSION TO THE NON - RESIDENT SALES AGENT, PURPORTEDLY U/S. 40(A)(I) OF THE ACT, ALLEGEDLY FOR EITHER NOT DEDUCTING TAX AT SOURCE U/S. 195(1) OF THE ACT, OR NOT OBTAINING EXEMPTION CERTIFICATES FROM THE A.O. U/S. 195(2) OF THE ACT. 4.2 THE LEARNED AO ERRED IN CONCLUDING THAT THERE WAS NO NECESSITY TO THE APPELLANT TO ENGAGE THE COMMISSION AGENTS FOR SALE OF IRON ORE ABROAD, AND HENCE THAT THE COMMISSIONS PAYABLE WERE NOT ALLOWABLE AS BUSINESS EXPENDITURE U/S. 37 OF THE ACT. 5.1 THE LEARNED A.O. ERRED DISALLOWING AND THE DRP ERRED IN DIRECTING THE DISALLOWANCE PURPORTEDLY U/S. 40(A)(I) OF THE ACT AN EXPENDITURE OF RS. 1,27,25 ,674 / - INCURRED BY THE APPELLANT IN PAYMENT OF DEMURRAGE TO THE NON - RESIDENT BUYERS OF IRON ORE. 5.2 THE LEARNED A.O. ERRED IN DISALLOWING THE DEMURRAGE PAYMENT OF RS. 1,27,25,694 / - TO THE NON - RESIDENT BUYERS OF IRON ORE IN TERMS OF THE RELEVANT EXPORT CONTRACT. 5.3 THE LEARNED A.O. ERRED IN DISALLOWING THE DEMURRAGE PAYMENT OF RS. 1,27,25,694 / - TO THE NON - RESIDENT BUYERS OF IRON ORE IN TERMS OF THE RELEVANT EXPORT CONTRACT ALSO FOR THE REASONS THAT, SUCH PAYMENT WERE TO THE EFFECT OF MERELY RE - IMBURSEMENT OF COST INCURRED BY SUCH NON RESIDENT 6.1 THE LEARNED A.O. ERRED IN DISALLOWING AND THE DRP ERRED IN DIRECTING THE DISALLOWANCE OF THE EXPENDITURE OF RS. 23,36,876 / - TOWARDS DEMURRAGE ON SHIPS PAYABLE 4 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) TO THE FOREIGN SHIP - OWNERS, FOR THE ALLEGED REASONS THAT THE TDS WAS NOT DEPOSITED WITHIN THE DUE DATE. 6.2. THE DISALLOWANCE OF THE SAID EXPENDITURE U/S. 40(A)(I) OF THE ACT WAS NOT WARRANTED. 7. THE LEARNED A.O. ERRED IN DISALLOWING AND THE DRP HAS ERRED IN DIRECTING THE DISALLOWANCE OF THE APPELLANTS CLAIM FOR DEDUCTION OF EDUCATION CESS AND SECONDARY & HIGH SECONDARY EDUCATIONAL CESS PAID ON INCOME TAX AND FRINGE BENEFIT TAX, TOTALLY AMOUNTING TO RS. 21,11,70,993 / - , HOLDING THAT SUCH EXPENDITURES SPECIALLY COVER FOR DISALLOWANCES U/S. 40(A)(IC) AND (II) OF THE ACT. 8.1 THE LEARNED A.O. ERRED IN REJECTING THE APPELLANTS CLAIM AND THE DRP ERRED IN DIRECTING THE REJECTION OF THE CLAIM FOR DEDUCTION OF RS. 18,04,30,468 / - U/S. 10 - B OF THE ACT IN RESPECT OF ITS EOU AT CODLI ALLEGING THAT THE SAID UNITS IS NOT ENGAGED IN ANY 'MANUFACTURE OR PRODUCTION OF ARTICLE OR THING'. 8.2 THE LEARNED AO AND DRP OUGHT TO HAVE APPRECIATED THAT THE INPUT PROCESSED IN THIS EOU BEING THE WASTE MATERIAL (TAILINGS) AND THE FINAL PRODUCT BEING MARKETABLE ULTRA IRON ORE FINES, THE ACTIVITY CARRIED ON BY THE EOU AT CODLI SATISFIED ALL THE CONDITIONS MENTIONED IN THE DEFINITION OF 'MANUFACTURE' U/S. 2(29BA) OF THE ACT. 8.3 THE LEARNED A.O. ALSO OUGHT TO HAVE APPRECIATED THAT THE ACTIVITY TO PRODUCE/ATTAIN THE MARKETABLE IRON ORE FINES OUT OF WASTAGES (TAILINGS) BEING PART OF THE MINING PROCESS, THE ACTIVITIES CARRIED ON IN THE SAID EOU ALSO AMOUNTED TO 'PRODUCTION' AND THAT THE SAID EOU WAS ELIGIBLE FOR DEDUCTION U/S. 10 - B OF THE ACT, ON THIS COUNT ALSO. 8.4 THE LEARNED A.O. AND DRP ERRED IN REJECTING THE APPELLANT'S CLAIM FOR DEDUCTION U/S. 10 - B OF THE ACT IN RESPECT OF THE AFORESAID EOU, ALSO FOR THE REASONS THAT NO SEPARATE BOOK OF ACCOUNTS ARE MAINTAINED FOR EOU AND FOR NON - EOUS. THE A.O. OUGHT TO HAVE APPRECIATED THAT THE APPELLANT HAD PROVIDED A REPORT OF AN ACCOUNTANT AS PROVIDED U/S. 10 - B(5) OF THE ACT, AND THAT THERE IS NO SPECIFIC CONDITION IN SECTION 10 - B OF THE ACT TO MAINTAIN SEPARATE BOOK OF ACCOUNTS IN RESPECT OF AN EOU, FOR THE APPELLANT TO BECOME ELIGIBLE FOR DEDUCTION U/S. 10 - B OF THE ACT. 8.5 THE LEARNED A.O. AND DRP ERRED IN REJECTING THE APPELLANTS CLAIM FOR DEDUCTION U/S. 10 - B OF THE ACT IN RESPECT OF THE AFORESAID EOU ALSO FOR THE ALLEGED REASON THAT NO SATISFACTORY EVIDENCE IS PRODUCED REGARDING THE DATE OF COMMENCEMENT OF MANUFACTURE OR PRODUCTION. THE A. O. OUGHT TO HAVE CONSIDERED THAT THE LETTER FROM THE APPELLANT TO THE GOVT . , ADVISING THE COMMENCEMENT OF COMMERCIAL PRODUCTION OF THE UNIT ON 8.3.2000 (A COPY OF WHICH WAS SUBMITTED TO THE A.O.) WAS THE SUFFICIENT EVIDENCE IN THIS REGARDS. 8.6 THE LEARNED A.O. AND DRP ERRED IN REJECTING THE APPELLANTS CLAIM FOR DEDUCTION U/S. 10 - B OF THE ACT IN RESPECT OF THE AFORESAID EOU ALSO FOR THE ALLEGED REASON THAT THE FRESH APPROVAL OF THE BOARD IS NOT AVAILABLE TO THE UNIT. THE A.O. FAILED TO APPRECIATE THAT THE APPROVAL TO THE UNIT GRANTED BY THE MINISTRY OF INDUSTRY WAS FOR THE PERIOD OF 5 YEARS UPTO THE YEAR 2005 - 06, AND THAT THE SAID APPROVAL WAS RENEWED FOR THE FURTHER 5 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) PERIOD OF 5 YEARS FROM 2006 - 07 TO 2010 - 11, AND THAT THE SAID RENEWAL DID NOT REQU IRE THE APPROVAL OF THE BOARD OF APPROVAL. 8.7 THE LEARNED A.O. AND DRP ERRED IN REJECTING THE APPELLANTS CLAIM FOR DEDUCTION U/S. 10 - B OF THE ACT IN RESPECT OF THE AFORESAID EOU ALSO FOR THE REASONS THAT THE UNIT IS NOT DEBITING ANY PURCHASE COST IN RESPECT OF PURCHASE OF WASTE MATERIAL FROM OTHER UNITS. THE A.O. FAILED TO APPRECIATE THAT WASTE MATERIAL FROM THE OTHER UNITS WAS COLLECTED FROM THE DISCARDED MATERIAL, AND HENCE THAT THERE WAS NO PURCHASE COST THEREOF. 9. THE LEARNED A.O. ERRED IN DISALLOWING AND THE DRP ERRED IN DIRECTING THE DISALLOWANCE OF THE EXPENDITURE OF RS. 1,97,91,667 / - INCURRED BY THE APPELLANT AS CONTRIBUTION TO THE GOA MINERAL ORE EXPORTERS ASSOCIATION TOWARDS CONSTRUCTION OF A ROAD/BRIDGE FOR PUBLIC USE IN USGAO - GOA, TREATING IT AS CAPITAL EXPENDITURE. THE LEARNED A.O. OUGHT TO HAVE APPRECIATED THAT THE SAID CONTRIBUTION WAS MADE IN THE INTEREST OF FACILITATING THE APPELLANTS BUSINESS ENABLING IT TO B E CARRIED ON MORE EFFICIENTLY AND PROFITABLY, AND THAT NO ADVANTAGE OF ENDURING NATURE WAS AVAILED THEREWITH, AND HENCE THAT THE SAID CONTRIBUTION OUGHT TO HAVE BEEN ALLOWED AS A DEDUCTIBLE REVENUE EXPENDITURE. 10.1 THE LEARNED A.O. ERRED IN DISALLOWING THE APPELLANT'S CLAIM AND THE DRP ERRED IN DIRECTING THE DISALLOWANCE FOR DEDUCTION OF RS. 2,95,73,254 / - AS ADDITIONAL DEPRECIATION U/S. 32(L)(IIA) OF THE ACT, IN RESPECT OF NEW PLANT AND MACHINERY ACQUIRED AND INSTALL ED BY THE APPELLANT DURING THE PREVIOUS YEAR IN RESPECT OF ITS IRON ORE DIVISION, HOLDING THAT THE APPELLANT WAS NOT ENGAGED IN THE BUSINESS OF 'MANUFACTURE OR PRODUCTION' FOR THE PURPOSE OF SECTION 32(L)(IIA) OF THE ACT. THE A.O. OUGHT TO HAVE APPRECIATED THAT THE APPELLANT'S BUSINESS OF EXTRACTION AND PROCESSING OF IRON ORE HAS BEEN SPECIFICALLY HELD BY THE SUPREME COURT IN THEIR DECISION IN THE APPELLANT'S OWN CASE (REPORTED IN 271 ITR 331) AS 'PRODUCTION', AND HENCE THAT THE A.O. OUGHT NOT TO HAVE DISALLOWED THE APPELLANT'S CLAIM IN THIS REGARDS. 10.2 THE LEARNED A.O. WHILE DISALLOWING THE APPELLANTS CLAIM FOR ADDITIONAL DEPRECIATION OF RS. 2,95,73,254 / - IN RESPECT OF ITS IRON ORE DIVISION, ALSO ERRED IN HO LDING THAT THE SUPREME COURT'S DECISION IN THE APPELLANTS OWN CASE (SUPRA) IS NOT APPLICABLE ON THIS POINT, IN VIEW OF THE INTRODUCTION OF DEFINITION OF 'MANUFACTURE' IN THE ACT WITH EFFECT FROM 1.4.1999. THE A.O. OUGHT TO HAVE APPRECIATED THAT THE SUPREME COURT IN THE AFORESAID DECISION HAS HELD THAT THE APPELLANT'S BUSINESS OF EXTRACTION AND PROCESSING OF IRON ORE AMOUNT TO 'PRODUCTION' AND THAT THE SAID DECISION WHICH HAS INTERPRETED THE WORD 'PRODUCTION', CANNOT BE CONSIDERED AS SUPERSEDED BY THE INTRODUCTION OF DEFINITION OF THE WORD 'MANUFACTURE' IN THE ACT. 10.3 THE LEARNED A.O. ERRED IN REJECTING THE APPELLANTS CLAIM FOR ADDITIONAL DEPRECIATION OF RS. 44,94,967 / - IN RESPECT OF PLANT AND MACHINERY ACQUIRED AND INSTALLED FOR THE PURPOSE OF ITS MANUFACTURE/PRODUCTION OF METALLURGICAL COKE, HOLDING THAT CONVERSION OF COAL INTO COKE CANNOT BE TREATED AS 'MANUFACTURE' UNDER THE DEFINITION OF 'MANUFACTURE' U/S. 2(29BA) OF THE ACT. THE A.O. FAILED TO APPRECIATE THAT THE RELEVANT PROCESS OF CONVERTING COAL INTO COKE RESULTS IN TRANSFORMATION OF COAL INTO A DISTINCT ARTICLE, I.E. METALLURGICAL COKE, WHICH HAS A DIFFERENT NAME, CHARACTER AND USE, 6 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) AND HENCE THAT IT HAS SQUARELY FALLEN WI THIN THE DEFINITION OF 'MANUFACTURE' U/S. 2(29BA) OF THE ACT. 10.4 ASSUMING BUT NOT ADMITTING THAT CONVERTING COAL INTO COKE DO NOT FALL WITHIN THE MEANING OF 'MANUFACTURE' AS DEFINED U/S. 2(29BA) OF THE ACT, THE A.O. OUGHT TO HAVE APPRECIATED THAT THE SAID ACTIVITY NEVERTHELESS FALLS WITHIN THE MEANING OF 'PRODUCTION', WHICH WORD HAS A WIDER CONNOTATION THAN THE WORD 'MANUFACTURE', AND THA T HE OUGHT TO HAVE ALLOWED THE ADDITIONAL DEPRECIATION OF RS. 44,94,967/ - AS CLAIMED BY THE APPELLANT. 11.1 THE LEARNED A.O. ERRED IN DISALLOWING AND THE DRP ERRED IN DIRECTING THE DISALLOWANCE OF THE EXCHANGE LOSS OF RS. 28,96,685 / - ARISING ON OUTSTANDING EXPORT RECEIPTS, HOLDING THAT IT WAS A HYPOTHETICAL LOSS. THE A.O. OUGHT TO HAVE CONSIDERED THE APPELLANTS SUBMISSIONS THAT THE SAID LOSS WAS RECOGNIZED BY THE APPELLANT IN ITS ACCOUNTS IN ACCORDANCE WITH THE ACCOUNTING STANDARD PR ESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, AND ON THE BASIS OF AN ACCEPTED METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE APPELLANT, AND THAT THE SAID LOSS WAS ALLOWABLE DEDUCTION IN THE ASSESSMENT. 11.2 THE LEARNED A.O. ERRED IN DISALLOWING THE SAID EXCHANGE LOSS OF RS. 28,96,685 / - PURPORTEDLY BASED ON CBDT'S INSTRUCTIONS NO. 3 - 2010, DATED 23.3.2010. THE A.O. OUGHT TO HAVE APPRECIATED THAT THE SAID CIRCULAR WAS APPLICABLE TO SPECULATIVE TRANSACTIONS AS DEFINED U/S. 43(5) OF THE ACT, AND THAT THE TRANSACTIONS IN RESPECT OF WHICH THE AFORESAID LOSS HAD ARISEN TO THE APPELLANT WERE NOT OF THE NATURE AS DE FINED IN SECTION 43(5) OF THE ACT. 12.1 THE LEARNED A.O. ERRED IN DISALLOWING THE DRP ERRED IN DIRECTING THE DISALLOWANCE OF THE ACTUAL LOSS OF RS. 26,01,697 / - ARISING ON FORWARD CONTRACTS SETTLED DURING THE YEAR, HOLDING IT AS A SPECULATIVE LOSS, RELYING ON THE CBDT CIRCULAR NO. 23(XXXIV - 4)D OF 1960 DATED 12.9.1960 AND INSTRUCTION NO. 3 - 2010 DATED 23.3.2010. THE A.O. OUGHT TO HAVE HELD THAT THE LOSS INCURRED BY THE APPELLANT ON FORWARD CONTRACTS HAS A DIRECT NEXUSES WITH ITS BUSINESS OF MINING AND EXPORT OF IRON ORE AND THAT THE SAID LOSS WAS NOT ARISING ON TRANSACTION OF THE NATURE AS DEFINED IN SECTION 43(5) OF THE ACT, AND THAT THE SAID CBDT CIRCULAR AND INSTRUCTION ARE NOT APPLICABLE THEREWITH. 12.2 THE LEARNED A.O. ERRED IN REJECTIN G THE APPELLANTS SUBMISSION THAT THE LOSS ARISING ON FORWARD CONTRACT WAS A HEDGING LOSS AND HENCE THAT THE SAME IS ALLOWABLE AS DEDUCTION. THE A.O. OUGHT TO HAVE APPRECIATED THAT THE SAID FORWARD CONTRACTS IN FACT WERE IN THE NATURE OF HEDGING CONTRACTS INTENDED TO GUARD AGAINST THE LOSS THROUGH FUTURE EXCHANGE FLUCTUATIONS AND THAT THE SAID CONTRACTS WERE ALWAYS ENTERED INTO BY THE APPELLANT ONLY TO THE EXTENT OF FOREIGN EXCHANGE REQUIRED FOR IMPORT OR TO T HE EXTENT OF FOREIGN EXCHANGE REALIZABLE THROUGH EXPORTS IN THE COURSE OF ITS BUSINESS. 2. GROUND NO. 1 : GROUND NO. 1 RELATES TO THE ADDITION OF RS.3,95,27,600/ - MADE BY THE ASSESSING OFFICER AS TRANSFER PRICING ADJUSTMENT AS DETERMINED BY THE TRANSFER PRICING OFFI CER VIDE ORDER DT. 31.10.2011. THE BRIEF FACTS 7 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) RELATING TO THIS ADDITION IS THAT THE ASSESSEE COMPANY WAS PART OF MITSUI & CO., JAPAN TILL 23.4.2007 AND THEREAFTER BECAME PART OF VEDANTA GROUP UPON THE TRANSFER OF SHAREHOLDING BY MITSU I GROUP TO VEDANTA GROUP DURING 2007. THE ASSESSEE COMPANY ENTERED INTO CONTRACT FOR 3 YEARS FOR THE IMPORT OF COAL FROM BHP BILLITON MARKETING A.G. (A COMPANY INCORPORATED IN SWITZERLAND) AND/OR BM ALLIANCE COAL MARKETING PTY. LTD. (A COMPANY INCORPORATE D IN AUSTRALIA). THE ASSESSEE HAS IN PURSUANCE WITH THE AGREEMENT, IMPORTED 52010 MT OF COKING COAL FROM BHP BILLITON MARKETING, SWITZERLAND @ USD 115/TON. THE TPO HELD THIS COMPANY TO BE A RELATED COMPANY UNDER SECTION 92A(2)(M) AND ACCORDINGLY THE TPO MADE AN ADJUSTMENT OF RS. 3,95,27,600/ - OBSERVING THAT THE PREVALENT RATE OF THE COAL WAS USD 96/TON AS PER MCCLOSKEY REPORT WHILE THE ASSESSEE HAS PAID @ USD 115/TON AS PER THE CONTRACT ENTERED INTO FOR 3 YEARS. ON THE BASIS OF THE TPOS ORDER, THE ASSES SING OFFICER MADE THE ADDITION. WHEN THE MATTER WENT BEFORE THE DRP, THE DRP UPHELD THE ADJUSTMENT MADE BY THE TPO. 2 . 1 THE LEARNED AR BEFORE US CONTENDED THAT THE COMPAN IES FROM WHICH THE ASSESSEE HAS ENTERED INTO AGREEMENT FOR IMPORT OF COAL WERE NEITHER THE ASSOCIATED ENTERPRISES OF THE ASSESSEE COMPANY NOR THE GROUP COMPANY/COMPANIES OF ITS THEN PARENT COMPANY, MITSUI & CO., JAPAN . THEREFORE, THE PROVISION OF SEC. 92 C WERE NOT APPLICABLE. IT WAS SUBMITTED THAT BHP BILLI TON MARKETING A.G. BELONGED TO BHP BILLITON GROUP WHEREAS BM ALLIANCE COAL MARKETING PTY. LTD. IS A 50 - 50 JOINT VENTURE BETWEEN BHP BILLITON AND MITSUBISHI GROUP, JAPAN. FOR THIS, ATTENTION WAS DRAWN TO PG. 728 TO 746 OF THE PAPER BOOK. ATTENTION WAS ALS O DRAWN TOWARDS MAJOR SHAREHOLDING OF THIS GROUPS AND IT WAS VEHEMENTLY CONTENDED THAT IN TERMS OF THE DETAILED SHAREHOLDING PATTERN OF BHP BILLITON AS WELL AS MITSUBISHI GROUP , THERE IS NO CONNECTION WHATSOEVER WITH MITSUI GROUP. THEREFORE, THE QUESTION OF APPLICABILITY OF SEC. 92C IN RELATION TO THE TRANSACTION WITH THE SAID SUPPLIER DOES NOT ARISE. REFERRING TO PG. 176 TO 183, IT WAS ARGUED THAT AT PARA NO. 2.3 OF THE ORDER DT. 31.10.2011, THE TPO CONCLUDED THAT THE SAID TWO COMPANIES WERE NOT ASSOCIAT ED ENTERPRISES ON THE APPELLANT COMPANY AND THAT BHP BILLITON WAS THE SUBSIDIARY OF MITSUBISHI AND NOT OF MITSUI & CO. 8 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) BUT THE TPO AVERRED THAT HOWEVER THE SUPPLY OF THE COAL BY BHP BILLITON MARKETING LTD. IS HIT BY CLAUSE (M) OF SUB - SECTION 2 OF SEC. 92A AND WENT ON TO COMPUTE THE IMPUGNED ADDITION. THE DRP ON THE BASIS OF THE REPORT OF THE TPO UPHELD THE ADDITION. IT WAS VEHEMENTLY SUBMITTED THAT THE IMPUGNED ADDITION HAS BEEN MADE BY INVOKING THE PROVISIONS OF SEC. 92A(2)(M) ALLEGING THAT THERE IS RE LATIONSHIP OF MUTUAL INTEREST BETWEEN SESA GOA AND SAID BHP BILLITON OR BM ALLIANCE. THE SAID CLAUSE (M) COULD BE INVOKED ONLY WHEN SOMETHING HAS BEEN PRES CRIBED FOR THE APPLICABILITY OF THIS CLAUSE AND THE MATTER OF THE ASSESSEE FALLS WITHIN THAT PRESCRI BED CATEGORY. TILL DATE, NOTHING HAS BEEN PRESCRIBED UNDER SEC. 92A(2)(M) AND THEREFORE THE SAID PROVISION REMAINS NON - OPERATIVE. THE TPO HAD THOROUGHLY EXAMINED THE SHAREHOLDING PATTERN OF ALL THE COMPANIES INVOLVED AND HAD CATEGORICALLY CONCLUDED THAT BHP BILLITON MARKETING LTD., SWITZERLAND WAS A SUBSIDIARY OF MITSUBISHI AND NOT MITSUI. THE DRP ASSERTED THAT SINCE THE MATTER WAS UNDER INVESTIGATION BY SFIO, THE REMAND REPORT OF TPO HAD TO BE CONSIDERED AS TRUE. REFERRING TO THE REMAND REPORT, A COPY OF WHICH IS AVAILABLE AT PG. 817 OF THE PAPER BOOK, IT WAS STATED THAT THE TPO REITERATED THE FINDING THAT BHP BILLITON MARKETING LTD. WAS NOT A SUBSIDIARY OF MITSUI & CO. SINCE SESA GOA BELONGED TO MITSUI & CO. GROUP OF COMPANIES, THEREFORE, BHP BILLITON MARKETING LTD. COULD NOT BE RECOGNISED AS AE OF MITSUI & CO. IT WAS POINTED OUT UNDER PARA 3 OF THIS REPORT, THE TPO HAS CLEARLY STATED THAT THE ADDITION OF RS. 3.95 CRORES HAD BEEN MADE BY TAKING ON A LIBERAL VIEW OF THE PROVISIONS OF SEC. 92A(2)(M). O UR ATTENTION WAS ALSO DRAWN TO PG. 819 OF THE PAPER BOOK WHICH CONTAINS COPY OF THE LETTER DT. 30.11.2011 WRITTEN BY DCIT ( TP ) - VI, BANGALORE TO SFIO. THIS LETTER CLEARLY STATES THAT BHP BILLITON, SWITZERLAND IS A SUBSIDIARY OF MITSUBISHI AND NOT OF MITSUI & CO. A DJUSTMENT TO THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION CAN BE MADE ONLY IF BHP BILLITON, SWITZERLAND IS FOUND TO BE AN ASSOCIATED ENTERPRISE OF SESA GOA LTD. ATTENTION WAS DRAWN TO PARA 3 OF THIS LETTER WHEREIN IT HAS BEEN STAT ED THAT AS PER TRANSFER PRICING REGULATIONS UNDER SECTION 92CA OF THE INCOME TAX ACT, ADJUSTMENT TO THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION CAN BE MADE ONLY IF BHP BILLITON, SWITZERLAND IS FOUND TO BE ASSOCIATED ENTERPRISE OF SESA GOA LTD. 9 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) A ND ULTIMATELY UNDER PARA 4 IT WAS STATED THAT THE ADJUSTMENT OF RS.3.95 CRORES IS MADE TO THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION BETWEEN SESA GOA LTD. AND ITS ASSOCIATED ENTERPRISES, BHP MITSUI COAL PTY. & MITSUI & CO. SUBJECT TO THE ESTABLISHM ENT OF THE FACT THAT BHP BILLITON, SWITZERLAND IS FOUND TO BE AN ASSOCIATED ENTERPRISE OF SESA GOA LTD. JUST TO PROTECT THE INTEREST OF THE REVENUE. THIS WAS DONE TO KEEP THE ISSUE ALIVE UNTIL CLEAR FACTS ARE ESTABLISHED. THE DRP SUSTAINED THE TRANSFER P RICE ADDITION WITHOUT SPECIFYING HOW THE PROVISIONS OF SEC. 92A(2)(M) WAS APPLICABLE IN THE CASE OF THE ASSESSEE. THE ASSESSEE DOES NOT HAVE ANY INTEREST/ASSOCIATION WITH BHP BILLITON, SWITZERLAND. IT IS ONLY THE REVENUE WHICH HAS ALLEGED IT. THEREFORE, THE ONUS LIES ON THE REVENUE TO ESTABLISH THAT THERE IS AN ASSOCIATION BETWEEN THE ASSESSEE AND BHP BILLITON, SWITZERLAND. REVENUE CANNOT ABSOLVE FROM ITS ONUS BY SAYING THAT THE ASSESSEE HAS NOT MADE ANY ATTEMPT TO CLEAR THE CLOUD RELATING TO THE SHAREHOLDING. IT WAS VEHEMENTLY CONTENDED THAT THE ASSESSEE DOES NOT HAVE ANY CLOSE CONNECTION WITH BHP BILLITON, SWITZERLAND. RELIANCE WAS ALSO PLACED IN THIS REGAR D ON THE DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF SURAT CITY GYMKHANA VS. DCIT 254 ITR 733 IN WHICH IT WAS HELD THAT 'THE LAW IS WELL SETTLED, A PERSON WHO MAKES A POSITIVE AVERMENT IS REQUIRED TO ESTABLISH THE SAME. IT IS NOT FOR THE PERSON AGAINST WHOM THE AVERMENT IS MADE TO ESTABLISH NEGATIVELY THAT THE STATE OF AFFAIRS AVERRED BY THE OTHER PERSON DOES NOT EXIST.' FURTHER, RELIANCE WAS ALSO PLACED ON THE DECISION OF THE APEX COURT IN THE CASE OF K.P. VARGHESE VS. ITO 131 ITR 597 (SC) IN WHICH IT WAS HELD - 'IT IS WELL - SETTLED RULE OF LAW THAT THE ONUS OF ESTABLISHING THAT THE CONDITIONS OF TAXABILITY ARE FULFILLED IS ALWAYS ON THE REVENUE AND THE SECOND CONDITION BEING AS MUCH A CONDITION OF TAXABILITY AS THE FIRST, THE BURDEN LIES ON THE REVENUE TO SHOW THAT THERE IS AN UNDERSTATEMENT OF THE CONSIDERATION AND THE SECOND CONDIT ION IS FULFILLED. MOREOVER, TO THROW THE BURDEN OF SHOWING THAT THERE IS NO UNDERSTATEMENT OF THE CONSIDERATION, ON THE ASSESSEE WOULD BE TO CAST AN ALMOST IMPOSSIBLE BURDEN UPON HIM TO ESTABLISH A NEGATIVE, NAMELY, THAT HE DID NOT RECEIVE ANY CONSIDERATIO N BEYOND THAT DECLARED BY HIM.' THUS, IT WAS CONTENDED THAT CLAUSE (M) OF SECTION 92A(2) IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE AND THEREFORE NO QUESTION OF ADDING THE SUM OF RS.3.95 CRORES ARISES. ON MERIT ALSO IT WAS SUBMITTED AS UNDER - 10 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 4.10 THERE IS NO ABNORMALITY IN THE PRICE PAID TO THE SAID SUPPLIERS. THE 3 YEARS CONTRACT WAS COMPLIMENTED BY THREE ANNUAL CONTRACTS SPECIFYING THE QUANTITIES TO BE SUPPLIED AS WELL AS SETTLING THE ANNUAL RATES. THESE RATES WERE IN TANDEM WITH THE INTERNA TIONALLY SETTLED RATES. PAGE NO. / PAPER DOCUMENT REFERENCE BOOK VOL. NO. 3 YEARS BASE CONTRACT BETWEEN SESA GOA AND (I) BHP 291 - 305 BILLITON AND (II) BM ALLIANCE PB VOL. 2 CONTRACT NOTE NO. 1 DATED 01/03/06 FOR FY 2006 - 07 (FOR 288 - 290 SUPP LIES FROM 01/09/06 TO 31/03/07) PB VOL. 2 CONTRACT NOTE NO. 2 DATED 01/01/07 FOR FY 2007 - 08 (FOR 275 - 277 SUPPLIES FROM 01/09/07 TO 31/03/08) PB VOL. 2 4.11 THE ACTUAL CONTRACTED SUPPLY FOR THE FY 2006 - 07 (BEING THE FIRST YEAR OF SUCH SUPPLY), COULD NOT BE LIFTED DURING THE SAID YEAR. HENCE, AS PER THE INTERNATIONAL NORMS, THE BALANCE QUANTITY WAS LIFTED IMMEDIATELY IN THE NEXT FY 2007 - 08 (I.E., DURING M/O APR IL 07). SINCE THIS WAS THE SPILL OVER QUANTITY, HENCE IT WAS PAID AT THE RATE APPLICABLE TO FY 2006 - 07 ONLY. THE TPO HAS DRAWN AN INFERENCE THAT PRICE PAID WAS MORE THAN THE PREVAILING PRICE FOR FY 2007 - 08 (I.E., THE ACTUAL FY WHEN SUPPLY WAS MADE) - WITHO UT APPRECIATING THAT THIS WAS THE SPILL OVER QUANTITY OF FY 2006 - 07 AND HENCE WAS TO BE PURCHASED AT THE CONTRACTED RATE FOR THAT YEAR. HOWEVER, WHAT THE TPO IGNORED WAS THE FACT THAT ALTHOUGH CONTRACT NOTE NO. 2 FOR SUPPLIES AT THE RATE OF USD 96 WAS FOR THE FY 2007 - 08, YET THIS WAS APPLICABLE ON DELIVERIES TO BE AFFECTED BETWEEN 1 ST SEP., 2007 TO 31 ST MARCH, 2008. THUS, THE SPILL OVER QUANTITY OF FY 2006 - 07 COULD NOT HAVE BEEN MADE AT USD 96 IN ANY CASE. 4.12 IN FACT, THE ASSESSEE HAD THE SAME SITUATION FOR NEXT YEAR AS WELL WHEN ENTIRE QUANTITY FOR FY 2007 - 08 ALSO COULD NOT BE LIFTED DURING THAT YEAR AND HENCE IT WAS LIFTED DURING THE FY 2008 - 09. INCIDENTALLY, THE PREVAILING PRICE FOR FY 2008 - 09 WAS EXT REMELY HIGHER AT USD 300 THAN THE PRICE FOR FY 2007 - 08 WHICH WAS JUST USD 96. AS IN EARLIER YEARS, THE SUPPLY WAS PAID AT THE CONTRACTUAL PRICE FOR FY 2007 - 08 ONLY. A CHART GIVEN BELOW REFLECTS ALL THESE FACTUAL DETAILS: STATEMENT SHOWING CONTRACTED & ACTUAL COAL PURCHASES DURING FY 2006 - 07 TO 2008 - 09 F.Y. CONTRACT DETAILS ACTUAL SUPPLY BALANCE REMARKS COAL COAL TYPE QTY MT PRICE US$ QTY MT PRICE US$ QTY MT PRICE US$ 2006 - 07 RIVERSIDE 1,60,000 115 1,11,831 115 48,169 115 - GOONYELLA 50,000 114 46,135 115 3,865 114 2007 - 08 RIVERSIDE 52,010 115 SPILL OVER QTY WRT FY 06 - 07 _ RIVERSIDE 1,50,000 96 88,314 96 61,686 96 11 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) - GOONYELLA 50,000 96 42,074 96 7,926 96 2008 - 09 RIVERSIDE 69,612 96 SPILL OVER QTY WRT FY 07 - 08 RIVERSIDE 1,50,000 300 25,699 300 1,24,301 300 GOONYELLA 50,000 300 30,489 300 19,511 300 THUS, ON MERITS IT WAS VEHEMENTLY CONTENDED THAT THERE WAS NO EXCESS PAYMENT OF THE PRICE. 2 . 2 THE LEARNED DR ON THE OTHER HAND RELIED ON THE ORDER OF THE AUTHORITIES BELOW AND DREW OUR ATTENTION TO PG. 729 AND CONTENDED THAT BM ALLIANCE COAL MARKETING PVT. LTD. IS THE COMPANY I N WHICH MITSUBISHI DEVELOPMENT PVT. LTD., AUSTRALIA WAS HOLDING 50% SHAR ES AND 50% SHARES ARE HELD BY BHP BILLITON GROUP. THE MITSUBISHI DEVELOPMENT PVT. LTD. IS 100% SUBSIDIARY OF MITSUBISHI CORPORATION. THE SHAREHOLDING OF THE MITSUBISHI CORPORATION IS ALSO GIVEN IN ANNEXURE 2 IN THAT PAGE BUT WHEN QUESTION WHETHER THE M ITSUI & CO., JAPAN HAS ANY SHAREHOLDING IN MITSUBISHI CORPORATION, FROM THE DETAILS GIVEN AND AVAILABLE AT PG. 728, 729 AND 730 AS WELL AS 731 HE COULD NOT BE ABLE TO SAY THE SHAREHOLDING OF MITSUBISHI CORPORATION, JAPAN OR MITSUBISHI DEVELOPMENT PVT. LTD. IN MITSUI & CO., JAPAN BUT VEHEMENTLY CONTENDED THAT IN VIEW OF THE PROVISIONS OF SECTION 92A(2)(M) THE RE EXISTS RELATIONSHIP OF MUTUAL INTEREST BETWEEN THE TWO ENTERPRISES I.E. THE ASSESSEE AS WELL AS BHP BILLITON MARKETING A.G AND BM ALLIANCE COAL MARKE TING PVT. LTD. THE ASSESSEE HAS BOUGHT THE COAL FROM BHP BILLITON MARKETING A.G AND THEREFORE THE TPO MADE THE IMPUGNED ADDITION BY APPLYING THE PROVISIONS OF SEC. 92A(2)(M) AND THEREFORE THE ASSESSEE AND BHP BILLITON ARE DEEMED TO BE ASSOCIATED ENTERPRIS ES. 2 . 3 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. SECTION 92(1) LAYS DOWN THAT INCOME RECEIVED FROM INTERNATIONAL TRANSACTIONS SHALL BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE BUT SECTION 92B(1) DEFINES THE INTERNATIONAL TRANSACTIONS FOR THE PURPOSE OF SECTION 92 TO MEAN A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON - RESIDENTS. THE 12 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) NATURE OF THE TRANSACTIONS IS ALSO GIVEN UNDER SECTION 92B(1). SUBSECTION 2 OF SE CTION 92B DEEMS THE TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES IF THE CONDITION STIPULATED THEREIN IS FULFILLED. EXPLANATION TO SECTION 92 B WHICH WAS INSERTED BY THE FINANCE ACT, 2012 W. R. E.F. 1.4. 2002 LAYS DOWN THE VARIOUS TRANSACTIONS TO BE INCLUDED WITHIN THE EXPRESSION INTERNATIONAL TRANSACTION. THEREFORE, FOR THE APPLICABILITY OF PROVISIONS OF SEC. 92(1) THERE MUST BE TWO OR MORE ASS OCIATED ENTERPRISES. THE ASSOCIATED ENTERPRISES ARE DEFINED UNDER SECTION 92A(1). UNDER SECTION 92A(2), TWO ENTERPRISES ARE DEEMED TO BE ASSOCIATED ENTERPRISES UNDER CERTAIN CONDITIONS WHICH ARE GIVEN IN CLAUSE (A) TO (M). I T IS NOT THE CASE OF THE ASSE SSING OFFICER THAT THE TRANSACTION ENTERED INTO BY THE ASSESSEE FOR THE PURCHASE OF COAL IS A TRANSACTION ENTERED INTO BETWEEN ASSOCIATED ENTERPRISES AS DEFINED UNDER SECTION 92A(1). IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE PROVISIONS OF SECTION 92 A(2) AS GIVEN UNDER CLAUSE (A) TO (L) ARE APPLICABLE IN THE CASE OF THE ASSESSEE AND THE TRANSACTION RELATING TO PURCHASE OF COAL FROM TWO COMPANIES, BHP BILLITON MARKETING A.G OR BM ALLIANCE COAL MARKETING PVT. LTD. THIS IS APPARENT FROM THE LETTER DT. 1 6.8.2012 WRITTEN BY THE TPO TO THE DRP WHICH IS REPRODUCED AS UNDER : OFFICE OF THE ASSISTANT COMMISSIONER OF INCOME - TAX (TRANSFER PRICING OFFICER - VI) NO. 14/3, 6 TH FLOOR, R.P.BHAVAN.NRUPATHUNGA ROAD, BAN GALORE - 560001. NO. TP - 90/TP - VI/2012 - 13 THE INCOME TAX OFFICER, O/O THE HON DISPUTE RESOLUTION PANEL - II MUMBAI MADAM, SUB: SUBMISSION OF REPORT ON THE CLARIFICATION SOUGHT IN THE CASE OF M/S SESA GOA LTD. AY 2008 - 09 - REG REF: LETTER IN NO.DRP - II/SEA GOA/2012 - 13 DATED 8.8.2012 PLEASE REFER TO THE ABOVE. DATE: 16.8.2012 13 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 2. IN THIS MATTER, AS MENTIONED IN PARA 2.3 OF THE TP ORDER DATED 31.10.2011, M/S BMP BILLITON LTD IS NOT A SUBSIDIARY OF M/S MITSUI & CO. M/S SESA GOA LTD BELONGS TO M/S MITSUI & CO GROUP OF COMPANIES AND THEREFORE, M/S BHP BILLITON LTD CANNOT BE CATEGORIZED AS AE OF M/S MITSUI. 3. UNDER THESE CIRCUMSTANCES, TAKING A LIBERAL VIEW OF THE PROVISIONS OF SECTION 92A(2)(M) OF THE INCOME TAX ACT, 1961, ADJUSTMENT OF RS.3.95 CRORES WAS PROPOSED IN RESPECT TO THE PURCHASES MADE BY M/S SESA GOA LTD FROM BHP BILLITON. 4. AS THE INTERNATIONAL TRANSACTIONS WERE REFERRED TO THE TPO BY THE CONCERNED AO, THE TPO HAS MOVED IN THIS CASE ON THE PRESUMPTION THAT THE INTERNATIONAL TRANSACTIONS REFER RED TO THE TPO ARE INTERNATIONAL TRANSACTIONS AS PER THE PROVISIONS OF SECTION 92A & 92B OF THE IT ACT. THOUGH THE ARM'S LENGTH PRICE WAS DECIDED ON THE PRESUMPTION THAT THE TRANSACTION REFERRED TO TPO ARE INTERNATIONAL TRANSACTION, BUT IN VIEW OF THE TAXP AYER'S OBJECTIONS, A LETTER WAS WRITTEN TO THE ADDITIONAL DIRECTOR,(FA - II), SFIO, NEW DELHI WITH A COPY MARKED TO THE AO/ADDL.CIT, RANGE - 1, PANAJI TO REACH TO A CONCLUSION ABOUT THE NATURE OF THE SAID TRANSACTION DURING THE ASSESSMENT PROCEEDINGS U/S 143(3)/148 OF THE IT ACT. A COPY OF THE LETTER IS ENCLOSED. 5. THE HON DRP IS THEREFORE REQUESTED TO DECIDE THE MATTER ON THE BASIS OF THE SUBMISSION OF THE AO IN THIS REGARD. THERE IS NOTHING FURTHER WHICH MAY BE EXPLAINED BY THE TPO IN THIS REGARD. REPORT CALLED FOR SUBMITTED. YOURS FAITHFULLY, (SUMATHY VENKATRAMAN) ASSISTANT COMMISSIONER OF INCOME TAX TPO - VI, BANGALORE 2 . 4 FROM THE READING OF 92A(2) , IT IS APPARENT THAT FOR THE APPLICABILITY OF CLAUSE (M) TO SECTION 92A(2), THE RELATIONSHIP OF MUTUAL INTEREST MUST BE PRESCRIBED. NO SUCH RELATIONSHIP OF MUTUAL INTEREST HAS BEEN PRESCRIBED SO FAR FOR THE PURPOSE OF SECTION 92A(2). THE FACT THAT THE ADDITIONS HAS BEEN MADE BY APPLYING PROVISION S OF SECTION 92A(2)(M) EVEN THOUGH THIS SECTION CANNOT BE APPLIED TILL THE RELATIONSHIP OF MUTUAL INTEREST IS NOT PRESCRIBED FOR THE PURPOSE OF SECTION 92A(2)(M) IS ALSO CLEAR FROM THE LETTER WRITTEN BY THE DCIT ( TP ) - VI TO SFIO . THE TRANSFER PRICING OFFIC ER IN THIS LETTER CLEARLY STATED THAT THE ADDITION HAS BEEN MADE TO PROTECT THE INTEREST OF REVENUE SUBJECT TO THE ESTABLISHMENT OF THE FACT THAT BHP BILLITON, SWITZERLAND IS FOUND TO BE AN ASSOCIATED ENTERPRISES OF SESA GOA LTD. THE LEARNED DR COULD NOT PRODUCE ANY EVIDENCE OR MATERIAL WHICH MAY PROVE THAT BHP 14 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) BILLITON, SWITZERLAND IS AN ASSOCIATED ENTERPRISE OF THE ASSESSEE COMPANY. THE LETTER DT. 30.11.2011 WHICH IS AVAILABLE AT PG. 819 OF THE PAPER BOOK HAS BEEN WRITTEN BY THE DCIT ( TP ) - VI TO SFIO REA DS AS UNDER : (PG. 819 AND 820) OFFICE OF THE DEPUTY COMMISSIONER OF INCOMETAX (TRANSFER PRICING) - VI NO.14/3, 6 TH FLOOR, R. P. BHAVAN, NRUPATHUNGA ROAD, BANGALORE - 1. 080 - 22130069 _________________________ ______________ EMAIL: [e-mail] 30.11.2011 TO, THE ADDITIONAL DIRECTOR (FA - II), SERIOUS FRAUD INVESTIGATION OFFICE, MINISTRY OF CORPORATE AFFAIRS, 2 ND FLOOR, PARYAVERAN BHAVAN, CGO COMPLEX, LODHI ROAD, DELHI - 110003. SUB : INFORMATION REGARDING TRANSFER PRICING ADJUSTMENT IN CASE OF M/S SESA GOA LTD , PANAJI, GOA. PLEASE REFER TO THE INFORMATION GIVEN BY YOU TO THIS OFFICE IN CASE OF M/S SESA GOA LTD, GOA REGARDING PURCHASE OF RIVERSIDE COAL BY M/S SESA GOA LTD, PANAJI, GOA FROM BHP COAL PTY, WHICH IS INFORMED TO BE A SUBSIDIARY OF MITSUI & CO. THIS OFFICE HAS RECEIVED INFORMATION THAT M/S SESA GOA LTD, PANAJI, GOA, WHICH IS A SUBSIDIARY OF MITSUI & CO HAS MADE PURCHASES FROM BHP MITSUI COAL PTY AT AN INFLATED PRICE. 2. BASED ON THE ABOVE INFORMATION, TRANSFER PRICING PROCEEDINGS WERE INITIATED IN THE CASE OF M / S SESA GOA LTD, PANAJI, GOA AND AN ADJUSTMENT OF RS.3.95 CRORES IS MADE TO THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BETWEEN M/S SESA GOA LTD, PAN AJI, GOA AND ITS ENTERPRISES, BHP MITSUI COAL PTY AND MITSUI & CO FOR THE A.Y 2008 - 09. 3. HOWEVER, FROM THE RECORDS AVAILABLE WITH THIS OFFICE, IT WAS NOTICED THAT THOUGH M/S SESA GOA LTD. IS APPEARING AS THE SUBSIDIARY OF MITSUI & CO. IN VIEW OF THE FACT THAT MITSUI & CO., HAS 50% OWNERSHIP OF VOTING SHARES IN M/S. SESA GOA LTD. BUT BHP MITSUI COAL PTY IS NOT APPEARING AS A SUBSIDIARY COMPANY OF MITSUI & CO., BUT IS APPEARING AS AN ASSOCIATED COMPANY . SO FAR AS VOTING SHARES ARE CONCERNED, MITSUI & CO. HOLDS ONLY 5.6% OWNERSHIP O F VOTING SHARES. ACCORDINGLY, AS PER INCOME TAX ACT, 1961, BHP MITSUI COAL PTY IS NOT AN ASSOCIATED ENTERPRISE. IN THIS CONNECTION , IT IS FURTHER RELEVANT TO POINT OUT THAT M/S SESA GOA LTD HAS BOUGHT RIV ERSIDE COAL IN APRIL, 2007, FROM BHP BILLITON, A SWITZERLAND BASED COMPANY HAVING ITS BRANCH IN SINGAPORE AND MINES IN AUSTRALIA FROM WHERE COAL HAS BEEN SHIPPED TO M/S. SESA GOA LTD. BHP BILLITON, SWITZERLAND IS A SUBSIDIARY OF MITSUBISHI AND NOT OF MITSUI & CO. AS PER TRANSFER PRICING REGULATIONS U/S 92 CA OF INCOME TAX ACT, 1961, ADJUSTMENTS TO THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS CAN BE MADE ONLY IF BH P BILLITON, SWITZERLAND IS FOUND TO BE AN ASSOCIATED ENTERPRISE OF M/S SESA GOA LTD. 4. AS A MATTER OF PRECAUTION TO PROTECT THE INTEREST OF REVENUE, AN ADJUSTMENT OF RS.3.95 CRORES IS MADE TO THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BETWEEN M/S SESA GOA LTD, PANAJI, 15 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) GOA AND ITS ASSOCIATED ENTERPRISES, BHP MITSUI COAL PTY AND MITSUI & CO SUBJECT TO ESTABLISHMENT OF THE FACT THAT BHP BILLITON, SWITZERLAND IS FOUND TO BE AN ASSOCIATED ENTERPRISE OF M/S SESA GOA LTD. THIS WAS DONE TO KEEP THE ISSUE ALIVE UNTIL CLEAR FACTS ARE ESTABLISHED. IN THIS EVENT, YOU ARE REQUESTED TO COMMUNICATE ANY MATERIAL INFORMATION TO THE ASSESSING OFFICER, ADDL. COMMISSIONER OF INCOME - TAX, RA NGE - I, PANAJI, GOA UNDER INTIMATION TO THIS OFFICE WHICH WILL CLEARLY ESTABLISH THE FACT THAT BHP BILLITON, SWITZERLAND IS AN ASSOCIATED ENTERPRISE OF M/S SESA GOA LTD SO AS TO PROCEED WITH FURTHER PROCEEDINGS UNDER INCOME TAX ACT, 1961. YOURS TRULY, (KIRAN KATTA) DY. COMMISSIONER OF INCOME - TAX, TRANSFER PRICING - VI(I/C), BANGALORE. COPY SUBMITTED TO: 1) COMMISSIONER OF INCOME - TAX, TRANSFER PRICING, BANGALORE. 2) ADDL. COMMISSIONER OF INCOME - TAX, RANGE - I, PANAJI, GOA. 2.5 IN OUR VIEW, THE ONUS LIES ON THE REVENUE TO PROVE THAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH BHP BILLITON FOR THE SUPPLY OF COAL IS A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES AND BHP BILLITON IS AN ASSOCIATED ENTERPRISE OF THE ASSESSEE. THE ADDITIONS JUST CANNOT BE SUSTAINED MERELY ON ASSUMPTIONS AND PRESUMPTIONS AND FOR THE PURPOSE OF PROTECTING THE INTEREST OF THE REVENUE. T HE PROVISIONS OF SECTION 92A(2)(M) IN OUR OPINION ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE AND ACCORDINGLY, WE DELETE THE ADDITION. THUS, GROUND NO. 1 STANDS ALLOWED. 3 . GROUND NO. 2 : GROUND NO. 2 DEALS WITH THE DISALLOWANCE MADE UNDER SECTION 14A R/W RULE 8D. 3.1 THE LEARNED AR IN THIS REGARD RELIED ON THE ORDER OF THIS TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE A.Y. 2009 - 10 AND CONTENDED THAT THE CASE OF ASSESSEE IS DULY COVERED BY THE DECISI ONS OF THIS TRIBUNAL FOR THE A.Y. 2008 - 09. 3.2 THE LEARNED DR ON THE OTHER HAND STATED THAT THE SATISFACTION HAS ALREADY BEEN RECORDED BY THE ASSESSING OFFICER IN THE ORDER PASSED UNDER SECTION 143(3) REGARDING DISALLOWANCE MADE UNDER SECTION 14A AND FOR APPLYING RULE 16 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 8D. ONCE THE SATISFACTION IS ARRI VED AT ABOUT INCORRECTNESS OF THE ASSESSEES CLAIM, THE ASSESSING OFFICER HAS TO COMPUTE THE DISALLOWANCE AS PER RULE 8D OF THE INCOME TAX ACT. IN THIS REGARD, RELIANCE WAS PLACED ON THE DECISION OF BANGALORE BENCH IN THE CASE OF KHODAY INDIA LTD. IT A NO. 211 / BANG / 2012. COPY OF THE ORDER WAS PLACED BEFORE US IN THE PAPER BOOK. RELIANCE WAS ALSO PLACED ON THE FOLLOWING DECISIONS : - MUMBAI ITAT SPECIAL BENCH , ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. ( 2009 ) 1 1 7 ITD 169 COCHIN BENCH IN THE CASE OF P A RRY AGRO INDUSTRIES VS. ACIT, (2009) 314 ITR (AT) 181 GODREJ & BOYCE MFG. CO. LTD. VS. DCIT, (2010) 194 TAXMAN 203 GOING THROUGH THE DECISIONS, THE LEARNED DR VEHEMENTLY CONTENDED THAT ONCE IT IS FOUND THAT PROVISIONS OF SECTION 14A ARE APPLICABLE, THE ASSESSING OFFICER IS BOUND TO DISALLOW THE EXPENDITURE RELATING TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME AS P ER COMPUTATION GIVEN UNDER RULE 8D AND RULE 8D IS CLEARLY APPLICABLE FROM THE A.Y 2008 - 09. 3. 3 WE HAVE HEARD THE RIVAL SUBMISSIONS CAR EFULLY AND CONSIDERED THE SAME. WE HAVE ALSO GONE THROUGH THE DECISIONS RELIED BY THE LEARNED DR IN THE CASE OF KHODAY INDIA LTD. WHICH THE LEARNED DR VEHEMENTLY RELIED. WE NOTED THAT THE TRIBUNAL HAS GIVEN A CLEAR - CUT FINDING THAT ONCE IT IS FOUND THAT PROVISIONS OF SEC. 14A OF THE ACT ARE APPLICABLE, THEN, IRRESPECTIVE OF THE FACT THAT THERE WAS NO RECEIPT OF SHARE OF PROFIT FROM THE FIRM IN THE PRESENT YEAR OR THE ARGUMENT THAT DISALLOWANCE CANNOT EXCEED THE AMOUNT OF SHARE OF PROFIT RECEIVED FROM THE FIRM, CANNOT BE ACCEPTED. THUS, IT IS CLEARLY LAID DOWN THAT FOR THE APPLICABILITY OF DISALLOWANCE, IT IS NECESSARY THAT THERE MUST BE A FINDING THAT THE PROVISIONS OF SEC. 14A ARE APPLICABLE IN THE CASE OF THE ASSESSEE. WHETHER THE PROVISIONS OF SEC. 14 A ARE APPLICABLE IN THE CASE OF THE ASSESSEE OR NOT, THIS TRIBUNAL HAS GIVEN A CLEAR - CUT FINDING GOING THROUGH VARIOUS DECISIONS THAT THE PROVISIONS OF SEC. 14A ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE A S THE CONDITIONS STIPULATED IN THE SECTION ARE NOT COMPLIED WITH BY THE ASSESSING OFFICER AND A CCORDINGLY DELETED THE DISALLOWANCE IN THE A.Y.2009 - 10 . DURING THE HEARING, WE NOTED THAT THE 17 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) ASSESSING OFFICER MADE THE DISALLOW ANCE ON THE SAME BASIS AS HAS BEEN DISALLOWED IN A.Y. 2009 - 10. THEREFORE, IN OUR OPINION, THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS TRIBUNAL FOR THE A.Y. 2009 - 10 ON THE SAME ISSUE IN WHICH THIS TRIBUNAL IN PARA NOS. 14 TO 18 OF ITS ORDER ELABORATELY HELD AS UNDER : 14. WE HAVE C AREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDER OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH VARIOUS CASE LAWS AND THE PROVISIONS OF THE IT ACT IN THIS REGARD. THE ISSUE INVOLVED BEFORE US RELATE TO THE DISALLOWANCE MADE BY THE AO B Y APPLYING THE PROVISIONS OF SEC.14A OF THE IT ACT READ WITH RULE 8D OF THE IT RULES. SEC.14A WAS INSERTED BY THE FINANCE ACT, 2001 W.E.F. 1.4.1962. ORIGINALLY THIS SEC. PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE NO DEDUCTION SHALL BE ALLO WED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SUBSEQUENTLY, BY FINANCE ACT, 2002 WITH RETROSPECTIVE EFFECT FROM 11/5/2001 PROVISO WAS ADDED WHICH STATES T HAT THIS SEC. SHALL NOT EMPOWER THE AO EITHER TO RE - ASSESS OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE 1/4/2001. WITH E FFECT FROM 1/4/2007 BY FINANCE ACT, 2006 SUB - SEC. (2) EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. SUCH POWER IS TO BE EXERCISED IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB - SEC.(1). BEFORE APPLYING RULE 8D, IT IS APPARENT THAT THE AO MUST BE SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. SUCH SATISFACTION IS AN OBJECTIVE SATISFACTION THAT IT HAS TO BE JUDICIOUS AND BASED ON THE MATERIAL ON RECORD. IT CANNOT BE AN IMPRESSION THAT IT IS MUCH MORE THAN THE GOSSIP OR HEARSAY, IT MEANS JUDGMENT OR BELIEF THAT IT IS A BELIEF OR A CONNECTION RESULTING FROM WHAT ONE THINKS ON A PARTICULAR QUESTION. IT MUST BE BASED ON THE REASONS AND GROUND AS SEEMS GOOD TO HIM AND WHILE MAKING SUCH SATISFA CTION, THE AO MUST GIVE REGARD TO THE ACCOUNTS OF THE ASSESSEE. HE MUST RECORD DEFICIENCY IN THE ACCOUNTS WITH REGARDS TO THE CLAIM OF THE ASSESSEE. SUB - SEC.(3) PROVIDES THAT PROVISIONS OF SUB - SEC.(2) SHALL ALSO APPLY WHERE ASSESSEE CLAIMS THAT NO EXPENDI TURE HAD BEEN INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS NOT THE CASE OF THE ASSESSEE AS IN THE CASE OF THE ASSESSEE, ASSESSEE HIMSELF ESTIMATED THE EXPENSES RELATING TO THE EXEMPT INCOME AND DISALLOWED THE SAME. RULE 8D W AS INSERTED BY GAZETTE NOTIFICATION DATED 24/3/2008 IN VIEW OF THE POWER CONFERRED UNDER SUB - SEC (2). THIS RULE PRESCRIBES THE METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS AN UNDIS PUTED FACT THAT IN THIS CASE, THE ASSESSEE HAS INVESTED IN DEBTS MUTUAL FUNDS. THE ASSESSEE COMPUTED DISALLOWANCE U/S 14A(2) AT RS.25,78,156/ - AND DISALLOWED THE SAME, WHILE COMPUTING ITS TOTAL INCOME. THE WORKING OF THE SAID DISALLOWANCE CLAIMED BY THE A SSESSEE IS GIVEN HEREIN ABOVE IN THE SUBMISSIONS MADE BY THE ASSESSEE. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE ESPECIALLY THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE 18 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) INCURRED ON EARNING THE DIVIDE ND INCOME. CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND THE DIVIDEND INCOME RECEIVED, THE AO WAS OF THE VIEW THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A OF THE IT ACT TOWARDS THE ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGNITUDE OF PURCHASE AND SALES MADE BY THE ASSESSEE AND THE INVESTMENTS OF LARGE MAGNITUDE CANNOT BE MADE WITHOUT PROPER ANALYSIS OF THE MARKET CONDITION/STOCK MOVEMENT ETC. THE REVENUE WAS OF THE OPINION, THAT THE ASSESSEE HAS WORKED OUT THE ADMINISTRATIVE EXPENDITU RE AND HAD NOT CONSIDERED ALL THE ADMINISTRATIVE EXPENDITURE. BOTH THE PARTIES BEFORE US VEHEMENTLY RELIED ON THE DECISION OF GODREJ BOYCE MFG CO. LTD. VS DCIT 328 ITR 81 (MUM). 15. WE HAVE GONE THROUGH THIS DECISION AND WE NOTED THAT IN THIS CASE, THE A SSESSEE CLAIMED EXEMPTION IN RESPECT OF DIVIDEND INCOME OF 34.34 CRORES U/S 10(33). THE AO ISSUED NOTICES FOR DISALLOWANCE OF INTEREST U/S 14A OF THE IT ACT. THE EXPLANATION OF THE ASSESSEE WAS THAT (I) 95% OF THE SHARES WERE BONUS SHARES FOR WHICH NO COST WAS INCURRED; (II) NO INVESTMENT IN SHARES WAS MADE IN THE CURRENT YEAR AND NO DISALLOWANCE WAS MADE IN EARLIER YEARS AND (III) THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL, RESERVES ETC. WHICH WERE MORE THAN INVEST MENT IN SHARES. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HE MADE DISALLOWANCE U/S 14A ON PRORATA BASIS. THE CIT(A) FOLLOWING HIS ORDERS FOR EARLIER YEARS, ACCEPTED THE APPEAL OF THE ASSESSEE. THE TRIBUNAL FOLLOWING THE DECISIO N OF THE SPECIAL BENCH IN THE CASE OF ITO VS DAGA CAPITAL MANAGEMENT (P) LTD 117 ITD 169 (SB) RESTORED THE MATTER TO THE FILE OF THE AO FOR THE CONSIDERATION IN THE LIGHT OF THE PROVISIONS OF SUB - SEC.(2) & (3) OF SEC.14A OF THE IT ACT. THE ASSESSEE, BE ING AGGRIEVED, FILED APPEAL AS WELL AS WRIT PETITION CHALLENGING THE CONSTITUTIONAL VALIDITY OF SUB - SEC. (2) & (3) AND RULE D. THE HONBLE HIGH COURT GAVE THE FOLLOWING FINDINGS; 1. THE PROVISIONS OF SEC. 14A AND RULE 8D ARE CONSTITUTIONALLY VALID. 2. THE PROVISIONS OF SUB - SEC. (2) & (3) OF SEC.14A AND RULE 8D ARE PROSPECTIVE AND NOT RETROSPECTIVE, IN NATURE AND THEREFORE, WOULD APPLY FROM ASSESSMENT YEAR 2007 - 08. 3. THE BASIC OBJECT OF SEC.14A IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INC URRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME (PAGE 21). 4. THE INSERTION OF SEC.14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOME MINU S EXPENDITURE THAT IS TAXABLE. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME (PAGES 22 - 23). THE TEST WHICH HAS BEEN ENUNCIATED IN WALLFORT FOR ATTRACTING THE PROVISIONS OF SEC.14A IS THAT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. ONCE THE TEST OF PROXIMATE CAUSE, BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO BE EFFE CTED UNDER SECTION 14A (PAGE 28) 5. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF THE AO TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISES IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE AO HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB - SEC (2) DOES NOT IPSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE 19 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION T O INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE AO MUST, IN THE FIRST INSTANCE, DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. T HE SATISFACTION OF THE AO MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE AO TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE W OULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE AO NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW (PAGES 31 - 32). 6. IN THE EVENT THAT THE AO IS NOT SATISF IED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HIS CONCLUSION (PAGE - 79). 7. THE EFFECT OF SEC.14A IS TO WIDEN THE THEORY OF THE APPORTIONMENT OF EXPENDITURE (PAGE 49). 8. THE EXPRESSION EXPENDITURE INCURRED; IN SEC. 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (PAGE - 50). 9. SUB - SECTIONS (2) & (3) OF SEC.14A ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC (1) (PAGES 50). 10. EVEN IN THE ABSENCE OF SUB - SECTION (2) OF SEC.14A THE AO WOULD HAVE TO APPORTION THE EXPENDITURE AND TO DISALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO WOULD HAVE TO FOLLO W A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AND HAVING REGARD TO ALL RELEVANT FACTS AND CIRCUMSTANCES. THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT IS BINDING ON US. WH ILE DECIDING THIS CASE, THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS WALLFORT SHARES & STOCK BROKERS LTD., 233 CTR (SC) 42 WAS REFERRED TO. IN THIS DECISION, WE NOTED THAT THE HONBLE SUPREME COURT IN THAT CASE UPHELD THE VIEW OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. VS ITO 310 ITR 421. THE HONBLE SUPREME COURT IN THIS DECISION, AT PAGE - 31 OF THE ORDER HELD AS UNDER; TO ATTRACT SEC.14A THERE HAS TO BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE. HENCE, SEC.14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS, IN THE ABSENCE OF SUCH PROXIMATE CAUSE FOR DISALLOWANCE, SEC.14A CANNOT BE INVOKED. 16 . THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT (SUPRA) THEREFORE AT PAGE - 28 HAS CLEARLY LAID DOWN THAT THERE MUST BE PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE THAT TAX EXEMPT INCOME IS ESTABLISHED, O NLY THEN A DISALLOWANCE WOULD HAVE TO BE EFFECTED U/S 14A OF THE IT ACT. THEREFORE, IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT AND THE DECISION OF THE HONBLE SUPREME COURT, WE ARE OF THE VIEW THAT SEC.14A CANNOT BE APPLIED UNLESS THERE IS A PROXIMATE CAUSE FOR DISALLOWANCE. THE ONUS TO ESTABLISH THAT THERE IS PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT INCOME IN 20 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) OUR OPINION IS ON THE REVENUE. THUS, THE APPLICATION OF THE PROVISIONS OF SEC. (2) & (3) OF SEC. 14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE, WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOME. SUB - SEC. (2) & (3) ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC. (1). THEREFORE, IT IS NECESSARY FOR THE AO FIRST TO ASCERTAIN WHETHER THERE IS PROXIMATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF SUCH PROXIMATE CONNECTION IS ESTABLISHED WITH THE EXEMPT INCOME, THE AO WOULD BE JUSTIFIED IN APPLYING THE PROVISION S OF SUB - SEC (2) & (3) OF SEC.14A AND RULE 8D OF THE IT ACT, 1961. THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT EXPENDITURE, BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIMATE. IF THERE IS MATERIAL TO ESTABLISH THAT THERE IS DIRE CT NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME THEN DISALLOWANCE WOULD BE JUSTIFIED EVEN WHERE THERE IS NO RECEIPT OF EXEMPTED INCOME U/S 10 IN THE YEAR UNDER CONSIDERATION IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD. 124 TTJ 577 (DEL)(SB). 17. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE, IF ANY EXP ENDITURE IS DIRECTLY RELATED TO EXEMPTED INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON THE SAME ANALOGY, IN OUR OPINION, IF ANY EXPENDITURE IS DIRECTLY RELATED TO TAXABLE INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE EXEMP TED INCOME MERELY BECAUSE SOME INCIDENTAL BENEFIT HAS ARISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THAT CLAIM OF ASSESSEE THAT EXPENDITUR E INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. HE IS ALSO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSESSING OFFICER IN TH IS CASE, WE NOTED IS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE MADE BY THE ASSESSEE EVEN THOUGH HE HAS ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT NO INTEREST IS INCURRED WITH REGARD TO EXEMPT INCOME. HE REJECTED THE EXPLANATION OF THE ASSES SEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING DIVIDEND INCOME CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND DIVIDEND INCOME RECEIVED AND THE DISALLOWANCE ACCORDING TO HIM MADE BY THE ASSESSEE U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE IS VE RY LESS. THE ASSESSING OFFICER NOWHERE POINTED OUT THE PROXIMATE CONNECTION OF OTHER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. HE MERELY OBSERVED THAT THE ADMINISTRATIVE EXPENSES DISALLOWED BY THE ASSESSEE IS VERY L ESS BUT HOW THEY ARE LESS AND HOW THE OTHER EXPENSES INCURRED BY THE ASSESSEE RELATED TO THE DIVIDEND INCOME HAS NOT BEEN BROUGHT ON RECORD. EVEN THE AO HAS NOT POINTED OUT THE EXPENSES EXCLUDED BY THE ASSESSEE FOR DISALLOWANCE HAS PROXIMATE CONNECTION WIT H DIVIDEND INCOME. IN OUR OPINION, THE ASSESSING OFFICER BEFORE REJECTING THE DISALLOWANCE COMPUTED BY THE ASSESSEE MUST GIVE A CLEAR CUT FINDING HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HOW THE OTHER EXPENDITURE CLAIMED BY THE ASSESSEE OUT OF NON EX EMPT INCOME IS RELATED WITH THE EXEMPT INCOME. NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE ASSESSING OFFICER IN OUR OPINION IN VIEW OF THE JURISDICTIONAL HIGH COURT DECISION IS BOUND TO RECORD SATISFACTION AS TO HOW THE EXPENSES CLAIM ED BY THE ASSESSEE HAVE BEEN INCURRED ON EARNING DIVIDEND INCOME WERE NOT SUFFICIENT AND CORRECT. WE HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS REGARD LIES ON THE ASSESSING OFFICER. ALTHOUGH THE LD. DR HAD VEHEMENTLY CONTENDED AND TRIED TO BUILD UP HIS CASE BY SUBSTITUTING THE REASONS 21 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) GIVEN BY THE CIT(APPEAL) IN PLACE OF THE AO, BUT FAILED TO BRING ANY COGENT MATERIAL OR EVIDENCE IN THIS REGARD WHICH MAY PROVE THAT THE OTHER EXPENSES CLAIMED BY THE REVENUE FOR APPORTIONMENT HAD PROXIMATE CONNECTION WITH THE EARNING OF THE DIVIDEND INCOME. IN OUR OPINION UNTIL AND UNLESS THIS IS PROVED OR ESTABLISHED BY THE REVENUE, THE ASSESSING OFFICER DOES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE ASSESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DI SALLOWANCE OUT OF THE EXEMPT INCOME. WE ARE NOT AT ALL CONVINCED WITH THE SUBMISSION OF THE LD. DR RELYING ON THE DECISION OF CIT(APPEAL) IN RESPECT OF EXPLANATION BB TO SEC. 80HHC THAT 10% OF THE RECEIPTS UNDER THE SOURCES MENTIONED THEREIN ARE DEEMED TO BE THE EXPENDITURE. THIS IN OUR OPINION WILL STRENGTHEN THE CASE OF THE ASSESSEE AS EXPLANATION BB TO SEC. 80HHC DOES NOT RECOGNIZE AMOUNT OF THE INVESTMENT MADE IN OTHER RECEIPT TO BE THE BASIS OF COMPUTING THE EXPENDITURE BEING INCURRED FOR THE EARNING OF THAT INCOME. SIMILAR VIEWS HAVE BEEN TAKEN BY HONBLE TRIBUNAL IN THE FOLLOWING DECISIONS ALSO. IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. HELD IN I.T.A.T. DELHI BENCH DATED 7.1.2011 IT WAS HELD AS FOLLOWS: NOW AS PER SECTION 14A(2) OF THE ACT, IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEES TOTAL INCOME UNDER THE ACT, THE AO SH ALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I.E., UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE PRESENT CASE, THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACTION OF THE AO RE GARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD BY THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN ADHOC DISALLOWANCE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE. THIS ONUS HAS NOT BEEN DISCHARGED. IN CIT VS. HERO CYCLES (P&H) 323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT THE DIS ALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN ACIT VS. EICHER LTD., 101 TTJ (DEL.) 369, THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN MARUTI UDYOG VS. DCIT, 92 ITD 119 (DEL.), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONUS TO ESTABLISH T HE NEXUS OF THE SAME WITH THE EXEMPT INCOME, IS ON THE REVENUE. IN WIMCO SEEDLINGS LIMITED VS. DCIT, 107 ITD 267 (DEL.) (TM), IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SI MILAR ARE THE DECISIONS IN: 1. PUNJAB NATIONAL BANK VS. DCIT, 103 TTJ 908 (DEL.); 2. VIDYUT INVESTMENT LTD., 10 SOT 284 (DEL.); AND 3. D.J. MEHTA VS. INCOME TAX OFFICER, 290 ITR 238 (MUM.) (AT) IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISSUE, THE SAME IS HEREBY CONFIRMED. GROUND NO.3 IS THUS REJECTED. 22 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) IN THE CASE OF JINDAL PHOTO LTD. VS. DCIT HELD IN I.T.A.T. DELHI BENCH DATED 23.9.2011 IT WAS HELD AS FOLLOWS: IN THE YEAR UNDER CONSIDERATION, IT IS SEEN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO REGARDING THE ASSESSEES CALCULATION BEING INCORRECT. EVEN SO, RULE 8D OF THE RULES HAS BEEN APPLIED. THIS, IN OUR OPINION, IS NOT CORRECT. SUCH SATISFACTION OF THE ASSESSING OFFICER IS A PRE - REQUISITE TO INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE LEARNED CIT(A), THEREFORE, ERRED IN PARTIALLY APPROVING THE ACTION OF THE ASSESSING OFFICER. IN THE CASE OF AVSHESH MERCANTILE P. LTD. VS. DCIT IN I.T.A.T. MUMBAI BENCH (I.T. ACT NO.5779/MUM/2006 & 208/MUM/2009) IT WAS HELD AS FOLLOWS: AT THE TIME OF HEARING, THE CONTENTION RAISED BY THE LEARNED DR IN THIS REGARD IS THAT THE APPEAL OF THE REVENUE ON THE ISS UE HAVING BEEN DISMISSED BY THE HON'BLE BOMBAY HIGH COURT MERELY OBSERVING THAT NO QUESTION ARISES, IT CANNOT BE TREATED AS A DECISION RENDERED BY THE HON'BLE HIGH COURT ON THE MERIT OF THE ISSUE WHICH IS BINDING ON THIS TRIBUNAL. WE ARE UNABLE TO ACCEPT THIS CONTENTION OF THE LEARNED DR. IT IS WELL SETTLED PROPOSITION OF JUDICIAL PRECEDENTS THAT IS APPEAL THE HON'BLE HIGH COURT CONSIDERS FACTS PERTAINING TO THE ISSUE AND GIVES APPROVAL TO THE DECISION OF THE LOWER FORUM, THE DECISION OF LOWER FORUM GETS MERGED WITH THE JUDGMENT AND ORDER OF THE HIGH COURT AND IT BECOMES BINDING PRECEDENT EVEN THOUGH APPROVAL TO DECISION OF LOWER FORUM/COURT IS SUMMARILY RECORDED. SIMILAR SITUATION HAD ARISEN FOR CONSIDERATION BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. 283 ITR 402 WHEREIN THE EFFECTS OF SUMMARY DISPOSAL OF APPEAL BY THE HIGH COURT WERE ANALYSED AND EXPLAINED BY THEIR LORDSHIPS. IT WAS CLARIFIED THAT WHILE HEARING AN APPEAL EVEN FOR DECIDING WHETHER SUBSTANTIAL QUESTION OF L AW ARISES OR NOT FROM THE ORDER OF THE TRIBUNAL, THE HIGH COURT DOES NOT EXERCISE EITHER THE ORIGINAL JURISDICTION OR THE JURISDICTION TO ISSUE WRITS AND THE ONLY JURISDICTION EXERCISED BY THE HIGH COURT IN THE FIRST INSTANCE DECIDES WHETHER OR NOT SUBSTAN TIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL, IT CANNOT BE SAID THAT THE HIGH COURT DOES NOT EXERCISE THE APPELLATE POWERS OR THAT THERE IS NO DECISION ON MERIT WHEN THE HIGH COURT DISMISSES AN APPEAL HOLDING THAT NO SUBSTANTIAL QUESTION OF L AW ARISES FROM THE ORDER OF THE TRIBUNAL. IT WAS HELD THAT WHENEVER AN ORDER OF THE SUBORDINATE FORUM IS CARRIED IN APPEAL BEFORE THE HIGHER APPELLATE FORUM/COURT, OPERATIVE PART THEREOF MERGES INTO THE JUDGMENT, DECISION OR ORDER OF THE HIGHER COURT AFTE R THE CONFIRMATION, MODIFICATION OR REVERSAL, AS THE CASE MAY BE, AND THE DECISION OF THE LOWER COURT OR FORUM HAS NO INDEPENDENT EXISTENCE THEREAFTER IN RELATION TO THE ISSUE WHICH WAS CARRIED BEFORE THE APPELLATE COURT OR FORUM. IT WAS HELD THAT WHERE T HE HIGH COURT COMES TO THE CONCLUSION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES ON A PARTICULAR ISSUE, IT CANNOT BE STATED THAT THE SUBJECT MATTER OF CONTROVERSY BETWEEN THE PARTIES HAS NOT BEEN DEALT WITH BY THE HIGH COURT. IT WAS HELD THAT WHEN THE DEC ISION OF THE TRIBUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE THE HIGH COURT, IT IS THE DECISION OF THE HIGH COURT WHICH BECOMES OPERATIVE AND WHICH IS CAPABLE OF BEING GIVEN EFFECT TO FOR ALL INTENTS AND PURPOSES. KEEPING IN VIEW THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA), WE HAVE NO HESITATION TO HOLD THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DELITE ENTERPRISE LTD. (SUPRA) IS A DECISION ON MERIT WHICH IS BINDING PRECEDENT ON US. AS THE ISSUE INVOLVED IN THE PRESENT CASES AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA), WE RESPECTFULLY FOLLOW THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT AND 23 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) DELETE THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF PREMIUM PAID BY THE ASSESSEES ON REDEMPTION OF PREMIUM NOTES (OCPN) BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS REGARDS THE CASE LAWS CITED BY THE LEARNED DR, IT IS OBSERVED THAT IN NONE OF THESE CASES, THE FACTS INVOLVED WERE SIMILAR TO THE CASE OF THE PRESENT ASSESSEES IN AS MUCH AS THE INVESTMENT MADE THEREIN WAS NOT FOUND TO BE CAPABLE OF EARNING TAXABLE AS WELL AS EXEMPT INCOME WHICH WAS ACTUALLY NOT EARNED BY THE ASSESSEE IN TH E RELEVANT PERIOD AS ARE THE FACTS OF THE PRESENT CASE OR THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA) DECIDED BY THE HON'BLE BOMBAY HIGH COURT. ACCORDINGLY, WE DECIDE THE COMMON ISSUE INVOLVED IN ALL THESE APPEALS IN FAVOUR OF THE ASSESSEES FOLLOWING TH E DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF DELITE ENTERPRISES (SUPRA) AND ALLOW THE APPEALS OF ALL THE ASSESSEES. 18. WE HAVE ALSO GONE THROUGH THE DECISION RELIED UPON BY THE LEARNED DR ALSO. THE DECISION OF ACIT VS CITICORP FINANCE (IND.) L TD., 108 ITD 457 (BOM.) IS NO MORE RELEVANT, IN VIEW OF THE DECISION OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. (SUPRA). THE DECISION OF SPIC VS DCIT 93 TTJ (CHENNAI) 161 IS NOT APPLICABLE TO THE FACTS OF THE CASE. AS IN THA T CASE, THE ASSESSEE WAS REGULARLY INVESTING IN THE SHARES. THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE WITH REGARD TO THE EARNING OF THE DIVIDEND INCOME. UNDER THESE FACTS, THE HONBLE TRIBUNAL HELD THAT WHETHER TO INVEST OR NOT TO INVEST IS A VERY S TRATEGIC DECISION AND TOP MANAGEMENT INVOLVE IN TAKING THE DECISIONS. THIS DECISION RELATE TO ASSESSMENT YEAR 2000 - 01 MUCH PRIOR TO THE INSERTION OF PROVISION OF SEC.14A(2) OF THE IT ACT,1961. THE DECISION OF ACIT VS PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ (BOM.) RELATES TO ASSESSMENT YEAR 1991 - 92 PRIOR TO INSERTION OF 14A(2) HENCE WILL NOT ASSIST THE REVENUE. THE OTHER DECISION RELIED ON ARE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE, EXCEPT THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GO DREJ & BOYCE MFG. CO. LTD. VS DC IT & ANOTHER 328 ITR 81(BOM.). IN VIEW OF OUR AFORESAID DISCUSSION AND RESPECTIVELY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANOTHER 328 ITR 81 (BOM ), WE DELETE THE DISALLOWANCE MADE U/S 14A R.W. RULE 8D AND ACCORDINGLY, THE GROUND TAKEN BY THE ASSESSEE IN THIS REGARD IS ALLOWED. 3. 4 RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE A.Y. 2009 - 10, WE DELETE THE D ISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A R/W RULE 8D. THUS, GROUND NO.2 TAKEN BY THE ASSESSEE IS ALLOWED. 4 . GROUND NO. 3 : GROUND NO. 3 RELATES TO THE DISALLOWANCE OF RS. 1,36,91,148/ - AS EXPENDITURE ON R&D. BOTH THE PARTIES AGREED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS TRIBUNAL IN THE CASE OF THE ASSESSEE IN ITA NO. 72/PNJ/2012 FOR THE A.Y 2009 - 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT THIS 24 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) ISSUE HAS ARISEN DURING TH E A.Y. 2009 - 10 IN REVENUES APPEAL, ITA NO. 85/PNJ /2012 IN WHICH THIS TRIBUNAL VIDE ORDER DTD. 8.3.2013 UNDER PARA 48 AND 49 HELD AS UNDER : 48. THE SECOND GROUND RELATES TO DELETION OF THE DISALLOWANCE OF EXPENDITURE ON RESEARCH & DEVELOPMENT. THE BRIEF FACTS RELATING TO THE GROUND IS THAT THE AO DISALLOWED A SUM OF RS.1,94,55,376/ CONSIDERING THE SAME AS SCIENTIFIC RESEARCH EXPENDITURE BY TREATING IT AS EXPENDITURE OF CAPITAL IN NATURE. THE AO HAS DEALT WITH THIS ISSUE UNDER PARA - 2 PAGE - 5 OF THE ORDER. WHEN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) AFTER GETTING REMAND REPORT ON THE SUBMISSIONS OF THE ASSESSEE NOTED THAT THE ASSESSEE HAS NOT CLAIMED THE SUM OF RS.2,60,32,608/ - AS RESEARCH & DEVELOPMENT EXPENDITURE NEITHER IN THE BOOKS OF ACCOUNTS NOR IN THE COMPUTATION OF INCOME. THE AO HAS TREATED THIS EXPENDITURE WHICH WERE INCURRED IN USUAL COURSE UNDER VARIOUS HEADS TO BE SCIENTIFIC RESEARCH AS IN THE DIRECTORS REPORT SUCH EXPENDITURE WAS CLASSIFIED AS EXPENDITURE FOR RE SEARCH & DEVELOPMENT. IT WAS ALSO NOTED BY HIM THAT OUT OF TOTAL EXPENDITURE OF RS.2,60,32,608/ - AN AMOUNT OF RS.65,77,232/ - WAS CONSIDERED CAPITAL EXPENDITURE BY THE ASSESSEE AND ONLY THE BALANCE AMOUNTING TO RS.1,94,55,376/ - DEBITED TO THE PROFIT & LOSS ACCOUNT. THE AO HAS NOT BROUGHT OUT ANY SPECIFIC FINDING TO SHOW THAT ANY PART OF THE BALANCE EXPENDITURE UNDER REFERENCE IS IN THE NATURE OF CAPITAL EXPENDITURE. EVEN NO SUCH EXPENDITURE WAS DEBITED IN THE PROFIT & LOSS ACCOUNT UNDER THE HEAD RESEARCH & DEVELOPMENT. THE CIT(A) HAS GIVEN THE CLEAR CUT FINDING THAT THE CONDITIONS PRESCRIBED U/S 35 OF THE IT ACT WOULD COME TO PLAY ONLY IF THE EXPENDITURE IS CLAIMED AS EXPENDITURE FOR SCIENTIFIC RESEARCH. HOWEVER, IN THE PRESENT CASE, CONSIDERING THE DEFI NITION OF SCIENTIFIC RESEARCH PROVIDED U/S 43(4)(I) THE AO OBSERVED THAT THE CASE OF THE ASSESSEE IS NOT COVERED UNDER THE DEFINITION OF SCIENTIFIC RESEARCH. THE CIT(A) IN VIEW OF THE CONCLUSION OF THE AO TOOK THE VIEW THAT THE AO SHOULD HAVE NOT AGAIN TR EATED THIS EXPENDITURE TO BE SCIENTIFIC EXPENDITURE AND THEREFORE, HE DELETED THE ADDITION. 49. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. THE LEARNED DR ALTHOUGH, VEHEMENTLY RELIED ON THE ORDER OF THE AO BUT COU LD NOT DENY THAT THE AO HIMSELF OBSERVED THAT THE CASE OF THE ASSESSEE IS NOT COVERED UNDER THE DEFINITION OF THE SCIENTIFIC RESEARCH. IN VIEW OF THIS FACT, IN OUR OPINION, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF THE CIT(A) AND THE CIT(A)HAS RIGHTLY DELETED THE ADDITION. WE ACCORDINGLY, CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. THUS, GROUND NO. 2 STANDS DISMISSED. 4.1 RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE ASSESSEES CASE FOR THE A.Y. 2009 - 10, WE DELETE THE DISALLOWANCE. THUS, GROUND NO. 3 IS ALLOWED. 5 . GROUND NO. 4 : GROUND NO. 4 RELATES TO THE DISALLOWANCE OF THE COMMISSION AMOUNTING TO RS. 17,72,05,217/ - . 25 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 5.1 THE LEARNED AR CONTENDED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS BENCH IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2009 - 10. 5.2 THE LEARNED D R MADE THE FOLLOWING SUBMISSIONS : THE A.O. CORRECTLY DISALLOWED THE COMMISSION PAYMENTS MADE TO NON - RESIDENTS FOR NON - * DEDUCTION OF T DS AS THE SAME IS LIABLE FOR TAX IN THE HANDS OF NON - RESIDENTS. RELIANCE IS PLACED ON THE FOLLOWING DECISIONS: I) INCOME ARISING TO THE NON - RESIDENT AGENTS ON ACCOUNT OF COMMISSION PAYABLE TO THEM FOR SOLICITING EXPORT ORDER FOR THE INDIAN COMPANY IS TO BE DEEMED TO ACCRUE OR ARISE IN INDIA AND IS TAXABLE IN VIEW OF THE SPECIFIC PROVISIONS OF SEC. 5(2)(B) R.W.S. 9(1 )(I) AS THE RIGHT TO RECEIVE THE COMMISSION WOULD ARISE IN INDIA WHEN THE ORDER IS EXECUTED BY THE INDIAN COMPANY IN INDIA. SKF BOILDERS & DRIERS (P) LTD., IN RE (AAR) 68 DTR 106 II) RESIDENT INDIAN ORGANIZING FOOD AND WINE SHOW IN INDIA WHEREIN ALL BUSINESS OPERATIONS FOR HOLDING THE SHOW ARE TO BE CARRIED ON IN INDIA - APPOINTED A NON - RESIDENT AGENT TO FURNISH INFORMATION ABOUT TERMS AND CONDITIONS TO POTENTIAL FOREIGN PARTICIPANTS A ND FOR BOOKING SPACE IN EXHIBITION - COMMISSION IS PAYABLE TO THE AGENT ONLY IF THE EXHIBITOR PARTICIPATES IN THE EXHIBITION IN INDIA AND MAKES FULL AND FINAL PAYMENT IN INDIA - COMMISSION INCOME TAXABLE IN INDIA IN VIEW OF SEC. 5(2)(B) R.W.S. 9(1 )(I) - F ACT THAT THE AGENT IS TO RENDER SERVICES ABROAD AND THE COMMISSION IS TO BE REMITTED TO IT ABROAD ARE WHOLLY IRRELEVANT FOR THE PURPOSE OF DETERMINING THE SITUS OF INCOME SINCE INCOME IS FROM A SOURCE IN INDIA. RAJIV MALHOTRA, IN RE (AAR) 284 ITR 564 IN VIEW OF THE ABOVE JUDICIAL DECISIONS/OPINIONS, THE INCOME ON ACCOUNT OF COMMISSION PAYMENT RECEIVED BY THE NON - RESIDENTS ARE TAXABLE IN INDIA. ONCE IT IS TAXABLE THE ASSESSEE IS BOUND TO DEDUCT IDS FOR CLAIMING THE EXPENDITURE . IN GE INDIA TECHNOLOGY CENTRE (P) LTD., VS. CIT & ANR. (327 ITR 456) SUPREME COURT HELD THAT PAYER IS BOUND TO DEDUCT TAX AT SOURCE ONLY IF THE SUM PAID IS ASSESSABLE TO TAX IN INDIA. WITHOUT PREJUDICE TO THE ABOVE, IT IS ALSO SUBMITTED THAT THE ASSESSEE COMPANY NOT PROVED THE RENDERING OF SERVICES BY THE AGENTS TO WHOM THE COMMISSION IS PAID. THE ITAT FOR THE A.Y. 2005 - 06 IN THE ASSESSEE'S OWN CASE HELD THAT ASSESSEE NOT PROVED THE RENDERING OF SERVICES BY THE AGENTS EVEN BEFORE THE TRIBUNAL. HENCE, THE HON'BLE BENCH IS REQ UESTED TO CONFIRM THE ADDITIONS MADE BY THE AO. 5. 3 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD ALONGWITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE NOTED THAT THE ASSESSING OFFICER DISALLOWED COMMISSION PAID BY THE ASSESSEE TO THE NON - RESIDENT SALES AGENTS RENDERING SERVICES OUTSIDE INDIA AS THE ASSESSEE HAS NOT DEDUCTED TDS AND A SIMILAR DISALLOWANCE HAS B EEN MADE BY THE 26 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) ASSESSING OFFICER DURING THE ASSESSMENT YEARS 2005 - 06 TO 2007 - 08 UNDER SECTION 40 (A)(I) OF THE INCOME TAX ACT. THE DISALLOWANCE WAS ALSO MADE APART FROM NON - DEDUCTION OF TDS UNDER SECTION 40(A)(I) FOLLOWING THE ORDER OF CIT(A) FOR THE A.Y. 2006 - 07 UNDER SECTION 37 OF THE INCOME TAX ACT. WE NOTED THAT THE DISALLOWANCE IS DULY COVERED IN FAVOUR OF THE ASSESSEE SO FAR AS IT RELATES TO THE DISALLOWANCE MADE UNDER SECTION 40(A)(I) BY THE DECISION OF THIS TRIBUNAL. 2. THE GROUND NOS. 1 AND 2 RELATE TO THE ISSUE ABOUT THE CLAIM OF THE COMMISSION DISALLOWED BY THE ASSESSING OFFICER UNDER SECTION 40(A)(I) AND CONFIRMED BY THE CIT(A) UNDER SECTION 40(A)(I) AS WELL AS UNDER SECTION 37 OF THE INCOME TAX ACT. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT THIS ISSUE IS DULY COVERED IN FAVOUR OF THE ASSESSEE SO FAR IT RELATES TO THE DISALLOWANCE MADE UNDER SECTION 40(A)(I) BY THE DECISION OF THIS TRIBUNAL DTD. 10.3.2011 FOR A.Y. 2005 - 06 IN ITA NO. 113/PNJ/2010 IN WHICH THIS TRIBUNAL RELYING ON THE DECISION OF THE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD. VS. CIT & ANR. (327 ITR 456) DELETED THE DISALLOWANCE AND ALLOWED THE APPEAL OF THE ASSESSEE ON THIS ISSUE BY HOLDING AS UNDER : 9. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ISSUE IN CONTROVERSY WHETHER THE ASSESSEE REQUIRES TO DEDUCT TAX AT SOURCE FOR THE COMMISSION PAID TO NON - RESIDENTS HAS BEEN DEALT BY HON'BLE SUPREME COURT IN GE INDIA TECHNOLOGY CENTRE P. LTD. WHEREIN IT HAS BEEN HELD AS UNDER : THE MOST IMPORTANT EXPRESSION IN SECTION 195(1) OF THE INCOME TAX ACT, 1961 DEALING WITH DEDUCTION OF TAX AT SOURCE CONSISTS OF THE WORDS 'CHARGEABLE UN DER THE PROVISIONS OF THE ACT.' A PERSON PAYING INTEREST OR ANY OTHER SUM TO A NON - RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT CHARGEABLE TO TAX UNDER THE ACT. SECTION 195 CONTEMPLATES NOT MERELY AMOUNTS, THE WHOLE OF WHICH ARE PURE INCOME PAYM ENTS; IT ALSO COVERS COMPOSITE PAYMENTS WHICH HAVE AN ELEMENT OF INCOME IMBEDDED OR INCORPORATED IN THEM. THE OBLIGATION TO DEDUCT TAX AT SOURCE IS, HOWEVER, LIMITED TO APPROPRIATE PROPORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON - RESIDENT. IT IS FOR THIS REASON THAT THE CBDT HAS CLARIFIED IN CIRCULAR NO.728 DATED OCTOBER 31, 1995, THAT THE TAX DEDUCTOR CAN TAKE INTO CONSIDERATION THE EFFECT OF THE DTAA IN RESPECT OF PAYMENTS OF ROYALTIES AND TECHNICAL F EES WHILE DEDUCTING TAX AT SOURCE. THE EXPRESSION 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT' IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF A TRADING RECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSA BLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED.' 27 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THE CLAIM OF THE ASSESSEE AND HELD THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE UNDER SECT/ON 195(1) BECAUSE INCOME IS NOT TAXABLE IN INDIA. THE TRIBUNAL IN CASE OF ITA NOS.6133(MUM.)/2002 AND NO.7589(MU M.)/2003, WHEREIN THE TRIBUNAL HAS CLARIFIED CIRCULAR NO.786 DATED 07 - 02 - 2000. ACCORDING TO PARA - 3 OF THIS CIRCULAR NO.7 OF 2009, THE EARLIER CIRCULAR NO.23 DATED 23 - 07 - 1969 IS WITHDRAWN WITH IMMEDIATE EFFECT. SIMILAR IS THE FATE FOR CIRCULAR NO.786. IT IS THEREFORE, BECOMES CLEAR THAT THE CIRCULARS ON WHICH THE TRIBUNAL HAS PLACED RELIANCE WHILE DECIDING THE CASE FOR ASSESSMENT YEAR 1997 - 98 IN ASSESSEE'S OWN CASE HOLD GOOD FOR THE INSTANT YEAR AS WELL. IT IS AXIOMATIC THAT A CIRCULAR IN OPERATION THROUGH T HE ASSESSMENT YEAR 1998 - 99 CANNOT BE HELD TO BE IN OPERATIONAL SIMPLY BY REASON OF THE FACT THAT IT HAS BEEN WITHDRAWN IN THE YEAR 2009. THE WITHDRAWAL OF SUCH CIRCULARS WILL BE EFFECTIVE ONLY AFTER THE SAID DATE OF 22 - 10 - 2009 BY WHICH THESE CIRCULARS WILL BE EFFECTIVE ONLY AFTER THE SAID DATE OF 22 - 10 - 2009 BY WHICH THESE CIRCULARS HAVE BEEN WITHDRAWN WITH IMMEDIATE EFFECT. ACCORDINGLY, CIRCULAR NO.7 OF 2009 WITHDRAWING THE CIRCULAR NO.23 OF 1969,163 OF 1975 AND 786 OF 2000 WILL BE OPERATIVE ONLY FROM 22 - 10 - 2009 AND NOT PRIOR TO THAT DATE. THUS, WE ARE OF THE VIEW THAT THIS ASSESSMENT YEAR IS 2005 - 06 AND IT IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. THEREFORE, WE ALLOW THE APPEAL OF THE ASSESSEE ON THIS GROUND. 3. SO FAR AS THE ISSUE RELATING TO DI SALLOWANCE OF THE COMMISSION UNDER SECTION 37 IS CONCERNED, THE ISSUE IS COVERED BY THE ORDER DT. 8.3.2013 OF THIS TRIBUNAL IN THE CASE OF THE ASSESSEE IN ITA NO. 72/PNJ/2012 IN WHICH THIS TRIBUNAL TOOK THE VIEW THAT THE COMMISSION HAS BEEN INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE BY HOLDING AS UNDER : 24. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDER OF THE TAX AUTHORITIES BELOW AND ALSO THE MATERIAL RELIED UPON BY BOTH THE PART IES. THE ONLY ISSUE BEFORE US IS WHETHER THE COMMISSION PAID BY THE ASSESSEE HAS BEEN INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. NOW, COMING TO THE RELEVANT PROVISION IN WHICH THE ASSESSEE CLAIMED DEDUC TION IS SECTION 37(1) OF THE INCOME TAX ACT, 1961. SECTION 37(1) READS AS UNDER: - ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE) , LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. EXPLANATION: FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE I N RESPECT OF SUCH EXPENDITURE 28 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) FROM THE AFORESAID SECTION, IT IS APPARENTLY CLEAR THAT EXPENDITURE TO BE ELIGIBLE FOR DEDUCTION U/S 37(1) MUST FULFILL THE FOLLOWING CONDITIONS: - A ) THE EXPENDITURE SHOULD NOT BE COVERED BY THE PROVISION OF SECTION 30 TO 36 AS THESE SECTIONS PROVIDE ITS SPECIFIC TREATMENT TO EXPENDITURE LAID DOWN IN THOSE SECTIONS. B ) EXPENDITURE SHOULD NOT BE CAPITAL IN NATURE. C ) IT IS NOT TO BE PERSONAL EXPENDITURE OF THE ASSESSEE. D ) IT SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF BUSINESS OR PROFESSION. E ) IT SHOULD BE INCURRED DURING THE PREVIOUS YEAR. F ) IT SHOULD NOT BE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. 24.1 IN THE CASE OF THE ASSESSEE, THERE IS NO DOUBT THAT THE COMMISSION PAID BY TH E ASSESSEE IS NOT COVERED BY THE PROVISION OF SECTION 30 TO 36. THERE IS ALSO NO DISPUTE THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS OF REVENUE NATURE AND NOT OF CAPITAL IN NATURE. THERE IS ALSO NO DISPUTE ABOUT THE FACT THAT THE EXPENDITURE HAS BEEN INCURRED DURING THE RESPECTIVE PREVIOUS YEARS. THERE IS ALSO NO DISPUTE THAT THIS EXPENDITURE HAS NOT BEEN INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THE EXPENDITURE SO INCURRED BY THE ASSESSEE COMPANY CANNOT BE REGARDED T O BE THE PERSONAL EXPENDITURE OF THE ASSESSEE. THERE IS NO EVIDENCE ON RECORD THAT THESE EXPENSES WERE INCURRED TO MEET OUT THE PERSONAL NEEDS OF THE ASSESSEE COMPANY. THE COMPANY IS ALWAYS INCORPORATED FOR THE PURPOSE OF CARRYING ON THE BUSINESS AS STIPU LATED UNDER ITS OBJECT CLAUSE LAID DOWN IN THE MEMORANDUM OF ASSOCIATION. THE COMPANY SO INCORPORATED IS NOT HUMAN BEING, WHICH MAY HAVE PERSONAL NEEDS. THE COMPANY IS AN ARTIFICIAL PERSON INCORPORATED UNDER THE LEGISLATURE BY HAVING A SEPARATE ENTITY. AL THOUGH BY HAVING A SEPARATE ENTITY; IT MAY WORK AS A HUMAN BEING IN ITS OWN NAME BUT IT DOES NOT REQUIRE ANY EXPENDITURE TO BE INCURRED, AS A HUMAN BEING REQUIRES FOR MEETING OUT ITS PERSONAL NEEDS. THEREFORE THE EXPENDITURE INCURRED BY THE ASSESSEE COMPAN Y CANNOT BE REGARDED TO BE THE PERSONAL EXPENDITURE OF THE ASSESSEE. THE PERSONAL EXPENDITURE OF THE MANAGEMENT OR THE HUMAN BEINGS WHO ARE CONTROLLING THE COMPANY CANNOT BE REGARDED TO BE THE PERSONAL EXPENSES OF THE ASSESSEE COMPANY. IT MAY BE REMUNERAT ION OR PERQUISITE IN THE HANDS OF THE MANAGEMENT OR THE HUMAN BEINGS BUT IT CANNOT REGARD TO BE THE PERSONAL EXPENSES OF AN INCORPORATED BODY. 25. THE ONLY DISPUTE IN THIS CASE RELATES TO THE FACT WHETHER THE COMMISSION PAID CAN BE REGARDED TO HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION OF THE ASSESSEE COMPANY. BEFORE 1939, THE PHRASE USED WAS EXP ENDITURE INCURRED SOLELY FOR THE PURPOSE OF EARNING PROFIT. THE OMNIBUS PROVISION OF SECTION 37 AS AMENDED BY 1939 ACT ALLOWS OF EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH BUSINESS/PROFESSION AS LONG AS NO PERSONAL/CAPITAL ELEM ENT IS INVOLVED. THE SCOPE OF THE TERM FOR THE PURPOSE OF BUSINESS IS SURELY WIDER THAN THE TERM FOR THE PURPOSE OF EARNING PROFIT. IN OUR OPINION THE INCOME TAX DEPARTMENT 29 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) CANNOT PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND UNDER WHAT CIRCU MSTANCES. EVERY BUSINESSMAN KNOWS HIS INTEREST BEST. THE ASSESSEE MAY NOT BE A PRUDENT MAN AND YET AN EXPENDITURE INCURRED VOLUNTARILY FOR THE PURPOSE OF THE BUSINESS WOULD BE ALLOWABLE U/S 37(1). THE HONBLE APEX COURT IN THE CASE OF EASTERN INVESTMEN T LTD. VS. CIT, 20 ITR 14 (SC), LAID DOWN THE FOLLOWING PRINCIPLES FOR EVALUATION OF WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS: - (I) EVEN IF THE QUESTION MUST BE DECIDED ON THE FACTS OF EACH CASE, THE CONCLUDING DECISION WILL BE ONE OF LAW. (II ) IT IS NOT NECESSARY THAT THE EXPENDITURE BE INCURRED FOR EARNING PROFIT. (III) IT IS ENOUGH THAT THE MONEY WAS EXPENDED NOT OF NECESSITY AND WITH A VIEW TO DIRECTING AND IMMEDIATE BENEFIT TO THE TRADE, BUT VOLUNTARILY ON THE GROUND OF COMMERCIAL EXPEDIE NCY, AND IN ORDER, INDIRECTLY, TO FACILITATE THE CARRYING ON OF THE BUSINESS. (IV) NO HARD AND FAST RULE CAN BE LAID DOWN TO EXPLAIN WHAT THE WORD SOLELY IS MEANT FOR. THE EXPRESSION WHOLLY AND EXCLUSIVELY USED IN SECTION 37(1) DOES NOT MEAN NECES SARILY. ORDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF ITS OR HIS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY, AND IF IS INCURRED FOR PROMOTING THE BUSINESS AN D TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION THEREFORE UNDER SECTION 37(1) EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. THE SUPREME COURT, IN THE CASE OF CIT VS MALAYALAM PLANTATION (1964) 53 ITR 140 (SC), HELD THAT IT IS NOT ONLY EXPENDITURE WHICH DIRECTLY RESULTS IN BENEFIT OR ADVANTAGE TO THE ASSESSEES BUSINESS THAT IS ENTITLED TO DEDUCTION, BUT ALSO ANY EXPENDITURE WHICH IS INCURRED WITH A VIEW TO FACILITATING THE CARRYING ON OF THE BUSINESS. 26. WE DO AGREE WITH THE SUBMISSIONS OF THE LD. AR THAT IT IS NOT OPEN TO THE DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE THE ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE. EVERY BUSINESSMAN KNOWS HIS INTEREST BEST AS THIS HAS B EEN CLEARLY LAID DOWN BY THE HONBLE APEX COURT IN 91 ITR 544 IN THE CASE OF CIT VS DHANRAJGIRI RAJA NARSINGHGIRI. NO DOUBT EVERY BUSINESSMAN IS THE BEST JUDGE OF HIS BUSINESS EXPEDIENCY BUT THE ASSESSING OFFICER IN OUR OPINION HAS THE RIGHT TO KNOW WHET HER THE EXPENDITURE HAS BEEN INCURRED FOR BUSINESS PURPOSES OR NOT OR WHETHER IT HAS BEEN INCURRED FOR OTHER EXTRANEOUS CONSIDERATION. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF JAIPUR ELECTRO PVT. LTD. VS CIT, 134 CTR 2 37 (RAJ). THE HONBLE BOMBAY HIGH COURT HAS ALSO TAKEN THE SIMILAR VIEW IN THE CASE OF RAMANAND SAGAR VS DCIT, 255 ITR 134 (BOM) IN WHICH IT WAS HELD THAT THE MERE FACT THAT THE PAYMENT HAS BEEN MADE UNDER A CONTRACT IS NOT CONCLUSIVE OF EXPENDITURE BEING LAID DOWN WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. ONCE DOUBT ARISE ABOUT THE BONAFIDE NATURE OF THE 30 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) PAYMENT, IT IS NECESSARY TO LOOK INTO THE NECESSARY CIRCUMSTANCES SUCH AS RELATIONSHIP OF THE PAYEE TO THE ASSESSEE, THE GENERAL STANDARD OF SIMILAR EXPENDITURE IN COMPARABLE BUSINESS, THE TRUE WORTH OF THE SERVICES OR GOODS IN QUESTION AND SO FORTH. IT IS ALSO OPEN TO THE A.O. TO QUESTION THE REALITY OF THE EXPENDITURE I.E., THE TRUE NATURE OF THE PAYMENT, THE TRUE CONSIDERATION FOR IT AND SO FORTH. ONCE THE A.O. CONSIDERS THE PAYMENT AND THE PURPOSE TO BE BONAFIDE, IT IS NOT OPEN FOR HIM TO SUBSTITUTE HIS OWN JUDGMENT WHAT IS THE REASONABLE QUANTUM OF EXPENDITURE FOR THE ASSESSEE. THE A.O. CAN ONLY DECIDE WHETHER THE EXPENDITURE IS REAL, WH ETHER IT RELATES TO THE BUSINESS AND IS WHOLLY SPENT FOR THAT PURPOSE. IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY, FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS THE REASONABLENESS OF THE EXPE NDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT THE REVENUE, AS HELD IN CIT VS WALCHAND AND CO. (P) LTD. (1967) 65 ITR 381 (SC). THE SIMILAR VIEW HAS BEEN TAKEN IN THE CASES OF JK WOOLLEN MANUFACTURERS VS CIT (1969) 72 ITR 612 (S C); ALUMINUM CORPORATION OF INDIA LTD. VS CIT (1972) 86 ITR 11 (SC) AND CIT VS PANIPAT WOOLLEN AND GENERAL MILLS CO. LTD. (1976) 103 ITR 66 (SC). CONSIDERING THE TRUE IMPORT OF THE EXPRESSION WHOLLY AND EXCLUSIVELY IT WAS OBSERVED BY THE APEX COURT IN SA SSOON J DAVIT AND CO. PVT. LTD. VS CIT (1979) 118 ITR 261, THAT THE SAME DOES NOT MEAN NECESSARILY. ORDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VO LUNTARILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION UNDER THE RELEVANT PROVISION EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. THE FACT THAT S OMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION U/S 37 OF THE ACT IF IT OTHERWISE SATISFIES THE TESTS LAID DOWN BY LAW. THE BILL READ ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED. IN VIEW OF THE PROTESTS RAISED BY THE TAXPAYERS THE WORD NECESSARILY CAME TO BE DROPPED. IT WILL BE ALSO NOTICED THAT IN CIT VS CHANDU LAL KESHAVLAL AND CO. (1960) 38 ITR 601, 610, IT WAS OBSERVED AS FOLLOWS: - ANOTHER FACT THAT EMERGES FROM THESE CASES IS THAT IF THE EXPENSE IS INCURRED FOR FOSTERING THE BUSINESS OF ANOTHER ONLY OR WAS MADE BY WAY OF DISTRIBUTION OF PROFITS OR WAS WHOL LY GRATUITOUS OR FOR SOME IMPROPER OR OBLIQUE PURPOSE OUTSIDE THE COURSE OF BUSINESS THEN THE EXPENSE IS NOT DEDUCTIBLE. IN DECIDING WHETHER A PAYMENT OF MONEY IS A DEDUCTIBLE EXPENDITURE ONE HAS TO TAKE INTO CONSIDERATION QUESTIONS OF COMMERCIAL EXPEDIENC Y AND THE PRINCIPLES OF ORDINARY COMMERCIAL TRADING. IF THE PAYMENT OR EXPENDITURE IS INCURRED FOR THE PURPOSE OF THE TRADE OF THE ASSESSEE IT DOES NOT MATTER THAT THE PAYMENT MAY INCUR TO THE BENEFIT OF A THIRD PARTY (USHERS WILTSHIRE BREWERY LIMITED V BRUCE (1914) 6 TAX CASES 399 (HL). ANOTHER TEST IS WHETHER THE TRANSACTION IS PROPERLY ENTERED INTO AS A PART OF THE ASSESSEES LEGITIMATE COMMERCIAL UNDERTAKING IN ORDER TO FACILITATE THE CARRYING ON OF ITS BUSINESS; AND IT IS IMMATERIAL THAT A THIRD PAR TY ALSO BENEFITS THEREBY. BUT IN EVERY CASE IT IS A 31 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) QUESTION OF FACT WHETHER THE EXPENDITURE WAS EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF TRADE OR BUSINESS OF THE ASSESSEE. 27. IF WE APPLY THE PRINCIPLES OF THE LAW AS ENUNCIATED IN THE VARIOU S JUDGMENTS, WE ARE OF THE OPINION THAT ONCE THE A.O. FINDS THAT THE ASSESSEE HAS BONAFIDELY INCURRED THE EXPENDITURE FOR THE BUSINESS, THE A.O. CANNOT DECIDE THE QUANTUM OF THE EXPENDITURE TO BE INCURRED BY THE ASSESSEE. IN THIS CASE BEFORE US THE ASSESS ING OFFICER HAS DISPUTED THE FACT THAT COMMISSION HAS BEEN PAID FOR THE PURPOSE OF THE BUSINESS AND ALSO DISALLOWED THE SAID EXPENDITURE BY APPLYING THE PROVISIONS OF SEC. 40(A)(I) AS WELL AS ON THE BASIS OF THE GENUINENESS OF THE EXPENDITURE INCURRED. THE CIT (A) WHILE HOLDING THAT THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX IN RESPECT OF THE COMMISSION PAYMENT MADE TO THE NON - RESIDENT AGENTS TOOK THE VIEW THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING THE COMMISSION PAYMENT BY INVOKING THE PROV ISION OF SEC. 40(A)(I). THE CIT(A), HOWEVER, DISALLOWED THE COMMISSION PAID BY THE ASSESSEE TO THE FOREIGN NON - RESIDENT AGENTS BY APPLYING THE PROVISIONS OF SEC. 37 AS ACCORDING TO HIM THE ASSESSEE HAD NOT ABLE TO SUBSTANTIATE THE CLAIM FOR PAYMENT OF COMM ISSION TO NON - RESIDENT AGENTS BY ADDUCING SPECIFIC AND TANGIBLE EVIDENCE TO DEMONSTRATE THAT THE SERVICES WERE RENDERED BY THE SALES AGENTS TO JUSTIFY THE COMMISSION PAYMENT AS CLAIMED BY THE ASSESSEE. HE, THUS, CONFIRMED THE ORDER OF THE ASSESSING OFFICE R FOR THE SAID DISALLOWANCE. NOW THE ONLY ISSUE BEFORE US IS WHETHER THE ASSESSEE HAD DISCHARGED ITS ONUS OF PROVING THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE OR NOT. 27.1 THE DOCUMENTARY EVIDENCES BY WAY OF AGREEMENTS WITH THE NON - RE SIDENT AGENTS AND EMAILS EXCHANGED WITH THEM IN THIS REGARD, WHICH WERE PLACED ON RECORD OF THE AUTHORITIES BELOW AND ALSO FURNISHED AT PAGE NOS. 135 TO 156 OF THE PAPER BOOK BEFORE US, CLEARLY EXHIBIT THE NATURE AND EXTENT OF SERVICES RENDERED BY THOSE NO N - RESIDENT AGENTS; AND THE GENUINENESS OF THE SAME CANNOT BE DOUBTED MERELY ON SURMISES WITHOUT BRINGING ANYTHING CONTRARY ON RECORD. CIT (A) WHILE REJECTING THIS VITAL PIECE OF EVIDENCE HAS MERELY STATED VIDE PARA 6.5 OF HIS APPELLATE ORDER THAT IT IS P OSSIBLE THAT THE ASSESSEE MAY HAVE SOME KIND OF BUSINESS RELATIONSHIP WITH THE ABOVE TWO COMPANIES. IT IS ALSO POSSIBLE THAT THERE MAY BE SOME CORRESPONDENCE WITH THE TWO COMPANIES WITH REGARD TO SALES OF IRON ORE ABROAD. BUT THIS SHALL NOT BE SUFFICIENT JUSTIFICATION TO PROVE THAT THE COMPANIES ABROAD HAVE RENDERED NECESSARY SERVICES FOR EFFECTING SALES SO AS TO JUSTIFY THE CLAIM OF COMMISSION. WHEREAS IN OUR CONSIDERED VIEW, THE CONTENTS OF THE EMAILS FURNISHED BY THE ASSESSEE, WHICH HAVE BEEN SUMMARI ZED HEREIN ABOVE, CLEARLY SHOW THAT THOSE WERE BEING EXCHANGED WITH THE SAID TWO NON - RESIDENT AGENTS IN ACTUAL PERFORMANCE OF THEIR SERVICES FOR WHICH THEY HAD BEEN ENGAGED BY THE ASSESSEE AS PER THE RESPECTIVE AGREEMENTS ENTERED INTO WITH THEM AND FOR WHI CH COMMISSION HAD BEEN PAID TO THEM. IT IS NOT THE CASE OF THE REVENUE THAT THE IMPUGNED EMAILS WERE FABRICATED OR FORGED ONE. IN FACT, THE CIT (A) HAS ADMITTED IN HIS APPELLATE ORDER THAT IT IS POSSIBLE THAT THERE MAY SOME CORRESPONDENCE WITH THE TWO C OMPANIES WITH REGARD TO SALE OF IRON ORE ABROAD, BUT WITHOUT GOING INTO THE MERITS OF THE EMAILS EXCHANGED AND WITHOUT 32 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) CONTROVERTING HOW THE SAME DID NOT EXHIBIT THAT ACTUAL SERVICES HAD NOT BEEN RENDERED BY THOSE AGENTS, HE MERELY REJECTED THE CLAIM OF T HE ASSESSEE AS IF THE ASSESSEE HAS NOT INCURRED THESE EXPENSES GENUINELY FOR THE PURPOSE OF THE BUSINESS. IT IS CARDINAL PRINCIPLE OF LAW THAT A DISALLOWANCE CANNOT BE MADE ON MERE SURMISES AND CONJECTURES. WHERE THE EXPLANATION OF THE ASSESSEE IS BONAFIDE AND EVIDENCES PRODUCED BY IT FURTHER CORROBORATE ITS EXPLANATION, THERE IS NO REASON FOR REVENUE TO DISREGARD THE SAME ON WHIMS WITHOUT BRINGING FORTH ANY TANGIBLE AND COGENT MATERIAL TO THE CONTRARY. 27.2 THE SAID TWO NON - RESIDENT AGENTS HAD BEEN ENGAGED BY THE ASSESEEE IN THE PAST AND THEY HAVE BEEN PAID COMMISSION ON SALES ABROAD SINCE LAST SO MANY YEARS. THERE IS NO LAW WHICH MANDATES THAT A MIDDLEMAN IS ENTITLED TO HIS COMMISSION ONLY FOR THE FIRST T IME WHEN HE INTRODUCES BOTH THE PARTIES TO EACH OTHER. WE AGREE WITH THE LD. AR THAT IN FACT, IT IS A NORMAL BUSINESS PRACTICE ALL OVER THE WORLD THAT AFTER THE PARTIES ARE INTRODUCED THE ACTUAL WORK OF A COMMISSION AGENT STARTS. HERE IN THE INSTANT CASE OF THE ASSESSEE, THE BUYERS HAD BEEN INTRODUCED BY THE SAID AGENTS IN THE PAST. THE EMAILS EXHIBIT THAT THE AGENTS WERE DEEPLY INVOLVED WITH THE BUYERS VIS - - VIS THE ASSESSEE IN ACTUAL TRANSPORTATION OF GOODS AND SECURING PAYMENTS TO THE ASSESSEE. EMAIL S SHOW THAT THE AGENT WAS CONFIRMING VESSEL NOMINATION FROM THE BUYER, WHICH WAS LATER ACCEPTED BY THE ASSESSEE. OTHER EMAILS SHOW THE ASSESSEES REQUEST TO THE AGENT FOR OPENING OF LC AND SUBSEQUENTLY REQUESTING THE AGENT FOR LC AMENDMENTS AND LC ACCEPTA NCES. IN OTHER SUCH SET OF EMAILS, THE ASSESSEE IS FOUND SUGGESTING AMENDMENTS TO THE DRAFT LC AND THE AGENT CONFIRMING / SUGGESTING AMENDMENTS TO THE LC. SIMILARLY, ANOTHER SET OF EMAILS SHOW THE AGENT ADVISING CHANGES IN THE SALE CONTRACT WITH THE BUYE R AND THE ASSESSEE ACCEPTING THE SAME. YET ANOTHER EXCHANGE OF EMAILS SHOWS THE AGENT IS FORWARDING DRAFT REVISED FINAL ADJUSTMENT SHEET AND THE ASSESSEE IS SUGGESTING CORRECTIONS TO FINAL ADJUSTMENT SHEETS AND REQUESTING THE AGENT TO FORWARD THE SAME TO THE BUYER. MORE SO, IN ONE SUCH SET OF EMAILS, THE ASSESSEE IS SEEN ASKING THE AGENT TO CONVEY ITS MESSAGE TO THE BUYER AND THE AGENT CAN BE SEEN CONVEYING MESSAGE FROM THE BUYER TO THE ASSESSEE. THUS, THERE REMAINS NO DOUBT IN OUR MIND THAT THE NON - RES IDENT AGENTS WERE ACTUALLY RENDERING THE SERVICES AS MIDDLEMEN IN TERMS OF THEIR RESPECTIVE AGREEMENTS WITH THE ASSESSEE AND, ACCORDINGLY, COMMISSION WAS GENUINELY PAID BY THE ASSESSEE FOR THOSE SERVICES ONLY, I.E., WHOLLY AND EXCLUSIVELY FOR THE PURPOSE O F THE BUSINESS OF THE ASSESSEE. THE DECISION IN LAXMINARAYAN MADANLAL VS CIT (1972) 86 ITR 439 (SC), RELIED UPON BY THE REVENUE IS TOTALLY DISTINGUISHABLE ON FACTS. IN THAT CASE THE ASSESSEE HAD ONLY PRODUCED THE AGREEMENTS AND THE HONBLE APEX COURT DECIDED THAT THE MERE EXISTENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND ITS SELLING AGENTS OR PAYMENT OF CERTAIN AMOUNTS AS COMMISSION, ASSUMING THERE WERE SUCH PAYMENTS, DOES NOT BIND THE ITO TO HOLD THAT PAYMENT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF THE ASSESSEES BUSINESS. WHEREAS IN THE INSTANT CASE, THE ASSES SEE HAS PLACED OTHER DOCUMENTARY EVIDENCES ON RECORD BESIDES THE AGREEMENTS, WHICH CLEARLY DEMONSTRATE THAT THE REQUISITE SERVICES UNDER THOSE AGREEMENTS FOR WHICH COMMISSION WAS PAID TO 33 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) THEM, HAD ACTUALLY BEEN RENDERED BY THEM. THUS, IN THE CASE OF THE AS SESSEE COMMERCIAL EXPEDIENCY HAS CLEARLY BEEN PROVED. THEREFORE, THE DISALLOWANCE OF RS. 9,88,29,729/ - FOR COMMISSION PAID TO NON - RESIDENT AGENTS IS DELETED BY ALLOWING THIS GROUND OF APPEAL OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL FOR A.Y 2005 - 06 AND 2009 - 10 IN THE CASE OF THE ASSESSEE, WE ALLOW THE GROUND NO. 1 AND 2 TAKEN BY THE ASSESSEE AND DELETE THE DISALLOWANCE. 5. 4 RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL FOR THE A.Y. 2006 - 07 IN THE CASE OF THE ASSESSEE , WE ALLOW GROUND NO. 4 TAKEN BY THE ASSESSEE AND DELETE THE DISALLOWANCE MADE ON ACCOUNT OF COMMISSION PAID BY THE ASSESSEE. 6 . GROUND NOS. 5 & 6 : GROUND NO. 5 AND 6 RELATES TO DISALLOWANCE OF RS. 1,27,25,674/ - A ND RS.23,36,879/ - IN RESPECT OF DEMURRAGE PAID BY THE ASSESSEE. THE LEARNED AR IN THIS REGARD CONTENDED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS BENCH IN THE CASE OF THE ASSESSEE IN ITA NO. 72/PNJ/2012 FOR THE A.Y. 2009 - 10. ON THE OTHER HA ND, THE LEARNED DR CONTENDED THAT THE ASSESSEE WAS LIABLE TO DEDUCT TDS ON DEMURRAGE AS PER DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. ORIENT GOA CO. PVT. LTD. AND ACCORDINGLY THE ASSESSING OFFICER HAS RIGHTLY MADE THE DISALLOWANCE. THE LEARNED DR NEITHER GAVE THE COPY OF THE JUDGEMENT NOR FILED THE CITATION . 6.1 AFTER HEARING THE RIVAL SUBMISSIONS AND SEARCHING THE DECISION THROUGH INTERNET IN THE CASE OF CIT VS. ORIENT GOA CO. PVT. LTD., WE FIND THAT THE ISSUE RELATING TO DEMURRAGE CHARGES I S DULY COVERED BY THE DECISION OF THE HON'BLE HIGH COURT. IN THIS CASE, THE HON'BLE HIGH COURT WHILE DEALING WITH A SIMILAR ISSUE DECIDED THE ISSUE IN FAVOUR OF THE REVENUE BY HOLDING AS UNDER: 7. WE HAVE GIVEN ANXIOUS CONSIDERATION TO THE SUBMISSION OF THE LEARNED SENIOR COUNSEL. ON READING OF THE ENTIRE JUDGMENT OF THE LEARNED SINGLE BENCH, IT IS NOT POSSIBLE FOR US TO COUNTENANCE THE SUBMISSION OF THE LEARNED SENIOR ADVOCATE THAT THE RATIO OF THE JUDGMENT IS APPLICABLE TO THE FACTS OF THE CASE ON HAND . IN OUR VIEW, THIS JUDGMENT DOES NOT HELP THE PRESENT RESPONDENT, I.E., THE ASSESSEE. 34 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) ANOTHER JUDGMENT RELIED ON BY THE LEARNED SENIOR ADVOCATE MR. USGAONKAR FOR THE RESPONDENT - ASSESSEE IS IN THE MATTER OF CBDT V. CHOWGULE & CO. LTD. [1991] 192 ITR 40 ( KAR.). THERE THE LEARNED DIVISION BENCH OBSERVED THAT 'THE QUESTION FOR CONSIDERATION IS WHETHER DEMURRAGE PAYABLE TO A NON - RESIDENT OWNER OR CHARTERER OF A SHIP FOR THE DELAY IN LOADING THE ORE SOLD TO THE FOREIGNER IS LIABLE TO BE TAXED UNDER THE PROVISI ONS OF THE INCOME - TAX ACT'. WE HAVE SEEN THE FACTS OBTAINING IN THAT CASE. IN OUR VIEW, THE FACTS ARE DISTINGUISHABLE. THE RATIO OF THIS JUDGMENT ALSO DOES NOT HELP THE PRESENT ASSESSEE, I.E., THE RESPONDENT IN THIS APPEAL. WE HAVE NOTICED THE VARIOUS DATE S IN THE CITED JUDGMENT. WE HAVE ALSO CONSIDERED THE DEFINITION OF WORD 'DEMURRAGE' TO WHICH OUR ATTENTION WAS INVITED BY LEARNED SENIOR ADVOCATE SHRI USGAONKAR. LEARNED SENIOR ADVOCATE ALSO INVITED OUR ATTENTION TO DICTIONARY MEANING OF THE WORD 'DEMURRAG E' (BLACK'S LAW DICTIONARY). 8. SECTION 172 OF THE ACT 1961 IS CAREFULLY CONSIDERED BY US. CHAPTER XV TITLES AS 'LIABILITY IN SPECIAL CASES'. WE HAVE NO CONCERN WITH SECTIONS, STARTING FROM SECTION 159, TILL SECTION 171 FROM THIS CHAPTER XV. SECTION 172 COMES UNDER SUB - TITLE 'H. - PROFITS OF NON - RESIDENTS FROM OCCASIONAL SHIPPING BUSINESS'. TITLE OF SECTION 172 IS 'SHIPPING BUSINESS OF NON - RESIDENTS.' FOR BRINGING A CASE UNDER CHAPTER XV - H OF THE ACT 1961, ONE HAS TO ESTABLISH A CASE OF PROFITS OF NON - RESI DENTS FROM OCCASIONAL SHIPPING BUSINESS. 'NON - RESIDENT' IS DEFINED UNDER SECTION 2(30), AS A PERSON WHO IS NOT A 'RESIDENT' AND FOR THE PURPOSE OF SECTIONS 92, 93 AND 168, INCLUDES A PERSON WHO IS NOT ORDINARILY RESIDENT WITHIN THE MEANING OF CLAUSE (6) OF SECTION 6. THE RESPONDENT - ASSESSEE IS A COMPANY, INCORPORATED UNDER THE PROVISIONS OF INDIAN COMPANIES ACT, 1956, IS FAIRLY AN ADMITTED POSITION. THE ASSESSEE CANNOT BE SAID TO BE NON - RESIDENT. WE HAVE ALSO TAKEN NOTICE OF SECTION 6, I.E., 'RESIDENCE IN I NDIA'. IN SHORT, RESPONDENT - ASSESSEE CANNOT BE SAID TO BE NON - RESIDENT. THE PRESENT APPEAL PERTAINS TO THE RESPONDENT - ASSESSEE. IN OUR VIEW, IN THE FACTS OF THE PRESENT CASE, THE RESPONDENT - ASSESSEE CANNOT LAY FINGERS ON SECTION 172, SINCE WE ARE NOT DEALI NG WITH PROFITS OF NON - RESIDENTS. THE OTHER ASPECT IS THAT SUCH PROFITS OF NON - RESIDENTS SHOULD BE FROM OCCASIONAL SHIPPING BUSINESS. IT IS NOT THE CASE THAT THE RESPONDENT - ASSESSEE HAS EARNED SOME PROFIT FROM OCCASIONAL SHIPPING AND IS A NON - RESIDENT. IN OUR VIEW, SECTION 172 DOES NOT HAVE APPLICATION IN RELATION TO THE RESPONDENT - ASSESSEE AND IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. THE COMPANY FROM JAPAN VIZ., MITSUI & CO. LTD., JAPAN, RECIPIENT OF DEMURRAGE AMOUNT IS NOT BEFORE US. IN OTHER W ORDS, WE ARE NOT EXAMINING THE TAX LIABILITY OF THE FOREIGN COMPANY, I.E., MITSUI & CO. LTD., JAPAN. ON OUR QUERY TO THE LEARNED SENIOR ADVOCATE SHRI USGAONKAR AS TO MATERIAL ON RECORD FOR OCCASIONAL SHIPPING, PART OF PARA 3 FROM THE JUDGMENT OF THE LEARNE D COMMISSIONER OF INCOME - TAX HAS BEEN POINTED OUT TO US. HIS OBSERVATIONS ARE IN VERY FEW LINES. WE MAY REPRODUCE THE SAID PORTION HEREIN BELOW. ' 3. WE HAVE HEARD THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. ASSESSEE CLAIMED DEDUCTION OF RS. 1,08,53,980 BEING THE AMOUNT OF DEMURRAGE PAYABLE TO MITSUI CO. LTD., JAPAN. THE ASSESSING OFFICER OPINED THAT SINCE THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE, AS SUCH THE CASE OF THE ASSESSEE FALLS WITHIN THE MISCHIEF OF SECTION 40(A)( I) OF THE IN COME - TAX ACT, 1961'. PROVISIONS OF SECTION 172 ARE TO APPLY NOTWITHSTANDING ANYTHING CONTAINED IN THE OTHER PROVISIONS OF THE ACT. THEREFORE, IN SUCH CASES, THE PROVISIONS OF SECTIONS 194C AND 195 RELATING TO TAX DEDUCTION AT SOURCE, ARE NOT APPLICABLE. TH E RECOVERY OF TAX IS TO BE REGULATED FOR VOYAGE UNDERTAKEN FROM ANY PORT IN INDIA BY A SHIP, UNDER THE PROVISIONS OF SECTION 172. IN THIS VIEW, THESE OBSERVATIONS OF THE LEARNED VICE PRESIDENT OF INCOME - TAX APPELLATE TRIBUNAL HAVE NO CONCERN WITH THE 35 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) FACTU AL ASPECT THAT IT IS A CASE OF OCCASIONAL SHIPPING, PLEADED OR RAISED BY ASSESSEE. THERE IS NO DISPUTE ABOUT INTERPRETATION OF SECTION 172 OR SECTION 195. CRUCIAL POINT IS AS TO HOW SECTION 172 APPLIES TO THE FACTS OF THE PRESENT CASE WHEREIN THE RESPONDEN T - ASSESSEE IS AN INDIAN COMPANY, INCORPORATED UNDER THE PROVISIONS OF INDIAN COMPANIES ACT, 1956. IN OUR VIEW, THE LEARNED VICE PRESIDENT OF THE ITAT HAS RECORDED A PERVERSE OBSERVATION/FINDING IN PARA 3 REGARDING APPLICATION OF SECTIONS 44B AND 172 OF THE 1961 ACT. 9. WE MAY NOTICE THAT THE JUDGMENT OF THE LEARNED APPELLATE TRIBUNAL IS UNREASONED AND CRYPTIC ONE. THIS JUDGMENT RUNS IN AROUND 20 TO 25 LINES. WE ARE NOT OBLIVIOUS OF THE FACT, THAT NOT THE FORM, BUT SUBSTANCE IS MATERIAL. THE LEARNED APPELLATE TRIBUNAL SEEMS TO HAVE REFERRED TO THE CIRCULAR OF CBDT NO. 723, DATED 19 - 9 - 1995. 10. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNED COUNSEL APPEARING FOR THE PARTIES PERTAINING TO THE CIRCULAR NO. 723, DATED 19 - 9 - 1995 BY CBDT (ANNEXURE 'C'). SECTION 119 EMPOWERS THE CENTRAL BOARD OF DIRECT TAXES TO GIVE INSTRUCTIONS TO SUBORDINATE AUTHORITIES. WE HAVE CONSIDERED SECTION 119 OF THE ACT 1961. WE HAVE ALSO PERUSED THE CIRCULAR ANNEXURE C. THIS CIRCULAR SEEMS TO HAVE BEEN ISSUED BY THE CBDT, CLAR IFYING THE SCOPE OF SECTIONS 172, 194C AND 195 OF THE ACT 1961. ADVOCATE ON BEHALF OF THE REVENUE POINTS OUT FROM PARA 4 OF THE CIRCULAR AND SUBMITS THAT SECTION 172 OPERATES IN THE AREA OF COMPUTATION OF PROFITS FROM SHIPPING BUSINESS OF NON - RESIDENTS AND THERE IS NO OVERLAPPING IN THE AREAS OF OPERATION OF THESE SECTIONS. LEARNED SENIOR ADVOCATE SHRI USGAONKAR, APPEARING ON BEHALF OF THE RESPONDENT - ASSESSEE, ALSO DREW OUR ATTENTION TO THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE MATTER OF COMMISSIONER OF SALES TAX V. INDRA INDUSTRIES [2001] 248 ITR 338. IT IS A THREE BENCH JUDGMENT OF THE HON'BLE SUPREME COURT. IT HAS BEEN HELD BY THE HON'BLE SUPREME COURT THAT THE CIRCULARS ISSUED BY COMMISSIONER OF SALES TAX NOT BINDING ON ASSESSEE OR COURT, HOWEVER, BINDING ON THE DEPARTMENT. IN THE CASE ON HAND, IN OUR VIEW, LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) AND THE LEARNED APPELLATE TRIBUNAL HAVE WRONGLY INTERPRETED THE CIRCULAR DATED 19 - 9 - 1995 ISSUED BY THE CBDT. THIS CIRCULAR, IN OUR OPINION, CANNOT BE CONSIDERED IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, IN AID TO THE RESPONDENT - ASSESSEE. THE LEARNED ASSESSING OFFICER, IN FACT, HAS PASSED A LEGAL, PROPER AND REASONED ORDER, HOLDING THAT THE PROVISIONS LAID DOWN UNDER SECTION 40(A)( I) OF THE 1 961 ACT APPLY TO THE CASE ON HAND. 11. WE MAY NOTICE HERE THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE MATTER OF UNION OF INDIA V. GOSALIA SHIPPING (P.) LTD. [1978] 113 ITR 307. THIS JUDGMENT SEEMS TO BE THE BASIC JUDGMENT WHICH IS BEING REFERRED TO BY THE LEARNED SINGLE BENCH OF THE KARNATAKA HIGH COURT. IN THAT CASE, GOSALIA SHIPPING (P.) LTD., A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE INDIAN COMPANIES ACT, 1956 INDULGED AT THE RELEVANT TIME IN BUSINESS OF CLEARING AND FORWARDING AND AS STE AMSHIP AGENTS. GOSALIA SHIPPING (P.) LTD., HAD ACTED AS THE SHIPPING AGENT OF 'ALUMINIUM COMPANY OF CANADA LIMITED' WHICH WAS A NON - RESIDENT COMPANY. THAT NON - RESIDENT COMPANY HAD CHARTERED A SHIP 'M.V. SPARTO' BELONGING TO A NON - RESIDENT COMPANY CALLED SP ARTO COMPANIA NAVIERA OF PANAMA. THE SAID SHIP CALLED AT THE PORT OF BETUL, GOA ON 1 - 3 - 1970. ON 20 - 3 - 1970, THE SHIP HAD LEFT FOR CANADA. THE SHIP WAS ALLOWED TO LEAVE PORT OF BETUL ON THE BASIS OF GUARANTEE BOND, EXECUTED BY THE RESPONDENT IN FAVOUR OF THE PRESIDENT OF INDIA. ON 15 - 4 - 1970, THE FIRST INCOME - TAX OFFICER, MARGAO, GOA ISSUED A DEMAND NOTICE TO THE RESPONDENT GOSALIA 36 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) SHIPPING (P.) LTD. FOR PAYMENT OF RS. 51,000 AND ODD AMOUNT, BY WAY OF INCOME - TAX. WE HAVE NOTICED ALL THESE FACTS ONLY TO SAY THA T IN THE CASE ON HAND, THERE ARE NO PLEADINGS OR MATERIAL BROUGHT ON RECORD TO SHOW THAT THE CASE IS GOVERNED BY OCCASIONAL SHIPPING WITHIN THE MEANING OF SECTION 172 OF THE ACT, 1961 AND SAID SECTION APPLIES. 12. HAVING CONSIDERED THE SUBMISSIONS OF THE LEARNED COUNSEL APPEARING FOR THE PARTIES, IN OUR VIEW, THE FACTS OF THE PRESENT CASE, ARE GOVERNED BY SECTION 40(A)(I ) OF THE ACT 1961. ORDER PASSED BY THE ASSESSING OFFICER, IN OUR VIEW, IS LEGAL, PROPER AND IN ACCORDANCE WITH THE SCHEME OF ACT 1961. I N VIEW OF WHICH WE HAVE TAKEN IN THE MATTER, THE APPEAL DESERVES TO BE ALLOWED BY QUASHING AND SETTING ASIDE THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) DATED 28 - 8 - 2002 AND THE ORDER PASSED BY THE INCOME - TAX APPELLATE TRIBUNAL, PAN AJI DATED 2 - 12 - 2004. THE SAME ARE, ACCORDINGLY, QUASHED AND SET ASIDE AND THE ORDER PASSED BY THE ASSESSING OFFICER STANDS UPHELD. APPEAL IS, ACCORDINGLY, ALLOWED AND DISPOSED OF WITH NO ORDER AS TO COSTS. 6. 2 THE DECISION OF THE HON'BLE HIGH COURT IS BIN DING ON US. WE, ACCORDINGLY, CONFIRM THE ORDER OF CIT(A). THUS, GROUND NOS. 5 AND 6 STAND DISMISSED. 7 . GROUND NO. 7 : GROUND NO. 7 RELATES TO CLAIM OF DEDUCTION BY THE ASSESSEE IN RESPECT OF EDUCATION CESS. BOTH THE PARTIES AGREE THAT THIS ISSUE IS DULY COVERED IN FAVOUR OF THE REVENUE BY THE ORDER OF THIS TRIBUNAL. AFTER HEARING THE RIVAL SUBMISSIONS, WE NOTED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS TRIBUNAL IN ITA NO. 72/PNJ/2012 FOR THE A.Y. 2009 - 10 IN WHICH THIS TRIBUNAL VIDE ORD ER DTD. 8.3.2013 HELD AS UNDER : - 6.6 IN THE PRESENT CASE, IT IS SIGNIFICANT TO NOTE THAT ASSESSEE IS AN ESTABLISHED IRON ORE EXPORTER AND HAS BEEN EXPORTING IRON ORE TO THE SAME COUNTRIES YEAR AFTER YEAR FOR SUBSTANTIALLY LONG TIME. IT IS ALSO OBSERVED THAT THE ASSESSEE HAS BEEN TRANSACTING WIT H KNOWN BUSINESS CONCERNS AND THEREFORE, THERE WAS NO REAL NECESSITY FOR AN AGENT TO RENDER ANY SERVICE FOR PROMOTING SALES WITH SUCH CONCERNS WITH WHOM THE ASSESSEE HAS BEEN TRANSACTING FOR LONG. AS FAR AS MITUSI & CO., JAPAN, IS CONCERNED, IT IS PERTINEN T TO NOTE THAT ASSESSEE HAS BEEN EXPORTING IRON TO THIS CONCERN FOR SUBSTANTIALLY LONG TIME, WHICH SHOULD NORMALLY NOT REQUIRE ANY SALES PROMOTION. CONSIDERING THE FACTS OF THE CASE AS DISCUSSED ABOVE, THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THE CLA IM FOR PAYMENT OF COMMISSION TO NON - RESIDENT AGENTS BY ADDUCING SPECIFIC AND TANGIBLE EVIDENCE TO DEMONSTRATE THAT SERVICES WERE RENDERED BY THE SALES AGENTS TO JUSTIFY COMMISSION PAYMENT AS CLAIMED BY THE ASSESSEE. THEREFORE, IN VIEW OF THE ABOVE, IT IS H ELD THAT THE COMMISSION PAYMENT OF RS.9,88,29,729/ - WHICH IS CLAIMED TO HAVE BEEN PAID TO NON - RESIDENT AGENTS CANNOT BE ALLOWED AS BUSINESS EXPENDITURE U/S 37 OF THE I.T. ACT, AND THEREFORE, THE 37 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) DISALLOWANCE OF RS.9,88,29,729/ - MADE BY THE ASSESSING OFFIC ER IS ACCORDINGLY CONFIRMED. THE GROUND OF APPEAL IS ACCORDINGLY, DISMISSED. 7.1 RESPECTFULLY FOLLOWING THE SAID DECISION OF THIS TRIBUNAL, WE CONFIRM THE DISALLOWANCE. THUS, GROUND NO. 7 STANDS DISMISSED. 8 . GROUND NO. 8 : GROUND NO. 8 RELATES TO CLAIM OF DEDUCTION BY THE ASSESSEE IN RESPECT OF EO UNIT AT CODLI AMOUNTING TO RS. 18,04,30,468/ - . 8.1 THE LEARNED AR IN THIS REGARD STATED THAT THE ISSUE INVOLVED IS DULY COVERED BY THE DECISION OF THIS TRIBUNAL IN ITA NO. 72/PNJ /2012 FOR THE A.Y. 2009 - 10 IN WHICH THIS TRIBUNAL AFTER CONSIDERING THE SUBMISSIONS OF THE DR TOOK THE VIEW VIDE ORDER DTD. 8.3.2013 THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION IN RESPECT OF CODLI UNIT UNDER SECTION 10B OF THE INCOME TAX ACT. 8.2 THE LE ARNED DR ON THE OTHER HAND CONTENDED THAT THE TRIBUNAL HAS NOT EXAMINED WHETHER THE CODLI UNIT IS AN INDEPENDENT UNIT OR NOT AND ALSO RELIED ON THE WRITTEN SUBMISSION MADE BY HIM WHICH READS AS UNDER : 1. FACTS OF THE CASE ON 10B DEDUCTION : (I ) M/S SESA GOA LTD., HAS CLAIMED CODLI UNIT AS NEWLY ESTABLISHED 100% EOU MANUFACTURING OR PRODUCING ANY ARTICLE OR THING. (II) THIS UNIT DO NOT EXTRACT IRON ORE ITSELF. (III) ENTIRE PROFIT FROM EXPORT FROM THIS UNIT IS TAKEN AS EXEMPT U/S 10B. NO PROFIT HAS BEEN ALLOCATED TO OTHER ACTIVITIES, E.G. EXTRACTION ETC. SECTION 10B(7) HAS TOTALLY BEEN DISREGARDED BY NOT TAKING THE INPUT COST OF IRON ORE AT A MARKET RATE. 1 A. ITAT PANAJI BENCH'S VIEW ON 10B DEDUCTION IN SIMILAR CASE : ITAT, PANAJI BENCH INTERPRETED CIT VS. SESA GOA LTD.,(266 ITR 126 (BOM) IN THE CASE OF ACIT CIRCLE - 2 VS. M/S CHOWGULE & CO. LTD., IN ITA NO. 162/PNJ/ 2006 AND ITA NO. 184/PNJ/2006. PRODUCTION IN RELATION TO EXTRACTION AND PROCESSING OF IRON ORE HAS BEEN HELD AS UNDER. 'THE SUPREME COURT IN FACT HAS HELD IN THE CASE OF SESA GOA LTD., THAT 'EXTRACTION AND PROCESSING OF MINING ORE AMOUNTS TO PRODUCTION'. ONE SHOULD READ THE EXPRESSION 'EXTRACTION' AND 'PROCESSING' TOGETHER. THE RULING OF THE SUPREME COURT IS NOT THAT EXTRA CTION AS WELL AS PROCESSING, INDEPENDENTLY AMOUNTS TO PRODUCTION, (EMPHASISE SUPPLIED). IF AN ASSESSEE CARRIES ON THE BUSINESS OF EXTRACTING MINERAL ORE, IT AMOUNTS TO MANUFACTURE OR PRODUCTION AS PER THE ABOVE JUDGEMENT . IF THE SAME ASSESSEE IN ADDITION TO EXTRACTION, ALSO PROCESS THE MINERAL ORE, THE COMBINED ACTIVITY OBVIOUSLY AMOUNTS TO PRODUCTION/MANUFACTURE. BUT PROCESSING THE MINERAL ORE WITHOUT EXTRACTION 38 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) OF THE ORE HAS NOT BEEN HELD TO BE PRODUCTION / MANUFACTURE BY THE SUPREME COURT IN THE SAID DECISION OF SESA GOA.' 'IN THE PRESENT CASE ALSO, THE PROCESS CARRIED ON BY THE ASSESSES ;'S PROVIDING VALUE ADDITION TO IRON ORE BY ENHANCING ITS QUALITY. IT IS IN FACT UPGRADING THE QUALITY FOR APT INDUSTRIAL USE. EVEN THOUGH THE PROCESS EMPLOYED BY THE ASSESSEE MIGHT REQUIRE DEPLOYMENT OF HUGTE CAPITAL AND LARGE PLANT AND MACHINERY, SUCH THINGS DO NOT CHANGE THE BASIC CHARACTER OF THE ACTIVITIES CARRIED ON BY THE ASSESSEE - COMPANY. WHAT IS RECEIVED BY THE ASSES SEE - COMPANY IS IRON ORE; WHAT IS PROCESSED BY THE ASSESSEE - COMPANY IS IRON - ORE AND AGAIN WHAT IS SENT OUTSIDE THE ASSESSEE - COMPANY IS STILL THE IRON ORE. NO NEW PRODUCT COMES INTO EXISTENCE. IN THIS LINE OF TRADE, DIFFERENT GRADES OF IRON ORE WILL HAVE DIF FERENT NOMENCLATURES AND NAMES. BUT THOSE EXPRESSIONS OF CONVENIENCE DO NOT MEAN THAT THE ASSESSEE HAS PRODUCED OR MANUFACTURED A NEW ARTICLE OR THING.' 1A.2 SIMILARLY THE ITAT, PANAJI BENCH IN THE ABOVE REFERRED CASE HELD AS UNDER: 'IF SEC. 10B PROVIDES EXEMPTION FOR PROCESSING ALSO, THE LAW WOULD HAVE MADE IT VERY CLEAR BY APPARENTLY STATING THAT PROCESSING IS ALSO ENTITLED FOR EXEMPTION. WHEN THE EXPRESSION 'PROCESSING' IS OMITTED IN SEC. 10B, WE ARE NOT SUPPOSED TO FILL UP THE OMISSION. IF SOM ETHING IS NOT THERE, WE SHOULD ACCEPT AS IT IS NOT THERE. WE SHOULD NOT PROVIDE FOR THE OMISSION. THAT AMOUNTS TO JUDICIAL LEGISLATION. THERE IS NO CONFUSION IN THE PROVISION OF LAW PROVIDED U/S 10B.' THE DECISION OF HON'BLE ITAT IN MA NO.23/PNJ/2007 HAS NOT CHANGED THE ABOVE POSITION REGARDING 'PRODUCTION' IN THE CASE OF IRON ORE. THEREFORE, IT IS SUBMITTED THAT THE ASSESSEE COMPANY IS NOT ENTITLED FOR DEDUCTION U/S 10B. THE HON'BLE BENCH IS REQUESTED TO APPLY THE COVERED CASE LAW OF THIS BENCH IN THE CASE OF CHOWGULE & COMPANY IN ITA NO. 162/PNJ/2006 AND ITA NO. 184/PNJ/2006 TO THE ASSESSEE'S CASE. FURTHER, THE PRESENT HON'BLE BENCH DECIDED THIS ISSUE FOR THE ASST. YEAR 2009 - 10 IN FAVOUR OF THE ASSESSEE. HOWEVER, CERTAIN MATERIAL FACTS ARE NOT CONSIDER ED BY THE HON'BLE BENCH FOR THE A.Y. 2009 - 10 ON THIS ISSUE AND THEREFORE, THE DEPARTMENT IS PREFERRING MISCELLANEOUS APPLICATION FOR THE A.Y. 2009 - 10 BEFORE THIS HON'BLE TRIBUNAL. IF THE HON'BLE BENCH DECIDES TO DIFFER WITH THE DECISION OF THE ITAT, PANAJI BENCH IN THE CASE OF CHOWGULE & COMPANY IN ITA NO. 162/PNJ/ 2006 AND ITA NO. 184/PNJ/2006, THE HON'BLE BENCH IS REQUESTED TO CONSTITUTE THE SPECIAL BENCH TO DECIDE THIS ISSUE. 1A.3 THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THAT IN AY 2001 - 02, IT HAD S ET UP ANY NEW UNIT/UNDERTAKING, AND THAT SUCH UNDERTAKING HAD A SEPARATE EXISTENCE IN TERMS OF PLANT AND MACHINERY, RAW MATERIAL, OR PRODUCTS, DEPRECIATION CHART, ASSET REGISTER, MANPOWER EMPLOYED ETC. THE COMPUTATION OF PROFITS STATED TO BE RELATED TO THE UNIT, WAS NOT MADE IN EARLIER YEARS UP TO 2005 - 06, WHEN THE ENTIRE EXPORTS OF THE ASSESSEE WAS ELIGIBLE FOR DEDUCTION U/S 80HHC FOR THE ENTIRE EXPORT OF IRON ORE, PROCESSED AS WELL AS UNPROCESSED. THE ASSESSEE HAS MORE THAN ONE BENIFICIATION PLANTS/UNITS AT CODLI, WHICH ALL CARRY OUT THE SIMILAR ACTIVITIES OF PROCESSING AND PRODUCING LUMPS AND FINES, AFTER PROCESSING. 1 B. WHY SPECIAL BENCH : 39 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) I. OBSERVATION OF THE BENCH DURING THE COURSE OF HEARING OF THE PRESENT CASE WERE THAT THE DECISION IN ITA NO.162/PNJ/2006 AND ITA NO.1841/PNJ/2006 HAVE BEEN REVERSED AND THE SAME CANNOT BE APPLIED TO THE CASE OF THE ASSESSEE - COMPANY. II) HOWEVER, THERE IS NO REVERSAL OF THE JUDGEMENT. IN FACT, NO ITAT CAN REVERSE OR REVIEW ITS OWN DECISION. ONLY MISTAKES APPARENT FROM RECORD CAN BE RECTIFIED. II I) IF THIS VIEW IS TAKEN THEN IT WOULD BE CONTRARY TO THE EARLIER FINDINGS OF ITAT IN CHOWGULE'S CASE. IV). THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF AFFECTION INVESTMENT LTD., VS. ACIT.REPORTED IN 222 CTR 2009, SAYAJI IRON & ENGG. CO. VS. CIT (2002) 172 CTR (GUJ). 339 (2002) 253 ITR 749 (GUJ) AND DECISION OF MADRAS HIGH COURT IN THE CASE OF CIT VS. L.G. RAMAMURTHI REPORTED IN 110 ITR 453, CLEARLY MANDATES THAT THE ITAT HAS TO REFER TO THE LARGER BEN CH ON THE ISSUE IF IT IS TO TAKE A CONTRARY VIEW ON A DECISION RENDERED BY THE BENCH OF THE SAME ITAT IN THE EARLIER DECIDED CASES. FURTHER, SUPREME COURT IN THE CASE OF ITAT VS. DCIT REPORTED IN 218 ITR 275 HELD THAT PRESIDENT, ITAT CAN SUO - MOTO OR ON REQ UEST FROM ANY PARTY CAN CONSTITUTE SPL. BENCH. 1 C. MANUFACTURE DOES NOT INCLUDE PROCESSING W.E.F. 01.04.2001 : AS PER PROVISIONS OF SEC. 10B UPTO 31.03.2001, MANUFACTURE INCLUDES THE ACTIVITY OF PROCESSING OR ASSEMBLING. HOWEVER, SEC. 10B IS AMENDED W.E.F. 01.04.2001 AND THE ACTIVITIES OF PROCESSING OR ASSEMBLING ARE EXCLUDED FROM MANUFACTURE. THEREFORE, THE ACTIVITY OF PROCESSING CARRIED OUT BY THE ASSESSEE CANNOT BE TREATED AS MANUFACTURING ACTIVITY ALSO IN VIEW OF THE AMENDED PROVISIONS. THE DECISI ONS OF HIGH COURTS OR ITATS WHICH STATE THAT 'PROCESSING' IS MANUFACTURE ARE NO MORE VALID LAW W.E.F. 01.04.2001. 1 D. MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS FOR EXEMPTED AND NON - EXEMPTED UNITS IS NECESSARY : THE ASSESSEE COMPANY NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR 10B UNIT AND OTHER NON 10B UNITS. THE SUPREME COURT IN THE CASE OF ARISUDANA SPINNING MILLS VS. CIT REPORTED IN 348 ITR 385 (SC) (2002) HELD THAT MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS I S NECESSARY TO WORK OUT THE PROFITS OF EXEMPTED UNIT/BUSINESS AND NON - EXEMPTED UNITS. THE DECISION IS ENCLOSED IN A SEPARATE PAPER BOOK. 1 E. IT IS NOT A NEW UNDERTAKING : FOR AVAILING THE 10B DEDUCTION, IT SHOULD BE A NEW UNDERTAKING. THERE IS NO NEW UNDERTAKING IN THE ASSESSEE'S CASE. THE DIFFERENCE BETWEEN ASSESSEE AND UNDERTAKING IS EXPLAINED BY THE MADRAS HIGH COURT IN THE 98 ITR 119. SIMILARLY, THE SAME PERSONS ARE CAR RYING ON THE SAME BUSINESS AND HENCE IT CANNOT BE TREATED AS NEW UNDERTAKING. RELIANCE IS PLACED ON THE SUPREME COURT DECISION IN THE CASE OF TEXTILE MACHINERY. SIMILARLY, PROFIT IN THE ALLEGED UNIT GENERATED BY THE UNIT IS TRANSFERS ONLY AND EXPORT IF ANY WERE DONE BY EXISTING UNIT ONLY. RELIANCE IS PLACED IN THE CASE OF CIT VS. MODI XEROX, REPORTED IN 344 ITR 435 (DEL). THE DECISIONS ON THE ABOVE CASES ARE ENCLOSED IN SEPARATE PAPER BOOK. 8. 3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT A SIMILAR ISSUE HAS COME IN THE CASE OF THE ASSESSEE IN RESPECT OF 40 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) CODLI UNIT AS WELL AS OTHER UNITS WHETHER THE ASSESSEE IS ENTITLED FOR EXEMPTION UNDER SECTION 10B OR NOT. THE REVENUE HAS TAKEN SIMILAR OBJECTION WHATEVER HAS BEE N TAKEN IN THE WRITTEN SUBMISSION FILED BEFORE US. EVEN THE ISSUE WHETHER THE CODLI UNIT IS AN INDEPENDENT UNIT OR NOT HAS ALSO BEEN EXAMINED. EVEN THE INSPECTION OF THE UNIT WAS ALSO CARRIED OUT BY THIS BENCH. THIS BENCH AFTER HEARING THE SUBMISSION FR OM BOTH THE SIDES ULTIMATELY UNDER PARA 42.7 TO 45.22 OF ITS ORDER DT. 8.3.2013 IN ITA NO. 72/PNJ/2012 FOR THE A.Y. 2009 - 10 HELD AS UNDER : 42.7 IN OUR OPINION, THE COMMON ISSUE INVOLVED ON THE FACTS OF THE CASE IN THE CASE OF THE ASSESSEE IS WHETHER ALL THE THREE UNITS IN RESPECT OF WHICH THE ASSESSEE CLAIMED THE EXEMPTION U/S 10B ARE ENGAGED IN ANY MANUFACTURE OR PRODUCTION OF ARTICLE OR THING FOR THE PURPOSE AVAILING OF EXEMPTION U/S 10B. IF ENGAGED IN PROCESSING, WHETHER ASSESSEE IS ENTITLED FOR EXEMPTION U/S 10B IN RESPECT OF ALL THESE THREE UNITS. THE NATURE OF ACTIVITIES IN THE CASE OF AMONA PLANT AS WELL AS CHITRADURGA IS SIMILAR AS EXPLAINED IN THE EARLIER PARAS. BOTH THESE UNITS AS WELL AS CODLI PLANT ARE APPROVED AS 100% EOU UNITS. THE NECESSARY BOARD APPROVALS ARE PLACED IN RESPECT OF EACH UNIT BY THE ASSESSEE ON RECORD. FOR CODLI UNIT, APPROVAL WAS GIVEN INITIALLY FOR FIVE YEARS, WHICH W AS SUBSEQUENTLY EXTENDED TO WHICH WE ARE SATISFIED AS THE REVENUE DID NOT PROVE THAT THE LETTER ISSUED IS BOGUS OR FORGED ONE. TO DECIDE THE ISSUE WHETHER ALL THESE UNITS ARE ENGAGED IN ANY MANUFACTURING OR PRODUCTION OF ARTICLE OR THING, IT IS NECESSARY T O REFER TO THE RELEVANT PROVISIONS OF THE INCOME - TAX ACT, 1961. 43. PROVISION OF SEC. 10A OF THE ACT WHICH DEALS WITH THE SPECIAL PROVISIONS IN RESPECT OF THE NEWLY ESTABLISHED UNDERTAKINGS IN FREE - TRADE ZONE, ETC., AND SEC. 10AA OF THE ACT WHICH DEALS WITH THE SPECIAL PROVISIONS IN RESPECT OF THE NEWLY ESTABLISHED UNITS I N SPECIAL ECONOMIC ZONES; AND ALSO SEC. 10B OF THE ACT WHICH DEALS WITH THE SPECIAL PROVISIONS IN RESPECT OF THE NEWLY ESTABLISHED 100% EXPORT ORIENTED UNDERTAKINGS WERE INSERTED BY THE FINANCE ACT, 1988 W.E.F. 01/04/1989. SEC. 10B PROVIDES THAT ANY PROFIT S AND GAINS DERIVED BY AN ASSESSEE FROM A 100% EOU SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. THIS PROVISION APPLIES TO ANY UNDERTAKING WHICH MANUFACTURES OR PRODUCES ANY ARTICLE OR THING. EXPLANATION (I) TO SEC. 10B PROVIDES THAT THE EXPRE SSION 100% EXPORT ORIENTED UNIT MEANS AN UNDERTAKING WHICH HAS BEEN APPROVED BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFIRMED BY SEC. 14 OF THE INDUSTRIES (DEVELOPMENT ®ULATION) ACT, 1951 AND THE RILE S MADE THERE UNDER. EXPLANATION (III) WHICH WAS THERE AT THE TIME OF THE SAID SEC. 10B DEFINED THE WORD MANUFACTURE FOR THE PURPOSE OF THE SAID SECTION TO INCLUDE ANY (A) PROCESS OR (B) ASSEMBLING OR (C) RECORDING OF PROGRAMME ON DISC, TAPE, PERFORATE D MEDIA OR OTHER INFORMATION STORAGE DEVICE. THUS, PROCESS WAS INCLUDED WITHIN THE WORD MANUFACTURE FOR THE PURPOSE OF SEC. 10B. EXPLANATION (IV) OF THE SAID SEC. 10B FURTHER PROVIDED THAT THE WORD PRODUCE FOR THE PURPOSE OF SAID SECTION, IN RELATION T O ANY ARTICLE OR THING SHALL INCLUDE PRODUCTION OF COMPUTER PROGRAMME. CBDT VIDE ITS CIRCULAR NO. 528 DATED 16/12/1988 176 ITR ST. 154 EXPLAINED THE [PROVISIONS ENACTED BY THE FINANCE ACT, 1988 UNDER PARA 8.2 OF THE 41 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) CIRCULAR. IN THIS CIRCULAR, CBDT HAD CL EARLY EXPLAINED THAT THE SAID NEW SEC. 10B HAD BEEN INSERTED IN THE STATUTE BOOK WITH A VIEW TO PROVIDE FURTHER INCENTIVE FOR EARNING FOREIGN EXCHANGE SO AS TO SECURE THAT THE INCOME OF A 100% EOU SHALL BE EXEMPT FROM TAX FOR A PERIOD OF FIVE CONSECUTIVE A SSESSMENT YEARS FALLING WITHIN THE BLOCK OF EIGHT ASSESSMENT YEARS. THE EXEMPTION PROVIDED UNDER THIS NEW SECTION WAS SIMILAR TO THE ONE PROVIDED UNDER SEC. 10A OF THE ACT TO INDUSTRIAL UNDERTAKING OPERATING UNDER THE FREE - TRADE ZONE. IT WAS ALSO CLARIFIED THEREIN THAT THE EXPRESSION MANUFACTURE FOR THE PURPOSE OF BOTH SECTIONS 10A AND 10B OF THE SAID ACT WOULD INCLUDE ANY PROCESSING OR ASSEMBLING OR RECORDING OF PROGRAMME ON DISC, TAPE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE. 43.1 THIS D EFINITION OF MANUFACTURE WAS REMOVED WHEN SEC. 10A AND 10B OF THE ACT WERE AMENDED BY THE FINANCE ACT, 2001 W.E.F. 01/04/2001. SECTIONS 10A AND 10B OF THE ACT WERE FURTHER AMENDED BY THE FINANCE ACT, 2003 W.E.F. 01/04/2004 AND THE DEFINITION OF MANUFACT URE WAS INSERTED AS UNDER: - EXPLANATION (IV) FOR THE PURPOSE OF THIS SECTION, MANUFACTURE OR PRODUCE SHALL INCLUDE THE CUTTING AND POLISHING OF PRECIOUS AND SEMI - PRECIOUS STONES. 43.2 THE EOUS WERE ALLOWED TO SELL 25% PRODUCTION WITHIN THE COUNTR Y. WITH A VIEW TO RATIONALIZE THE CONCESSION AND TO PHASE THESE OUT BY THE END OF THE ASSESSMENT YEAR 2009 - 10, THE PROVISIONS OF SEC. 10A AND 10B WERE SUBSTITUTED BY THE NEW PROVISIONS BY THE FINANCE ACT, 2000. CBDT VIDE CIRCULAR NO. 794 DATED 09/08/2000 2 45 ITR ST. 21, 34 - 35 UNDER PARA 15.3 EXPLAINED THAT THE DEDUCTION U/S 10B WOULD BE GRANTED IN RESPECT OF PROFITS AND GAINS DERIVED BY AN UNDERTAKING WHICH MANUFACTURES OR PRODUCES ARTICLE OR THINGS OR COMPUTER SOFTWARE AND DERIVED PROFITS AND GAINS FROM TH E EXPORTS THEREOF. THE SAID EXEMPTION WAS AVAILABLE FOR A PERIOD OF 10 CONSECUTIVE YEARS IN A GRADED MANNER. THE NEW PROVISIONS CONTAINED THE FOLLOWING ADDITIONAL CONDITIONS: I . THE SALE PROCEEDS OF ARTICLES OR THINGS OR COMPUTER SOFTWARE EXPORTED OUT OF IND IA, SHOULD BE RECEIVED IN OR BROUGHT INTO INDIA WITHIN A PERIOD OF 6 MONTHS FROM THE END OF THE PREVIOUS YEAR OR WITHIN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW SUB - SECTION (3); II . THE PROFITS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS, THE SAME PROPORTION, AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLE OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF BUSINESS SUB - SECTION (4); III . THE ASSESS EE MUST FURNISH IN THE PRESCRIBED FORM NO. 56G, ALONG WITH HIS RETURN OF INCOME, THE REPORT OF A CHARTERED ACCOUNTANT CERTIFYING THAT THE DEDUCTION HAS BEEN CORRECTLY CLAIMED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 10B SUB - SECTION (5); IV . WHERE THE AS SESSEE AVAILS OF THE BENEFITS OF SECTION 10A OR SECTION 10B, IT WILL NOT BE ELIGIBLE FOR OTHER TAX EXEMPTIONS AVAILABLE UNDER OTHER PROVISIONS OF THE ACT DURING THE PERIOD OF 10 YEARS SUB - SECTION (6); 42 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) V . MANUFACTURE SHALL HAVE THE SAME MEANING AS ASSIGNE D TO IT IN CLAUSE (R) OF SECTION 2 OF THE SPECIAL ECONOMIC ZONES ACT, 2005. 43.3 SUBSEQUENTLY, SPECIAL ECONOMIC ZONE ACT, 2005 WAS PASSED BY THE PARLIAMENT IN MAY, 2005, WHICH WAS BROUGHT INTO EFFECT W.E.F. 23/06/2005. SECTION 2(R) OF SPECIAL ECONOMIC ZONE ACT DEFINES THE EXPRESSION MANUFACTURE AS UNDER: - MANUFACTURE MEANS TO MAKE, PRODUCE, FABRICATE, ASSEMBLE, PROCESS OR BRING INTO EXISTENCE, BY HAND OR BY MACHINE, A NEW PRODUCT HAVING A DISTINCT NAME, CHARACTER OR USE AND SHALL INCLUDE PROCESSES SUCH AS REFRIGERATION, CUTTING, POLISHING, BLENDING, REPAIR, REMAKING, RE - ENGINEERING AND INCLUDES AGRICULTURE, AQUACULTURE, ANIMAL HUSBANDRY, FLORICULTURE, HORTICULTURE, PISCI CULTURE, POULTRY, SERICULTURE, AVICULTURE AND MINING. 43.4 THIS DEFINITION W AS ADOPTED BY THE LEGISLATURE IN SECTION 10AA W.E.F. 10/02/2006 AS ADOPTED BY THE SPECIAL ECONOMIC ZONES ACT, 2005 BY INSERTING EXPLANATION 1(III) TO SECTION 10AA OF THE ACT WHICH READS AS UNDER: - (III) MANUFACTURE SHALL HAVE THE SAME MEANING AS ASSIGNE D TO IT IN CLAUSE (R) OF SECTION 2 OF THE SPECIAL ECONOMIC ZONE ACT, 2005. AS PER THE SAID DEFINITION PROCESS IS INCLUDED IN MANUFACTURE. SUBSEQUENTLY, BY THE FINANCE ACT, 2009 W.E.F 1.4.2009, CLAUSE (29BA) WAS INSERTED IN SECTION 2 OF THE INCOME TAX ACT, 1961DEFINING THE EXPRESSION MANUFACTURE AS UNDER: MANUFACTURE, WITH ITS GRAMMATICAL VARIATIONS, MEANS A CHANGE IN A NON - LIVING PHYSICAL OBJECT OR ARTICLE OR THING, - ( A ) RESULTING IN TRANSFORMATION OF THE OBJECT OR ARTICLE OR THING INTO A NEW AND DISTINCT OBJECT OR ARTICLE OR THING HAVING A DIFFERENT NAME, CHARACTER AND USE OR ( B ) BRINGING INTO EXISTENCE OF A NEW AND DISTINCT OBJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTURE. 43.5 IN CHOWGULE & CO. PVT. LTD. VS. UNION OF INDIA (1981) 1 SCC 653 HONBLE SUPREME COURT, AFTER CONSIDERING THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN NILGIRI CEYLON TEA SUPPLYING CO. VS. STATE OF BOMBAY (1959) 10 STC 500 (BOM .), CLEARLY OBSERVED ON THE QUESTION WHETHER THE BLENDING OF ORE, WHILST LOADING IT IN THE SHIP BY MEANS OF THE MECHANICAL ORE HANDLING PLANT, CONSTITUTED MANUFACTURE OR PROCESSING OR ORE FOR SALE WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13 OF THE C ENTRAL SALES TAX ACT, 1956. DEALING WITH THIS QUESTION, THEIR LORDSHIPS HELD AND OBSERVED AT PAGES 659 AND 660 OF THE REPORTS AS UNDER: - IT STILL REMAINS TO CONSIDER WHETHER THE ORE BLENDED IN THE COURSE OF LOADING THROUGH THE MECHANICAL ORE HANDLING P LANT CAN BE SAID TO UNDERGO PROCESSING WHEN IT IS BLENDED. THE ANSWER TO THIS QUESTION DEPENDS UPON WHAT IS THE TRUE MEANING AND CONNOTATION OF THE WORD PROCESSING IN SECTION 8(3)(B) AND RULE 43 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 13. THIS WORD HAS NOT BEEN DEFINED IN THE ACT AND IT MUST THER EFORE BE INTERPRETED ACCORDING TO ITS PLAIN NATURAL MEANING. WEBSTERS DICTIONARY GIVES THE FOLLOWING MEANING OF THE WORD PROCESS: TO SUBJECT TO SOME SPECIAL PROCESS OR TREATMENT, TO SUBJECT (ESPECIALLY RAW MATERIAL) TO A PROCESS OF MANUFACTURE, DEVELOP MENT OF PREPARATION FOR THE MARKET ETC.; TO CONVERT INTO MARKETABLE FORM AS LIVESTOCK BY SLAUGHTERING, GRAIN BY MILLING, COTTON BY SPINNING, MILK BY PASTEURIZING, FRUITS AND VEGETABLES BY SORTING AND REPACKING. WHERE THEREFORE ANY COMMODITY IS SUBJECTED TO A PROCESS OR TREATMENT WITH A VIEW TO ITS DEVELOPMENT OR PREPARATION FOR THE MARKET, AS, FOR EXAMPLE, BY SORTING AND REPACKING FRUITS AND VEGETABLES, IT WOULD AMOUNT TO PROCESSING OF THE COMMODITY WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13. THE NATURE AND EXTENT OF PROCESSING MAY VARY FROM CASE TO CASE; IN ONE CASE THE PROCESSING MAY BE SLIGHT AND IN ANOTHER IT MAY BE EXTENSIVE; BUT WITH EACH PROCESS SUFFERED, THE COMMODITY WOULD EXPERIENCE A CHANGE. WHEREVER A COMMODITY UNDERGOES A CHANGE AS A RESULT OF SOME OPERATION PERFORMED ON IT OR IN REGARD TO IT, SUCH OPERATION WOULD AMOUNT TO PROCESSING OF THE COMMODITY. THE NATURE AND EXTENT OF CHANGE IS NOT MATERIAL. IT MAY BE THAT CAMPHOR POWDER MAY JUST BE COMPRESSED INTO CAMPHOR CUBES BY APPLICATIO N OF MECHANICAL FORCE OR PRESSURE WITHOUT ADDITION OR ADMIXTURE OF ANY OTHER MATERIAL AND YET THE OPERATION WOULD AMOUNT TO PROCESSING OF CAMPHOR POWDER AS HELD BY THE CALCUTTA HIGH COURT IN OM PRAKASH GUPTA VS COMMISSIONER OF COMMERCIAL TAXES [16 STC 935 (CAL)]. WHAT IS NECESSARY IN ORDER TO CHARACTERIZE AN OPERATION AS PROCESSING IS THAT THE COMMODITY MUST AS A RESULT OF THE OPERATION, EXPERIENCE SOME CHANGE. HERE, IN THE PRESENT CASE, DIVERSE QUANTITIES OF ORE PROCESSING DIFFERENT CHEMICAL AND PHYSICAL COMPOSITIONS ARE BLENDED TOGETHER TO PRODUCE ORE OF THE REQUISITE CHEMICAL AND PHYSICAL COMPOSITION DEMANDED BY THE FOREIGN PURCHASER AND OBVIOUSLY AS A RESULT OF THIS BLENDING, THE QUANTITIES OF ORE MIXED TOGETHER IN THE COURSE OF LOADING THROUGH THE MEC HANICAL ORE HANDLING PLANT EXPERIENCE CHANGE IN THEIR RESPECTIVE CHEMICAL AND PHYSICAL COMPOSITION, BECAUSE WHAT IS PRODUCED BY SUCH BLENDING IS ORE OF A DIFFERENT CHEMICAL AND PHYSICAL COMPOSITIONS. WHEN THE CHEMICAL AND PHYSICAL COMPOSITION OF EACH KIND OF ORE WHICH GOES INTO THE BLENDING IS CHANGED, THERE CAN BE NO DOUBT THAT THE OPERATION OF BLENDING WOULD AMOUNT TO PROCESSING OF ORE WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13. IT IS NO DOUBT TRUE THAT THE BLENDING OF ORE OF DIVERSE PHYSICAL A ND CHEMICAL COMPOSITIONS IS CARRIED OUT BY THE SIMPLE ACT OF PHYSICALLY MIXING DIFFERENT QUANTITIES FOR SUCH ORE ON THE CONVEYOR BELT OF THE MECHANICAL ORE HANDLING PLANT, BUT TO OUR MIND IT IS IMMATERIAL AS TO HOW THE BLENDING IS DONE AND WHAT PROCESS IS UTILIZED FOR THE PURPOSE OF BLENDING. WHAT IS MATERIAL TO CONSIDER IS WHETHER THE DIFFERENT QUANTITIES OF ORE WHICH ARE BLENDED TOGETHER IN THE COURSE OF LOADING THROUGH THE MECHANICAL ORE HANDLING PLANT UNDERGO ANY CHANGE IN THEIR PHYSICAL AND CHEMICAL C OMPOSITION IS A RESULT OF BLENDING 44 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) AND SO FAR AS THIS ASPECT OF THE QUESTION IS CONCERNED, IT IS IMPOSSIBLE TO ARGUE THAT THEY DO NOT SUFFER ANY CHANGE IN THEIR RESPECTIVE CHEMICAL AND PHYSICAL COMPOSITIONS. THUS THE HONBLE SUPREME COURT ACCEPTED THAT THERE IS CHANGE IN CHEMICAL COMPOSITIONS AFTER PROCESSING OF THE IRON ORE IN THIS CASE.FROM THE SAID DECISION OF THE APEX COURT, IT IS APPARENT THAT HONBLE APEX COURT HELD EVEN BLENDING OF IRON ORE FOR THE PURPOSE OF EXPORT IN VOLVES CHANGE IN THE CHEMICAL AND PHYSICAL COMPOSITION OF IRON ORE. BUT IF WE LOOK TO THE FACTS IN THE IMPUGNED CASE OF THE ASSESSEE, THE ASSESSEE IS NOT ONLY BLENDING IRON ORE BUT CARRYING OUT VARIOUS PROCESSES AS TO MAKE IRON ORE CALLED CRUDE ORE USEABLE TO ISPAT INDUSTRIES. THE ACTIVITY OF THE UNITS OF THE ASSESSEE FOR AMONA AND CHITRADURGA INVOLVED CONVERTING INPUT INTO OUTPUT CONSIST OF CRUSHING (CRUDE ORE CALLED ROM WHICH APPEARED TO BE PIECES OF ROCKS AS WE NOTED DURING THE COURSE OF HEARING ON THE B ASIS OF SAMPLE SHOWN TO US) SCREENING, WASHING, STACKING, LOADING IN BARGES, RIVER TRANSPORTATION TO THE BOAT AND EXPORT IN SHIPS. THE FINISHED PRODUCT WHICH COMES OUT ARE CALLED LUMPS AND FINES WHICH ARE USED FOR ISPAT INDUSTRIES AND BROUGHT BY THE FOREIG N BUYERS. THE FINISHED PRODUCT TECHNICALLY AFTER PROCESSING HAD DIFFERENT NAME. AS SHOWN TO US DURING THE COURSE OF HEARING WE NOTED THAT THE LUMPS AND FINES ARE ENTIRELY DIFFERENT FROM CRUDE ORE. DURING CONVERSION OF CRUDE ORE INTO LUMPS AND FINES, WASTE IS GENERATED WHICH IS CALLED TAILING AND DISCHARGED INTO TAILING POND. IN CODLI UNIT THESE TAILINGS WHICH ARE IN LIQUID FORM ARE CONVERTED INTO ULTRA FINE. IN OUR OPINION AS WE NOTED FROM THIS PHYSICAL SAMPLE ALSO CRUDE ORE IS ENTIRELY DIFFERENT FROM THE L UMPS AND FINE IN PHYSICAL APPEARANCE USED AND CHEMICAL COMPOSITIONS EVEN TECHNICALLY NAMES ARE ALSO DIFFERENT, SIMILARLY WHAT COMES AS OUTPUT FROM THE INPUT IN CODLI UNIT THAT IS ALSO DIFFERENT IN PHYSICAL APPEARANCE AND CHEMICAL COMPOSITION. WE DO NOT AG REE WITH THE LEARNED D.R THAT THERE IS NOT ANY CHANGE IN PHYSICAL AND CHEMICAL COMPOSITION OF THE OUTPUT THAN THE INPUT AS IS BEING PROCESSED IN ALL THE THREE UNITS. IF WE GO TO SECTION 2(29BA) INSERTED W.E.F. 1.4.2009, WE FIND CLAUSE (B) OF THIS SECTION CLEARLY STATES THAT BRINGING INTO EXISTENCE OF NEW AND DISTINCT OBJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTURE TANTAMOUNT TO MANUFACTURE. THE CRUDE ORE ONCE PROCESSED IS MADE MARKETABLE AND HAD A DIFFERENT CHEMICAL AND PHYSICAL COMPOSITION THAN THE ROM (CRUDE ORE) EVEN THOUGH IN COMMON PARALANCE BOTH MAY BE CALLED IRON ORE. IT IS NO MORE REMAINS AS CRUDE ORES. TAILING NO MORE REMAINS TAILING BUT CONVERTED INTO A POWDER.IN VIEW OF THIS CLAUSE AND THE DECISION OF SUPR EME COURT IN THE CASE OF CHOWGULE & CO. (SUPRA), IT CAN BE HELD THAT THE ASSESSEE IS ENGAGED IN THESE UNITS IN MANUFACTURING. FURTHER, IN CIT VS N.C. BUDHARAJA & CO. (1993) 204 ITR 412 (SC), HONBLE SUPREME COURT FURTHER OBSERVED THAT THE WORD PRODUCT ION IS MUCH WIDER THAN THE WORD MANUFACTURE. IT WAS SAID (PAGE 423): THE WORD PRODUCTION HAS A WIDE CONNOTATION THAN THE WORD MANUFACTURE. WHILE EVERY MANUFACTURE CAN BE CHARACTERIZED AS PRODUCTION, EVERY PRODUCTION NEED NOT AMOUNT TO MANUFACTUR E THE WORD PRODUCTION OR PRODUCE WHEN USED IN JUXTAPOSITION WITH THE WORD MANUFACTURE TAKES IN BRINGING INTO EXISTENCE NEW GOODS BY A PROCESS WHICH MAY OR MAY NOT AMOUNT TO MANUFACTURE. IT ALSO TAKES IN ALL THE BY - 45 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) PRODUCTS, INTERMEDIATE PRODUCTS AND RESIDUAL PRODUCTS WHICH EMERGE IN THE COURSE OF MANUFACTURE OF GOODS. 43.6 IN CHRISTIAN MICA INDUSTRIES LTD. VS. STATE OF BIHAR (1961) 12 STC 150 (SC), HONBLE SUPREME COURT DEFINED THE WORD PRODUCTION, ALBEIT, IN CONNECTION WITH THE BIHAR SALES TA X ACT, 1947. THE DEFINITION WAS ADOPTED FROM THE MEANING ASCRIBED TO THE WORD PRODUCTION IN THE OXFORD ENGLISH DICTIONARY, AS MEANING AMONGST OTHER THINGS THAT WHICH IS PRODUCED; A THING THAT RESULTS FROM ANY ACTION, PROCESS OR EFFORT, A PRODUCT; A PROD UCT OF HUMAN ACTIVITY OR EFFORT. FOR THE WIDE DEFINITION OF THE WORD PRODUCTION, IT HAS TO FOLLOW THAT MINING ACTIVITY FOR THE PURPOSE OF PRODUCTION OF MINERAL ORES WOULD COME WITHIN THE AMBIT OF THE WORD PRODUCTION SINCE ORE IS A THING, WHICH IS TH E RESULT OF HUMAN ACTIVITY OR EFFORT. 43.7 ACCORDING TO WEBSTER INTERNATIONAL ENGLISH DICTIONARY, THE VERB PRODUCE MEANS TO BRING FORWARD, BEGET, ETC. THE JUXTAPOSITION OF THE WORD MANUFACTURE WITH AGRICULTURE AND HORTICULTURE IS SIGNIFICANT AND CANNOT BE LOST SIGHT OF. THE INTENTION IN EMPLOYING THE WORD PRODUCED OBVIOUSLY WAS TO INTRODUCE AN ELEMENT OF VOLITION AND EFFORT INVOLVING THE EMPLOYMENT OF SOME PROCESS FOR BRINGING INTO EXISTENCE SOME GOODS. 43.8 IN PARAGRAPH 7 OF ITS IN THE CASE O F CHOWGULE & C0 (P) LTD. VS. UOI (SUPRA), HONBLE APEX COURT ALSO CONSIDERED THE QUESTION WHETHER THE DIFFERENT BRANDS OF TEA PURCHASED AND BLENDED BY THE ASSESSES FOR THE PURPOSE PRODUCING THE TEA MIXTURE COULD BE SAID TO HAVE BEEN PROCESSED, AFTER THE PURCHASE, WITHIN THE MEANING OF THE PROVISO TO SECTION 8(A), SO AS TO PRECLUDE THE ASSESSES FROM BEING ENTITLED TO DEDUCT THEIR TURNOVER UNDER SECTION 8(A), SO AS TO PRECLUDE THE VALUE OF THE TEA PURCHASED BY THEM. THE RELEVANT OBSERVATIONS MADE BY THE HON BLE SUPREME COURT IN THIS RESPECTIVE ARE QUOTED AND SET OUT HEREIN BELOW FOR READY REFERENCE: 7. THE REVENUE HOWEVER RELIED ON THE DECISION OF THE BOMBAY HIGH COURT IN NILGIRI CEYLON TEA SUPPLYING CO. VS. STATE OF BOMBAY [10 STC 500 (BOM HC)]. THE ASSES SEES IN THIS CASE WERE REGISTERED DEALERS IN TEA UNDER THE BOMBAY SALES TAX ACT, 1953 AND THEY PURCHASED IN BULK DIVERSE BRANDS OF TEA AND WITHOUT THE APPLICATION OF ANY MECHANICAL OR CHEMICAL PROCESS BLENDED THESE BRANDS OF DIFFERENT QUALITIES ACCORDING T O A CERTAIN FORMULA EVOLVED BY THEM AND SOLD THE TEA MIXTURE IN THE MARKET. THE QUESTION AROSE BEFORE THE SALES TAX AUTHORITIES WHETHER THE DIFFERENT BRANDS OF TEA PURCHASED AND BLENDED BY THE ASSESSEE FOR THE PURPOSE OF PRODUCING THE TEA MIXTURE COULD BE SAID TO HAVE BEEN PROCESSED AFTER THE PURCHASE WITHIN THE MEANING OF THE PROVISO TO SECTION 8(A), SO AS TO PRECLUDE THE ASSESSES FROM BEING ENTITLED TO DEDUCT FROM THEIR TURNOVER UNDER SECTION 8(A), THE VALUE OF THE TEA PURCHASED BY THEM. THE HIGH COURT OF BOMBAY HELD THAT DIFFERENT BRANDS OF TEA PURCHASED BY THE ASSESSES COULD NOT BE REGARDED AS PROCESSED WITHIN THE MEANING OF THE PROVISO TO CLAUSE (A) OF SECTION 8, BECAUSE THERE WAS NOT EVEN APPLICATION OF MECHANICAL FORCE SO AS TO SUBJECT THE COMMOD ITY TO A PROCESS, MANUFACTURE, DEVELOPMENT OR PREPARATION AND THE COMMODITY REMAINED IN THE SAME CONDITION. THE ARGUMENT 46 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) OF THE REVENUE BEFORE US WAS THAT THIS DECISION OF THE BOMBAY HIGH COURT WAS ON ALL FOURS WITH THE PRESENT CASE AND IF THE BLENDING OF DIFFERENT BRANDS OF TEA FOR THE PURPOSE OF PRODUCING A TEA MIXTURE IN ACCORDANCE WITH A FORMULA EVOLVED BY THE ASSESSES COULD NOT BE REGARDED AS PROCESSING OF TEA, EQUALLY ON A PARITY OF REASONING, BLENDING OF ORE OF DIFFERENT CHEMICAL AND PHYSICAL COMP OSITIONS COULD NOT BE HELD TO CONSTITUTE PROCESSING OF THE ORE. NOW UNDOUBTEDLY THERE IS A CLOSE ANALOGY BETWEEN THE FACTS OF NILGIRI TEA COMPANY CASE [10 STC 500 (BOM HC)] AND THE FACTS OF THE PRESENT CASE, BUT WE DO NOT THINK WE CAN ACCEPT THE DECISIO N OF THE BOMBAY HIGH COURT IN THE NILGIRI TEA COMPANY CASE [10 STC 500 (BOM HC)] AS LAYING DOWN THE CORRECT LAW. WHEN DIFFERENT BRANDS OF TEA WERE MIXED BY THE ASSESSEE IN NILGIRI TEA COMPANY CASE [10 STC 500 (BOM HC)] FOR THE PURPOSE OF PRODUCING A TEA MI XTURE OF A DIFFERENT KIND AND QUALITY ACCORDING TO A FORMULA EVOLVED BY THEM, THERE WAS PLAINLY AND INDUBITABLY PROCESSING OF THE DIFFERENT BRANDS OF TEA, BECAUSE THESE BRANDS OF TEA EXPERIENCED, AS A RESULT OF MIXING, QUALITATIVE CHANGE, IN THAT THE TEA M IXTURE WHICH CAME INTO EXISTENCE WAS OF DIFFERENT QUALITY AND FLAVOR THAN THE DIFFERENT BRANDS OF TEA WHICH WENT INTO THE MIXTURE. THERE ARE, IT IS TRUE, SOME OBSERVATIONS IN THE JUDGMENT OF THE BOMBAY HIGH COURT WHICH SEEM TO SUGGEST THAT IF INSTEAD OF MA NUAL APPLICATION OF ENERGY IN MIXING THE DIFFERENT BRANDS OF TEA, THERE HAD BEEN APPLICATION OF MECHANICAL FORCE IN PRODUCING THE TEA MIXTURE, THE COURT MIGHT HAVE COME TO A DIFFERENT CONCLUSION AND THESE OBSERVATIONS WERE RELIED UPON BY THE ASSESSEE, SINC E IN THE PRESENT CASE THE BLENDING WAS DONE BY APPLICATION OF MECHANICAL FORCE, BUT WE DO NOT THINK THAT IS THE CORRECT TEST TO BE APPLIED FOR THE PURPOSE OF DETERMINING WHETHER THERE IS PROCESSING. THE QUESTION IS NOT WHETHER THERE IS MANUAL APPLICATION OF ENERGY OR THERE IS APPLICATION OF MECHANICAL FORCE. WHATEVER BE THE MEANS EMPLOYED FOR THE PURPOSE OF CARRYING OUT THE OPERATION, IT IS THE EFFECT OF THE OPERATION ON THE COMMODITY THAT IS MATERIAL FOR THE PURPOSE OF DETERMINING WHETHER THE OPERATION C ONSTITUTES PROCESSING WE ARE CLEARLY OF VIEW THAT THE BLENDING OF ORE IN THE COURSE OF LOADING THROUGH THE MECHANICAL ORE HANDLING PLANT AMOUNTED TO PROCESSING OF ORE WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13 AND THE MECHANICAL ORE HANDLING PLA NT FELL WITHIN THE DESCRIPTION OF MACHINERY, PLANT, EQUIPMENT USED IN THE PROCESSING OF ORE FOR SALE 43.9 IN DECIDING THE SAID QUESTION, THE HONBLE SUPREME COURT AFTER CONSIDERING THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN NILGIRI CEYLON TEA SUPPLYING CO. VS. STATE OF BOMBAY [1959] 10 STC 500 (BOM), INTER ALIA, OBSERVED AS FOLLOWS: ( I ) WHEN DIFFERENT BRANDS OF TEA WERE MIXED BY THE ASSESSEE AS IN NILGIRI CEYLON TEA SUPPLYING CO.S CASE (1959) 10 STC 500 (BOM) FOR THE PURPOSE OF PURCHASING A TEA MIXTURE OF A DIFFERENT KIND AND QUALITY ACCORDING TO A FORMULA EVOLVED BY THEM, THERE WAS PLAINLY AND INDUBITABLY PROCESSING FOR THE DIFFERENT BRANDS OF TEA, BECAUSE THESE BRANDS OF TEA EXPERIENCED, AS A RESULT OF MIXING, A 47 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) QUALITATIVE CHANGE, IN THAT THE TEA MIXTURE WHICH CAME INTO EXISTENCE WAS OF A DIFFERENT QUALITY AND FLAVOR THAN THE DIFFERENT BRANDS OF THE TEA WHICH WENT INTO THE MIXTURE; ( II ) THERE ARE, IT IS TRUE, SOME OBSERVATIONS IN THE JUDGMENT OF THE BOMBAY HIGH COURT WHICH SEEM TO SUGGEST THAT IF INSTEAD OF MANUAL APPLICATION OF ENERGY IN MIXING THE DIFFERENT BRANDS OF TEA, THERE HAD BEEN APPLICATION OF MECHANICAL FORCE IN PRODUCING THE TEA MIXTURE, THE COURT MIGHT HAVE COME TO A DIFFERENT CONCLUSION AND THESE OBSERVATIONS WERE RELIED UPON BY THE A SSESSEE, SINCE, IN THE PRESENT CASE, THE BLENDING WAS DONE BY APPLICATION OF MECHANICAL FORCE, BUT THAT IS NOT THE CORRECT TEST TO BE APPLIED FOR THE PURPOSE OF DETERMINING WHETHER THE OPERATION CONSTITUTES IS PROCESSING. ( III ) THE QUESTION IS NOT WHETHER THE RE IS ANY MANUAL APPLICATION OF ENERGY OR THERE IS APPLICATION OF MECHANICAL FORCE. WHATEVER BE THE MEANS EMPLOYED FOR THE PURPOSE OF CARRYING OUT THE OPERATION, IT IS THE EFFECT OF THE OPERATION ON THE COMMODITY THAT IS MATERIAL FOR THE PURPOSE OF DETERMI NING WHETHER THE OPERATION CONSTITUTES PROCESSING. 43.10 THEREFORE, HONBLE SUPREME COURT, IN CONSTRUING THE EXPRESSION PROCESSING ALLOWED THE APPEAL OF THE ASSESSEE, IN CHOWGULE & CO. PVT. LTD. (SUPRA), HOLDING, INTER ALIA, THAT WHERE ANY COMMODITY I S SUBJECTED TO A PROCESS OR TREATMENT WITH A VIEW TO ITS DEVELOPMENT OR PREPARATION FOR THE MARKET IT WOULD AMOUNT TO PROCESSING OF THE COMMODITY WITHIN THE MEANING OF CENTRAL SALES TAX ACT, 1956. HONBLE SUPREME COURT, IN THE SAID JUDGMENT, DID NOT CONS IDER THE EXPRESSION MANUFACTURE SINCE THE QUESTION WAS DECIDED ONLY ON THE EXPRESSION PROCESSING. HOWEVER, CONSIDERING THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF NILGIRI TEA CO. [1959] 10 STC 500, HONBLE SUPREME COURT OBSERVED THAT, FOR THE PURPOSE OF PRODUCING A TEA MIXTURE OF A DIFFERENT KIND AND QUALITY ACCORDING TO A FORMULA EVOLVED BY THEM, THERE WAS PLAINLY AND INDUBITABLY PROCESSING OF THE DIFFERENT BRANDS OF TEA, BECAUSE THESE BRANDS OF TEA EXPERIENCED, AS A RESULT OF A QUALITATIVE CH ANGE, IN THAT THE TEA MIXTURE WHICH CAME INTO EXISTENCE WAS OF A QUALITY AND FLAVOR FROM THE DIFFERENT BRANDS OF TEA WHICH WENT INTO THE MIXTURE. 43.11 HONBLE KERALA HIGH COURT HAD THE OCCASION TO CONSIDER WHETHER ASSESSEE IS ENGAGED IN THE MANUFACTURE O R PRODUCTION OF AN ARTICLE OR THING WHEN ASSESSEE WAS EXCLUSIVELY ENGAGED IN BLENDING, PACKAGING AND EXPORT OF TEA BAGS, TEA PACKETS AND BULK TEA PACKS IN THE CASE OF TATA TEA LTD. VS. ACIT 338 ITR 285. THE ASSESSEES UNIT WAS RECOGNIZED AS 100% EOU. THE A SSESSEE CLAIMED EXEMPTION U/S 10B OF THE ACT FOR THE ASSESSMENT YEAR 1996 - 97 ONWARDS WHICH WAS GRANTED UP TO THE ASSESSMENT YEAR 2000 - 2001, BUT FOR THE ASSESSMENT YEARS 2001 - 02 AND 2002 - 03 THE EXEMPTION WAS DENIED FOR THE REASON THAT BY THE FINANCE ACT, 20 00, THE DEFINITION OF MANUFACTURE WHICH INCLUDED PROCESSING CONTAINED IN SEC. 10B OF THE ACT WAS DELETED W.E.F. 01/04/2001. (THE SAME REASONING AS HAS BEEN GIVEN BY THE COORDINATE BENCH IN THE CASE OF CHOWGULE & CO. ITA 162 & 184 HEAVILY RELIED BY THE DE PARTMENT UNDER PARA 14 OF THEIR ORDER DT. 12.7.2007.) HONBLE HIGH COURT NOTED IN THAT CASE THAT THE REVENUES 48 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) STAND IS THAT MANUFACTURE OR PRODUCTION HAD LIBERAL MEANING UNDER THE DEFINITION CLAUSE CONTAINED IN SECTION 10B OF THE ACT UNTIL ITS DELETION WH ICH COVERS EVEN PROCESSING AND, THEREFORE, BLENDING AND PACKAGING OF TEA FOR EXPORT WAS TREATED AS MANUFACTURE OR PRODUCTION OF AN ARTICLE QUALIFYING FOR EXEMPTION. HONBLE KERALA HIGH COURT CONSIDERED THE CONTENTION OF THE ASSESSEE THAT THE SCHEME OF INCOME TAX EXEMPTION AVAILABLE TO UNITS IN THE SEZ U/S 10A OF THE ACT AND UNITS IN THE FREE TRADE ZONE PROVIDED U/S 10AA OF THE ACT AND THE EXEMPTION AVAILABLE TO 100% EOU U/S 10B OF THE ACT ARE VERY SIMILAR IN NATURE AND THE WORDINGS OF THE STATUTORY PROV ISIONS ARE SIMILAR IN NATURE. HONBLE KERALA HIGH COURT ALSO CONSIDERED THE JUDGMENT IN THE DECISION OF SUPREME COURT IN TARA AGENCIES (292 ITR 444 (SC) RELIED UPON BY THE SR. STANDING COUNSEL FOR THE REVENUE, WHEREIN HONBLE SUPREME COURT CLEARLY HELD THA T BLENDING OF TEA DOES NOT AMOUNT TO MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THING, BUT IS ONLY PROCESSING. HONBLE HIGH COURT ALLOWING THE APPEAL OF THE ASSESSEE HELD THAT THE ASSESSEE WAS EXCLUSIVELY ENGAGED IN BLENDING AND PACKING OF TEA FOR EXPO RT AND WAS NOT MANUFACTURING OR PRODUCING ANY OTHER ARTICLE OR THING. IT WAS RECOGNIZED AS A 100% EOU DIVISION AND THE DEPARTMENT HAD NO CASE THAT THE ASSESSEES UNIT ENGAGED IN EXPORT OF TEA BAGS AND TEA PACKETS WAS NOT A 100% EOU. IF EXEMPTION WAS DENIED ON THE GROUND THAT PRODUCTS EXPORTED WERE NOT PRODUCED OR MANUFACTURED IN THE INDUSTRIAL UNITS OF THE ASSESSEES 100% EOU, IT WOULD DEFEAT THE VERY OBJECT OF SECTION 10B OF THE ACT. (SIMILAR TO ASSESSEES CASE). FURTHER, INDUSTRIAL UNITS ENGAGED IN THE VE RY SAME ACTIVITY, I.E., BLENDING, PACKING AND EXPORT OF TEA IN THE SPECIAL ECONOMIC ZONES AND FREE TRADE ZONES, WOULD CONTINUE TO ENJOY TAX EXEMPTION UNDER SECTION 10A OF THE ACT AND SECTION 10AA OF THE ACT RESPECTIVELY. THE ASSESSEE WAS ALLOWED EXEMPTION ON THE PROFIT DERIVED BY ITS 100% EOU ENGAGED IN BLENDING, PACKING AND EXPORT OF TEA BAGS AND TEA PACKETS. HONBLE HIGH COURT HELD AS UNDER: THE FINDING OF THIS COURT IS THAT THE PURPOSE OF INCORPORATION OF SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005, INTO SECTION 10AA OF THE INCOME - TAX ACT IS TO PROVIDE A LIBERAL MEANING TO THE WORD MANUFACTURE WHICH TAKES IN EVEN BLENDING, REFRIGERATION, ETC. IT WAS NOTICED BY THIS COURT THAT THE DEFINITIONS OF MANUFACTURE CONTAINED IN THE ABOVE DEFINITION C LAUSES ARE VERY LIBERAL WHICH TAKES IN EVEN PROCESSING LIKE BLENDING. THE CONTENTION OF THE COUNSEL FOR THE ASSESSEE IS THAT THE PURPOSE OF REMOVAL OF THE DEFINITION OF MANUFACTURE FROM SECTION 10B WAS NOT TO PROVIDE A RESTRICTED MEANING FOR THAT TERM CO NTAINED IN THE MAIN SECTION BECAUSE IF THAT WAS SO, THEN THE LEGISLATURE WOULD HAVE ONLY MODIFIED THE DEFINITION CLAUSE. FURTHER, THE DEFINITION OF 100 PER CENT EXPORT ORIENTED UNIT EVEN AFTER THE AMENDMENT IS RETAINED IN THE SAID SECTION, WHICH DEFINES IT AS AN UNDERTAKING WHICH HAS BEEN APPROVED AS A 100 PER CENT EXPORT ORIENTED UNDERTAKING BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF POWERS CONFERRED BY SECTION 40 OF THE INDUSTRIES (DEVELOPMENT & REGULATION) ACT, 1951, A ND THE RULES MADE UNDER THAT ACT. IT IS PERTINENT TO NOTE THE PRODUCTS FOR WHICH THE ASSESSEES UNIT IS RECOGNIZED AS A 100 PER CENT EXPORT ORIENTED UNIT ARE TEA BAGS, TEA IN PACKETS AND TEA IN BULK PACKS. IN FACT, THE ASSESSEE IS EXCLUSIVELY ENGAGED IN BL ENDING AND PACKING OF TEA FOR EXPORT AND IS NOT MANUFACTURING OR PRODUCING ANY OTHER ARTICLE OR THING. STILL IT IS RECOGNIZED AS A 100 PER CENT EXPORT ORIENTED UNIT BY THE CONCERNED 49 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) AUTHORITY WITHIN THE MEANING OF THAT TERM CONTAINED IN THE DEFINITION CLAU SE OF SECTION 10B OF THE INCOME - TAX ACT AND THE DEPARTMENT HAS NO CASE THAT THE ASSESSEES UNIT ENGAGED IN EXPORT OF TEA BAGS AND TEA PACKETS IS NOT A 100 PER CENT EXPORT ORIENTED UNIT. SO MUCH SO, IN OUR VIEW, IF EXEMPTION IS DENIED ON THE GROUND THAT PRO DUCTS EXPORTED ARE NOT PRODUCED OR MANUFACTURED IN THE INDUSTRIAL UNIT OF THE ASSESSEES 100 PER CENT EXPORT ORIENTED UNIT, THE SAME WOULD DEFEAT THE VERY OBJECT OF SECTION 10B. FURTHER, INDUSTRIAL UNITS ENGAGED IN THE VERY SAME ACTIVITY, I.E., BLENDING, P ACKING AND EXPORT OF TEA IN THE SPECIAL ECONOMIC ZONES AND FREE TRADE ZONES, WILL CONTINUE TO ENJOY TAX EXEMPTION UNDER SECTION 10A AND SECTION 10AA RESPECTIVELY. THE STILL WORSE POSITION IS THAT THE APPELLANT WOULD BE DENIED OF EXPORT EXEMPTION AVAILABLE UNDER SECTION 80HHC EVEN TO A MERCHANT EXPORTER. IN OUR VIEW, THE DECISION OF THE SUPREME COURT IN TARA AGENCIES CASE [2007] 292 ITR 444 (SC) IS NOT APPLICABLE FOR THE PURPOSE OF CONSIDERING EXEMPTION FOR INDUSTRIES IN THE EXPORT PROCESSING ZONES, FREE TR ADE ZONES AND TO 100 PER CENT EXPORT ORIENTED UNITS COVERED BY SECTIONS 10A, 10AA AND 10B OF THE INCOME - TAX ACT. THEREFORE, FOLLOWING THE JUDGMENT OF THIS COURT ABOVE REFERRED TO WE HOLD THAT THE ASSESSEE IS ENTITLED TO EXEMPTION ON THE PROFIT DERIVED BY I TS 100 PER CENT EXPORT ORIENTED UNIT ENGAGED IN BLENDING, PACKING AND EXPORT OF TEA BAGS AND TEA PACKETS. CONSEQUENTLY, WE ALLOW THE APPEALS BY REVERSING THE ORDERS OF THE TRIBUNAL AND BY RESTORING THE ORDERS OF THE FIRST APPELLATE AUTHORITY DECLARING THE APPELLANTS ENTITLEMENT FOR EXEMPTION. 43.12 HONBLE HIGH COURT IN THIS CASE, IN OUR OPINION, HAS CLEARLY LAID DOWN THAT ONCE THE ASSESSEE IS RECOGNIZED AS A 100% EOU FOR ENGAGING IN AN ACTIVITY AND ASSESSEE IS ENGAGED IN THE SAME VERY ACTIVITY, IF THE EX EMPTION IS DENIED TO THE ASSESSEE ON THE GROUND THAT THERE IS NO PRODUCTION OR MANUFACTURING BUT ONLY PROCESSING OF THE PRODUCTS EXPORTED IN THE 100% EXPORT ORIENTED UNIT, THE SAME WOULD DEFEAT THE VERY OBJECT OF SECTION 10B. THE HONBLE HIGH COURT TOOK TH E VIEW THAT THE DECISION OF THE HONBLE SUPREME COURT IN TARA AGENCYS CASE 292 ITR 444 WILL NOT APPLY EVEN THOUGH HONBLE SUPREME COURT IN THAT CASE HAS HELD THAT BLENDING OF TEA DOES NOT AMOUNT TO MANUFACTURE OR PRODUCTION OF AN ARTICLE BUT IS ONLY PROCE SSING. THUS, THE HONBLE KERALA HIGH COURT IN THE CASE OF TATA TEA LTD. (SUPRA) GAVE THE CLEAR CUT FINDING IMPLIEDLY THAT EVEN IF THE ASSESSEE IS ENGAGED IN PROCESSING AND IS RECOGNIZED AS 100% EOU, IT WILL BE ENTITLED FOR EXEMPTION CLAIMED U/S 10B OF THE ACT. 43.13 THE CRUX OF THE SUBMISSIONS OF THE LD. SPECIAL COUNSEL FOR THE DEPARTMENT IS THAT THE ASSESSEE IS ENGAGED IN THESE 100% EXPORT ORIENTED UNITS ONLY IN PROCESSING OF IRON ORE AND BY PROCESSING IT GET IT UPGRADED FOR EXPORT, THEREFORE IT IS NOT E NTITLED FOR EXEMPTION U/S 10B DOES NOT HAVE ANY LEG TO STAND IN VIEW OF THE DECISION OF KERALA HIGH COURT (SUPRA), SUPREME COURT IN THE CASE OF CHOWGULE & CO(SUPRA). EVEN ON THIS ISSUE WE HAVE GONE THROUGH THE DECISION OF HONBLE SPECIAL BENCH IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. AND OTHERS VS. DCIT. THE QUESTION FOR CONSIDERATION AND DECISION OF THE SPECIAL BENCH WAS: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ASSESSEES, WHO ARE IN THE BUSINESS OF BLENDING & PROCESSING OF T EA AND EXPORT THEREOF, CAN BE 50 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) SAID TO BE MANUFACTURE/PRODUCER OF THE TEA FOR THE PURPOSE OF SECTION 10A/10B OF THE I.T. ACT, 1961? 44. THE BRIEF FACTS IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. IN ITA NO. 1463/KOL/2007 WERE THAT THE ASSESSEE WAS E NGAGED IN THE BUSINESS OF MANUFACTURING, PROCESSING, EXPORTING AND DEALING IN VARIOUS COMMODITIES, MORE PARTICULARLY TEA, COFFEE, JUTE, PEPPER, CHILLIES, CARDAMOM, TURMERIC AND SIMILAR OTHER SPICES, ETC. THE ASSESSEE, AS PER THE CLAIM IS A 100% EOU WITHIN THE MEANING OF SECTION 10B OF THE I.T. ACT, 1961 AND CLAIMED EXEMPTION UNDER THAT SECTION. THE ASSESSEE BUYS TEA FROM AUCTIONS HELD IN TEA BOARD RECOGNIZED AUCTION CENTRES AT KOLKATA, GUWAHATI, SILIGURI, COCHIN, COIMBATORE AND COONOOR. THE ASSESSEE CONCED ED THE FACTUAL POSITION THAT IT IMPORTS SMALL QUANTITY OF TEA OF THE TYPE AND QUALITY NOT PRODUCED IN INDIA. IT FURTHER CONCEDED THE FACTUAL POSITION THAT IT DOES NOT GROW OR MANUFACTURE ANY TEA. ACCORDING TO THE ASSESSEE, TEA SO BOUGHT IN DIFFERENT AUCTIO NS IS PROCESSED WITH A VIEW TO REMOVE ALL DUST AND FOREIGN SUBSTANCES AND THEREAFTER IT BLENDS DIFFERENT VARIETIES OF TEA TO MAKE IT OF UNIFORM AND CONSISTENT QUALITY THROUGHOUT THE YEAR. THEREAFTER, IT IS PACKED IN CONSUMER PACKETS OF 50, 100, 250, 500 OR 1000 GMS. ETC. OR PACKED IN THE FORM OF TEA BAGS OF 1.94 GMS. OR 2 GMS. ETC., AS THE CASE MAY BE. THE ASSESSEE CLAIMED EXEMPTION U/S 10B OF THE ACT IN RESPECT OF ITS 100% EOU FOR EXPORT OF MANUFACTURED JUTE BAGS, PACKET TEA, TEA BAGS, BULK TEA, ETC. THE AO REJECTED THE CLAIM OF ASSESSEE OF EXEMPTION U/S 10B IN RESPECT OF EXPORT OF BLENDING OF TEA. THE REJECTION OF EXEMPTION U/S 10B WAS CONFIRMED BY THE CIT(A). WHEN THE MATTER WENT BEFORE THE SPECIAL BENCH, SPECIAL BENCH AFTER DISCUSSION THE RELEVANT PRO VISIONS AS WELL AS THE VARIOUS DECISIONS OF HIGH COURT AND THE SUPREME COURT HELD AS UNDER: - 32. THE PROVISIONS OF SECTION 10AA OF THE ACT WAS INSERTED ON THE STATUTE BOOK BY THE SPECIAL ECONOMIC ZONES ACT, 2005 W.E.F . 10.02.2006. EVEN PRIOR TO THE ENACTMENT OF THE SAID SEZ ACT, SPECIAL ECONOMIC ZONES (INCLUDING UNITS THEREIN) WERE ALL ALONG TREATED LIKE EQU / FTZ / EPZ FOR ALL PURPOSES WHATSOEVER AND WERE DEALT WITHIN THE EXIM POLICY ACCORDINGLY. SECTION 2(K) OF THE S PECIAL ECONOMIC ZONE ACT, 2005 DEFINES THE EXPRESSION 'EXISTING SPECIAL ECONOMIC ZONE' TO MEAN EVERY SPECIAL ECONOMIC ZONE WHICH IS IN EXISTENCE ON OR BEFORE THE COMMENCEMENT OF THE SAID ACT. SECTION 2(E) DEFINES THE EXPRESSION 'EXISTING UNIT' TO MEAN EVER Y UNIT WHICH HAS BEEN SET UP ON OR BEFORE THE COMMENCEMENT OF THE SAID ACT IN AN EXISTING SPECIAL ECONOMIC ZONE. IN OTHER WORDS, ADMITTEDLY ALL SPECIAL ECONOMIC ZONES WERE ALSO BEING GOVERNED BY THE EXIM POLICY PRIOR TO THE ENACTMENT OF SEZ ACT, 2005. CLAU SE (III) OF EXPLANATION 1 TO SECTION 1OAA LAYS DOWN THAT THE EXPRESSION 'MANUFACTURE' SHALL HAVE THE SAME MEANING AS ASSIGNED TO IT IN SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005, WHICH DEFINITION IS AS UNDER: 'MANUFACTURE' MEANS TO MAKE, PRODUCE, FABRICATE, ASSEMBLE, PROCESS OR BRING INTO EXISTENCE, BY HAND OR BY MACHINE, A NEW PRODUCT HAVING A DISTINCTIVE NAME, CHARACTER OR USE AND SHALL INCLUDE PROCESSES SUCH AS REFRIGERATION, CUTTING, POLISHING, BLENDING, RE PAIR, REMAKING, RE - ENGINEERING AND INCLUDES AGRICULTURE, AQUACULTURE, ANIMAL HUSBANDLY, FLORICULTURE, HORTICULTURE, PISCICULTURE, POULTRY, SERICULTURE, VITICULTURE AND MINING'. IN EXIM POLICY, THE EXPRESSION 'MANUFACTURE' IS DEFINED, IN PARAGRAPH 9.30 & 9. 31 THEREOF ALMOST IN THE SAME MANNER AS IN THE SPECIAL ECONOMIC ZONE ACT, 2005, WHICH IS AS UNDER: 51 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 'MANUFACTURE' MEANS TO MAKE, PRODUCE, FABRICATE, ASSEMBLE, PROCESS OR BRING INTO EXISTENCE, BY HAND OR BY MACHINE, A NEW PRODUCT HAVING A DISTINCTIVE NAME, C HARACTER OR USE AND SHALL INCLUDE PROCESSES SUCH AS REFRIGERATION, REPACKING, POLISHING AND LABELING. MANUFACTURE, FOR THE PURPOSE OF THIS POLICY, SHALL ALSO INCLUDE AGRICULTURE, AQUACULTURE, ANIMAL HUSBANDRY, FLORICULTURE, HORTICULTURE, PISCICULTURE, POUL TRY, SERICULTURE, VITICULTURE AND MINING.' BUT THE ONLY DIFFERENCE BETWEEN THE EXIM POLICY OF 2002 - 07 AND OF 2000 IS THAT WORDS 'AND SEGREGATION' WHICH WERE APPEARING IN THE DEFINITION OF THE EXPRESSION 'MANUFACTURE' IN THE EXIM POLICY OF 2000 WAS DELETED IN THE EXIM POLICY OF 2002 - 07. FURTHER, EVEN IN PREVENTION OF FOOD ALTERNATION RULES, 1955, IT HAS BEEN INTER ALIA STATED THAT TEA USED IN THE MANUFACTURE OF FLAVOURED TEA SHALL CONFORM TO THE STANDARDS OF TEA. THE FLAVOURED TEA : MANUFACTURERS SHALL REGISTER THEMSELVES WITH THE TEA BOARD BEFORE MAKING FLAVOUR TEA IN THE TEA (DISTRIBUTION & EXPORT) CONTROL ORDER, 1957 ISSUED BY THE GOVERNMENT OF INDIA, MINISTRY OF COMMERCE & INDUSTRY (DEPARTMENT OF COMMERCE) THE EXPRESSIONS 'FLAVOUR TEA', 'GREEN TEA ' 'INSTANT TEA', 'PACKET TEA' 'QUICK BREWING BLACK TEA', 'TEA' AND 'TEST BAG' HAVE BEEN S EPARATELY DEFINED AS DISTINCT PRODUCT. IN TEA (MARKETING) CONTROL ORDER, 2003 ISSUED BY THE ' CENTRAL GOVERNMENT, IN EXERCISE OF THE POWERS CONFERRED BY SECTION 3 0(5)(3) OF THE TEA ACT, 1953, THE EXPRESSIONS 'MANUFACTURER', 'BUYER', 'PACKET TEA', 'TEA BAG', - 'GREEN TEA', 'QUICK BREWING BLACK TEA', 'INSTANT TEA' AND 'MADE TEA' HAVE ALSO BEEN DISTINCTLY AND SEPARATELY DEFINED. CLAUSE (29BA) WAS INSERTED IN SECTION 2 OF THE INCOME TAX ACT, 1961 BY THE FINANCE (NO.2) ACT, 2009 W.E.F. 01.04.2009 TO DEFINE THE EXPRESSION 'MANUFACTURE' AS UNDER: 'MANUFACTURE', WITH ITS GRAMMATICAL VARIATIONS, MEANS A CHANGE IN A NON - LIVING PHYSICAL OBJECT OR ARTICLE OR THING, - (A) RESULTING IN TRANSFORMATION OF THE OBJECT OR ARTICLE OR THING INTO A NEW AND DISTINCT OBJECT OR ARTICLE OR THING HAVING A DIFFERENT NAME, CHARACTER AND USE; OR (B) BRINGING INTO EXISTENCE OF A NEW AND D ISTINCT OBJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTURE; THE AFORESAID DEFINITION OF THE EXPRESSION 'MANUFACTURE', ALTHOUGH BROUGHT INTO THE STATUTE BOOK W.E.F. 01.04.2009, WAS APPLIED BY THE HON'BLE SUPREME COURT EVE N FOR THE ASSESSMENT YEAR 2001 - 02 IN ITO V. ARIHANT TILES AND MARBLES PVT. LTD. (2010) 320 ITR 79, 82 (SC) ON THE GROUND THAT PARLIAMENT HAD TAKEN NOTE OF GROUND REALITY IN INSERTING SECTION 2(29BA) IN THE INCOME TAX LAW. THE SAID DEFINITION WAS AGAIN APPL IED BY THE HON'BLE SUPREME COURT IN CIT V. EMPTEE POLY - YARN PVT. LTD. (2010) 'GREEN TEA' MEANS THE VARIETY OF MANUFACTURED TEA COMMERCIALLY KNOWN AS GREEN TEA; 320 ITR 665,667 (SC). 33. THE ASSESSEE COMPANY CARRIES OUT ITS OPERATIONS OF BLENDING, PACKAGING AND EXPORT OF TEA BAGS, TEA PACKETS AND BULK TEA PACKS IN ITS MODERN FACTORY, WELL EQUIPPED WITH ALL IMPORTED AND SOPHISTICATED AUTOMATIC PLANT AND MACHINERIES WITH THE HELP OF OVER 100 WORKMEN ENGAGED ON CONTRACT BASIS THROUGH M/S. TROT PVT. LTD. THE MANUFACTURING'. OPERATIONS ARE CARRIED IN ITS SAID FACTORY SITUATED AT 19/4A, MUNSHIGANJ ROAD (UNDER FALTA EXPORT PROCESSING ZONE), KOLKATA. WE FIND FROM FACTS OF THE CASE THAT 52 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) THE DETAILS OF TURNOVER OF THE ASSESSEE SHOWS BULK TEA (0.94%), PACKET TEA AND TEA BAGS .(99.06%),. AS. PER DIFFERENT DESCRIPTIONS, BRAND NAMES AND VARIETIES, AS LISTED APR. ASSESSEE COMPANY IS DULY REGISTERED AS A 100% EOU BY THE GOVERNMENT OF INDIA, MINISTRY OF IND USTRY, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION SECRETARIAL FOR INDUSTRIAL APPROVALS, ECU SECTION IN THE STATE OF WEST BENGAL FOR MANUFACTURE OF PACKET TEA, TEA BAGS/BULK TEA WITH ANNUAL CAPACITY OF 3110 MT. IN TERMS OF REGISTRATION CERTIFICATE DATED 26TH DECEMBER, 1995, INTER ALIA, WITH THE CONDITION THAT ITS 100% PRODUCTION (EXCLUDING REJECTS NOT EXCEEDING 5%) WOULD HAVE TO BE EXPORTED AND THAT ITS REGISTERED EOU UNIT SHALL MAKE VALUE ADDITION TO A MINIMUM EXTENT OF 79%. UNDISPUTEDLY, THE EXPORTED CO NSUMER PRODUCTS, BLENDED BY ASSESSEE IN ITS SAID FACTORY PREMISES IS A CASE OF SUBSTANTIAL VALUE ADDITION, AS COMPARED TO THE UNBLENDED BLACK TEA IN GRANULE AND DUST FORM NORMALLY AVAILABLE FOR SALE IN THE OPEN RETAIL MARKET THROUGHOUT INDIA. 34. THE SUBJECT FOR CONSIDERATION UNDER SECTIONS 10A AND/OR 10B OF THE SAID ACT IS MANUFACTURE / PRODUCTION OF TEA ; THE OBJECT BEING GRANT OF BENEFITS OF TAX EXEMPTION TO EXPORTERS CARRYING OUT THEIR OPERATIONS IN FTZ, EOU, EPZ & SEZ AREAS IN ACCORDANCE WITH THE EXIM POLICY DECLARED BY THE GOVERNMENT OF INDIA IN PARLIAMENT AND IN THE LIGHT OF ALLIED AND GOVERNING LAWS; IN THE LIGHT OF ALLIED LAWS E.G. THE TEA ACT, 1953, THE PREVENTION OF FOOD ADULTERATION ACT, 1953 READ WITH PREVENTION OF FOOD ADULTERATION RUL ES, 1955. THE TEA (MARKETING) CONTROL ORDER, 2003, THE TEA (DISTRIBUTION & EXPORT) CONTROL ORDER, 2005 AS WELL AS THE RULES AND REGULATIONS FRAMED BY THE TEA BOARD AND ALSO CALCUTTA TEA TRADERS ASSOCIATION FROM TIME TO TIME AS DISCUSSED ABOVE. 35. WE FIND FROM THE ABOVE FACTS AND CIRCUMSTANCES AND CASE LAWS RELIED ON BY BOTH THE SIDES THAT THE ASSESSEE WAS EXCLUSIVELY ENGAGED IN BLENDING, PACKAGING AND EXPORT OF TEA BAGS, TEA PACKETS AND BULK TEA PACKS. THE ASSESSEE'S DIVISION ENJOYS RECOGNITION AS A 100% EOU, WHICH IS GRANTED BY THE DEVELOPMENT COMMISSIONER, MINISTRY OF COMMERCE & INDUSTRY, GOVT. OF INDIA. THE ASSESSEE CLAIMED EXEMPTION U/S. 10B OF THE ACT FOR AYS 2000 - 01 ONWARDS, WHICH WAS GRANTED UPTO THE AY 2003 - 04. HOWEVER, FOR THE AY 2004 - 05, E XEMPTION WAS DECLINED FOR THE REASONS THAT BY THE FINANCE ACT, 2000, THE DEFINITION OF `MANUFACTURE WHICH INCLUDED 'PROCESSING' CONTAINED IN SECTION 1OB OF THE ACT WAS DELETED W.E.F. 01.04.2001. THE ARGUMENT OF THE DEPARTMENT IS THAT MANUFACTURE OR PRODUC TION HAD LIBERAL MEANING UNDER THE DEFINITION CLAUSE CONTAINED IN SECTION 10B OF THE ACT UNTIL ITS DELETION WHICH COVERS EVEN PROCESSING AND, THEREFORE, BLENDING 'AND PACKAGING OF TEA FOR EXPORT WAS TREATED AS 'MANUFACTURE' OR 'PRODUCTION' OF AN ARTICLE QU ALIFYING FOR EXEMPTION. WE ARE OF THE CONSIDERED VIEW THAT THE CONTENTION OF THE ASSESSEE THAT THE SCHEME OF INCOME TAX EXEMPTION AVAILABLE TO UNITS IN THE SEZ U/S. TOA OF THE ACT AND UNITS IN THE FREE TRADE ZONE PROVIDED U/S, 10AA OF THE ACT AND THE EXEMPTION AVAILABLE TO 100% EOU U/S. 1OB OF THE ACT ARE VERY SIMILAR IN NATURE AND THE WORDINGS OF THE STATUTORY PROVISIONS ARE SIMILAR IN NATURE IS CORRECT. WE FIND THAT HON'BLE KERALA HIGH COURT ALSO CONSIDERED THE JUDGMENT IN - THE DECISION OF SUPREME COURT IN TARA AGENCIES, SUPRA RELIED ON BY THE LD. CIT, DR, WHEREIN HON'BLE SUPREME COURT CLEARLY HELD THAT BLENDING OF TEA DOES NOT AMOUNT TO 'MANUFACTURE' OR 'PRODUCTION' OF AN ARTICLE, BUT IS ONLY PROCESSING. WE FIND THAT THE ASSESS EE WAS EXCLUSIVELY ENGAGED IN 53 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) BLENDING AND PACKING OF TEA FOR EXPORT AND WAS NOT MANUFACTURING OR PRODUCING ANY OTHER ARTICLE OR THING. IT WAS RECOGNISED AS A 100% EOU DIVISION AND THE DEPARTMENT HAD NO CASE THAT THE ASSESSEE'S UNIT ENGAGED IN EXPORT OF TE A BAGS AND TEA PACKETS WAS NOT A 100% EOU. IF EXEMPTION WAS DENIED ON THE GROUND THAT PRODUCTS EXPORTED WERE NOT PRODUCED OR MANUFACTURED IN THE INDUSTRIAL UNIT OF THE ASSESSEE'S 100% EOU, IT WOULD DEFEAT THE VERY OBJECT OF SECTIONS 10B OF THE ACT. 36. WE, IN VIEW OF THE ABOVE, HOLD THAT WHEN THE PRODUCTS FOR WHICH THE ASSESSEE'S UNIT IS RECOGNIZED AS A 100% EOU ARE TEA BAGS, TEA IN PACKETS AND TEA IN BULK PACKS AND THE ASSESSEE IS EXCLUSIVELY ENGAGED IN BLENDING AND PACKING OF TEA FOR EXPORT MAY NOT BE MANUFACTURER OR PRODUCER OF ANY OTHER ARTICLE OR THING IN COMMON PARLANCE. HOWEVER, FOR THE PURPOSE OF SECTION 10A, 10AA AND 10B, WE HAVE TO CONSIDER THE DEFINITION OF THE WORD 'MANUFACTURE' AS DEFINED IN SECTION 2(R) OF SEZ ACT, EXIM POLICY, FOOD ADULTERA TION RULES, 1955, TEA (MARKETING) CONTROL ORDER, 2003, ETC. WE ALSO FIND THAT THE DEFINITION OF 'MANUFACTURE' AS PER SECTION 2(R) OF THE SEZ ACT, 2005 IS INCORPORATED IN SECTION 10AA OF THE INCOME - TAX ACT WITH EFFECT FROM 10.02.2006. HON'BLE KERALA HIGH CO URT IN THE CASE OF GIRNAR INDUSTRIES (SUPRA) HAD HELD SUCH AMENDMENT IN SECTION 10AA TO BE OF CLARIFICATORY IN NATURE. THE DEFINITION OF 'MANUFACTURE' UNDER THE SEZ ACT, EXIM POLICY, FOOD ADULTERATION RULES AND TEA (MARKETING) CONTROL ORDER IS MUCH WIDER THAN WHAT IS THE MEANING OF THE TERM `MANUFACTURE UNDER THE COMMON PARLANCE, AND IT INCLUDES PROCESSING, BLENDING, PACKAGING ETC. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOW ING THE DECISION OF HON'BLE KERALA HIGH COURT IN THE CASE OF GIRNAR INDUSTRIES (SUPRA) AND TATA TEA LIMITED (SUPRA), WE 'HOLD THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION UNDER SECTION 10B OF THE ACT ON ACCOUNT OF BLENDING OF TEA. SIMILARLY, IN OUR VIEW, THE INDUSTRIAL UNITS ENGAGED IN THE VERY SAME ACTIVITY I.E. BLENDING, PACKING AND EXPORT OF TEA IN THE FREE TRADE ZONE SHALL ALSO BE ENTITLED TO ENJOY TAX EXEMPTION UNDER SECTION 10A OF THE ACT. 37. ACCORDINGLY, WE ANSWER THE QUESTION REFERRED IN FAVOUR O F THE ASSESSEE BY HOLDING THAT THE ASSESSEES WHO ARE IN THE BUSINESS OF BLENDING AND PROCESSING OF TEA AND EXPORT THEREOF, IN 100% EOUS ARE MANUFACTURER/ PRODUCER OF THE TEA FOR THE PURPOSE OF CLAIMING EXEMPTION U/S.10B OF THE ACT. FURTHER, ASSESSEES WHO A RE IN THE BUSINESS OF BLENDING AND PROCESSING OF TEA HI RESPECT OF UNDERTAKINGS IN FREE TRADE ZONES ARE MANUFACTURER/PRODUCER OF TEA FOR THE PURPOSE OF CLAIMING EXEMPTION U/S. 10A OF THE ACT. WE HAVE EXAMINED AND DISCUSSED THE FACTS IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. AND FOUND THAT THERE IS BLENDING OF TEA AND CONSEQUENTLY THE ASSESSEE IS ELIGIBLE FOR EXEMPTION U/S. 10B OF THE ACT AS PRAYED FOR. THEIR APPEAL FOR THE AY 2004 - 05 IS ALLOWED. AS REGARDS OTHER APPEALS AND THAT OF THE INTERVENERS, THE MATTERS ARE RESTORED BACK TO THE DIVISION BENCH, WITH DIRECTIONS TO DECIDE THOSE APPEALS IN THE LIGHT OF PRINCIPLE LAID DOWN HEREIN, SO FAR AS THE CLAIM FOR RELIEF U/S. 10A OR 10B OF THE ACT IN ACCORDANCE WITH LAW. 44.1 FROM THE READING OF PARA 35 OF THE AFORESAID JUDGMENT WE NOTED THAT THE SPECIAL BENCH IN THIS CASE CLEARLY HELD THAT THE ASSESSEE WAS ENGAGED ONLY IN PROCESSING AND WAS NOT ENGAGED IN THE MANUFACTURE OR PRODUCTION BUT HAD ULTIMATELY UNDER PARA 36 IT 54 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) TOOK THE VIEW IN VIEW OF THE FACT THA T THE DEFINITION OF MANUFACTURE U/S 2(R) OF THE SEZ ACT, 2005 WHICH IS INCORPORATED IN SECTION 10AA W.E.F. 10/02/2006 INCLUDES PROCESSING. THEREFORE, FOLLOWING THE DECISION OF KERALA HIGH COURT IN THE CASE OF GIRNAR INDUSTRIES AND TATA TEA LTD. (WHICH WAS DISCUSSED BY US IN THE PRECEDING PARAGRAPHS) HELD THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION U/S 10B OF THE ACT ON ACCOUNT OF BLENDING OF TEA. 45. WE HAVE ALSO GONE THROUGH THE DECISION OF HONBLE SUPREME COURT IN INDIAN CINE AGENCIES VS CIT 308 ITR 98. IN THIS CASE THE QUESTION BEFORE THE HONBLE SUPREME COURT WAS: WHEN THE ASSESSEE WAS ENGAGED IN THE ACTIVITY OF CUTTING JUMBO ROLL FILMS INTO FLAT AND SMALL ROLLS IN DESIRED SIZES, WHETHER SUCH ACTIVITY UNDERTAKEN BY THE ASSESSEE WAS MANUFACTURE OR P RODUCTION? IN THIS CASE, THE HONBLE SUPREME COURT AFTER DISCUSSING VARIOUS CASES, THE PROVISIONS OF DIFFERENT ACTS AND THE DICTIONARY MEANING TOOK THE VIEW THAT THE ASSESSEE WAS ENGAGED IN MANUFACTURE / PRODUCTION. WHILE HOLDING SO UNDER PARA 12 OF ITS OR DER, HONBLE SUPREME COURT HAS GIVEN THE SAME ANALOGY FOR THE PURPOSE OF ELIGIBILITY OF DEDUCTION UNDER SECTION 80HH AND 80 - I AS HAS BEEN GIVEN BY THE KERALA HIGH COURT IN THE CASE OF TATA TEA DISCUSSED HEREIN ABOVE FOR THE PURPOSE OF SECTION 10B, THAT IF THERE WAS NO MANUFACTURING ACTIVITY, THEN THE QUESTION OF REFERRING TO ITEM 10 OF ELEVENTH SCHEDULE FOR THE PURPOSE OF EXCLUSION DOES NOT ARISE. FROM THIS JUDGMENT, THUS, IT IS APPARENT THAT THE HONBLE APEX COURT ACCEPTED THAT MANUFACTURE/PRODUCTION INCLU DES PROCESSING ALSO. 45.1 WE HAVE ALSO GONE THROUGH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ITO VS. ARIHANT TILES AND MARBLES PVT. LTD. 320 ITR 79(SC). IN THIS CASE WHEN THE ASSESSEE WAS ENGAGED IN THE ACTIVITY OF CUTTING AND POLISHING OF MAR BLE BLOCKS, THE QUESTION BEFORE THE SUPREME COURT WAS WHETHER THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE WOULD FALL WITHIN THE MEANING OF THE WORDS MANUFACTURE OR PRODUCTION IN SECTION 80 - IA OF THE INCOME - TAX ACT, 1961? IN THIS CASE, HONBLE SUPREME COURT , AFTER DISCUSSING THE DEFINITION OF MANUFACTURE GIVEN IN SECTION 2(29BA) OF THE INCOME - TAX ACT, 1961 AND ALSO DISCUSSING THE PROVISIONS OF SECTION 80 - IA(2)(III) AND AFTER GOING THROUGH VARIOUS DECISIONS, HELD AS UNDER: 22. APPLYING THE ABOVE TESTS LAID DOWN BY THIS COURT IN CIT VS. N.C. BUDHARAJA AND CO. 204 ITR 412 (SC) TO THE FACTS OF THE PRESENT CASES, WE ARE OF THE VIEW THAT BLOCKS CONVERTED INTO POLISHED SLABS AND TILES AFTER UNDERGOING THE PROCESS INDICATED ABOVE CERTA INLY RESULTS IN EMERGENCE OF A NEW AND DISTINCT COMMODITY. THE ORIGINAL BLOCK DOES NOT REMAIN THE MARBLE BLOCK, IT BECOMES A SLAB OR TILE. IN THE CIRCUMSTANCES, NOT ONLY THERE IS MANUFACTURE BUT ALSO AN ACTIVITY WHICH IS SOMETHING BEYOND MANUFACTURE AND WHICH BRINGS A NEW PRODUCT INTO EXISTENCE AND, THEREFORE, ON THE FACTS OF THESE CASES, WE ARE OF THE VIEW THAT THE HIGH COURT WAS RIGHT IN COMING TO THE CONCLUSION THAT THE ACTIVITY UNDERTAKEN BY THE RESPONDENTS - ASSESSEES DID CONSTITUTE MANUFACTURE OR PROD UCTION IN TERMS OF SECTION 80IA OF THE INCOME TAX ACT, 1961. 23. BEFORE CONCLUDING, WE WOULD LIKE TO MAKE ONE OBSERVATION. IF THE CONTENTION OF THE DEPARTMENT IS TO BE ACCEPTED, NAMELY THAT THE ACTIVITY 55 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) UNDERTAKEN BY THE RESPONDENTS HEREIN IS NOT A MANUFACTURE, THEN, IT WOULD HAVE SERIOUS REVENUE CONSEQUENCES. AS STATED ABOVE, EACH OF THE RESPONDENTS IS PAYING EXCISE DUTY, SOME OF THE RESPONDENTS ARE JOB WORKERS AND THE ACTIVITY UNDERTAKEN BY THEM HAS BEEN RECOGNIZED BY VARIOUS GOVERNMENT AUTHORITIE S AS MANUFACTURE. TO SAY THAT THE ACTIVITY WILL NOT AMOUNT TO MANUFACTURE OR PRODUCTION UNDER SECTION 80IA WILL HAVE DISASTROUS CONSEQUENCES, PARTICULARLY IN VIEW OF THE FACT THAT THE ASSESSEES IN ALL THE CASES WOULD PLEAD THAT THEY WERE NOT LIABLE TO PAY EXCISE DUTY, SALES TAX ETC. BECAUSE THE ACTIVITY DID NOT CONSTITUTE MANUFACTURE. KEEPING IN MIND THE ABOVE FACTORS, WE ARE OF THE VIEW THAT IN THE PRESENT CASES, THE ACTIVITY UNDERTAKEN BY EACH OF THE RESPONDENTS CONSTITUTES MANUFACTURE OR PRODUCTION AND , THEREFORE, THEY WOULD BE ENTITLED TO THE BENEFIT OF SECTION 80IA OF THE INCOME TAX ACT, 1961. 45.2 IN THIS CASE ALSO, HONBLE SUPREME COURT TOOK THE VIEW THAT CUTTING AND POLISHING OF THE MARBLE BLOCKS IS THE ACTIVITY WHICH CONSTITUTES MANUFACTURE OR PRODUCTION AS AFTER PROCESSING MARBLE BLOCK NO MORE REMAINS AS MARBLE BLOCK. THIS DECISION HAS ALSO DULY CONSIDERED, IN OUR OPINION, WHETHER THE ACTIVITY OF PROCESSING IS MANUFACTURE / PRODUCTION. 45.3 NOW, WE WOULD LIKE TO DEAL WITH THE SUBMISSIONS OF T HE REVENUE WHETHER THIS ISSUE SHOULD BE SENT TO SPECIAL BENCH OR NOT. WE HAVE GONE THROUGH THE DECISION OF THIS TRIBUNAL IN ITA NO. 162/PNJ/2006 DT. 12 TH JULY, 2007 READ WITH MISC. APPLICATION IN MA NO. 23/PNJ/2007 DT. 19 TH JULY, 2007 IN THE CASE OF CHOWG ULE & CO. IN THIS CASE WE NOTED THAT THE COORDINATE BENCH OF THE TRIBUNAL HAS INTERPRETED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SESA GOA 271 ITR 331 THAT EXTRACTION AND PROCESSING OF MINING ORE AMOUNTS TO PRODUCTION; AND ONE SHOULD READ THE EXPRESSION EXTRACTION AND PROCESSING TOGETHER (THIS DECISION WAS NOT RENDERED IN RESPECT OF EXEMPTION AVAILABLE U/S 10B). EVEN THE COORDINATE BENCH OF THIS TRIBUNAL FURTHER HELD THAT IF SECTION 10B PROVIDES EXEMPTION FOR PROCESSING ALSO, THE LAW WOU LD HAVE MADE IT VERY CLEAR BY APPARENTLY STATING THAT PROCESSING IS ALSO ENTITLED FOR EXEMPTION. WHEN THE EXPRESSION PROCESSING IS OMITTED IN SECTION 10B, WE ARE NOT SUPPOSED TO FILL UP THE OMISSION. IF SOMETHING IS NOT THERE WE SHOULD ACCEPT AS IT IS NO T THERE. WE SHOULD NOT PROVIDE FOR THE OMISSION THAT AMOUNTS TO JUDICIAL LEGISLATION. THERE IS NO CONFUSION IN THE PROVISION OF LAW PROVIDED UNDER SECTION 10B. THE EXEMPTION IS AVAILABLE ONLY TO MANUFACTURE OR PRODUCTION. IT IS NOT AVAILABLE FOR PROCESSING . ALTHOUGH SUBSEQUENTLY THIS TRIBUNAL HAS RECTIFIED THE ORDER UNDER SECTION 254 VIDE ORDER DATED 19 TH JULY, 2007 ON THE APPLICATION OF THE ASSESSEE AND TOOK THE VIEW THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION UNDER SECTION 10B AS THE ASSESSEE - COMPANY ITS ELF IS EXTRACTING THE ENTIRE IRON ORE FROM OWN MINES AND MINES TAKEN ON LEASE AND THEREAFTER PROCESSING THE SAME. WE CANNOT LOOK INTO THE FINDING OF THE COORDINATE BENCH WHETHER THEY HAVE CORRECTLY INTERPRETED THE DECISION OF SUPREME COURT IN 271 ITR 331 O R NOT. THE LD. AR VEHEMENTLY CONTENDED THAT THE DECISION DT. 12 TH JULY, 2007 OF THIS TRIBUNAL IN THAT CASE GOT OVERRULED BY THE DECISION OF THIS TRIBUNAL VIDE ORDER DT. 19 TH JULY, 2007 BUT WE DO NOT AGREE ON THIS WITH THE LD. AR. WE HAVE GONE THROUGH THE O RDER DT. 12 TH JULY, 2007 AS WELL AS ORDER DT. 19 TH JULY, 2007 BUT WE NOTED THAT THE TRIBUNAL RECTIFIED THE ORDER AS THE TRIBUNAL NOTED THE ASSESSEE ITSELF WAS EXTRACTING THE ENTIRE ORES AND PROCESSING THE SAME. THUS, THE ASSESSEE COMPLIED WITH BOTH THE CON DITIONS OF EXTRACTING AND 56 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) PROCESSING OF IRON ORE. THIS TRIBUNAL DID NOT REVERSE THE FINDING THAT THE PROCESSING IS NOT ENTITLED FOR THE EXEMPTION. THE TRIBUNAL DID NOT REVERSE THE FINDING THAT EXTRACTION AND PROCESSING SHOULD GO TOGETHER. EVEN THAT BENCH / TRIBUNAL DID NOT VISUALIZE THAT 100% EOU IS APPROVED FOR A PARTICULAR LOCATION AND ITS BOUNDRY CANNOT EXTEND BEYOND THAT LOCATION. IT IS ONLY THE PROFIT DERIVED BY THE 100% EOU UNIT SITUATED WITHIN THAT LOCATION, CAN BE REGARDED TO BE THE PROFIT DERIVED B Y THE 100% EOU. THE ASSESSEE IN THAT CASE HAS TAKEN THE MINES ON LEASE WHICH WERE NOT APPROVED AS PART OF 100% EOU BUT STILL THE ASSESSEE WAS ALLOWED EXEMPTION U/S 10B EVEN THOUGH THE IRON ORE EXTRACTED FROM THOSE MINES WHICH WERE TAKEN ON LEASE WERE NOT P ART OF THE 100% EOU 45.4 NO DOUBT THE DECISION OF THE COORDINATE BENCH IS BINDING ON US IN VIEW OF THE SETTLED JUDICIAL PRINCIPLES IN THE VARIOUS DECISIONS EVEN RELIED ON BY THE LD. CCIT BUT THERE ARE CERTAIN EXCEPTIONS TO THIS CARDINAL PRINCIPLE OF JUDICIAL DISCIPLINE. ONCE THE DECISION OF SPECIAL BENCH OR THIRD MEMBER HAS COME ON SIMILAR ISSUE SUBSEQUENTLY, THE DECISION OF THE SPECIAL BENCH WILL BE BINDING ON US. IF THE DECISION OF JURISDICTIONAL HIGH COURT / SUPREME COURT HAS COME SUBSEQUENTLY ON T HE SIMILAR ISSUE, IN VIEW OF THE ARTICLE 141 OF THE CONSTITUTION OF INDIA THAT DECISION WILL BE BINDING ON US. EVEN THIS WILL BE REGARDED A MISTAKE OF LAW IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS SAURASHTRA KUTCH STOCK EXCHANG E 305 ITR 227 (SC).IF THERE IS NO JURISDICTIONAL HIGH COURT DECISION AND SUBSEQUENTLY ANY OTHER HIGH COURT HAS DECIDED THE SIMILAR ISSUE, THIS IS THE SETTLED PRINCIPLE OF LAW THAT THE DECISION OF THAT HIGH COURT HAS TO BE FOLLOWED AS THE HIGH COURT IS ALW AYS SUPERIOR TO THE TRIBUNAL IN PREFERENCE TO THE DECISION OF COORDINATE BENCH. THE DECISION SO PRONOUNCED SUBSEQUENTLY IF AFFECTS THE ISSUE RELATING TO THE ASSESSEE, IN OUR OPINION, THESE SUBSEQUENT DECISIONS ARE BINDING ON US AS JUDICIAL DISCIPLINE REQUI RE THAT. THIS TRIBUNAL IS BOUND TO CONSIDER THOSE DECISIONS AND THE TRIBUNAL IS NOT BOUND WITH THE DECISION OF THE COORDINATE BENCH. THE JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF H.A. SHAH & CO. VS. CIT (1956) 30 ITR 618, 625 (BOM.) EVEN TOOK THE VI EW THAT IN CASE FRESH MATERIAL FACTS CAME TO THE KNOWLEDGE OF SUBSEQUENT BENCH, THE DECISION OF COORDINATE BENCH IS NOT BINDING. IN THIS REGARD, HONBLE HIGH COURT OBSERVED AS UNDER : - NOR ARE WE SATISFIED THAT IN ORDER TO ENABLE THE SECOND TRIBUNAL T O DEPART FROM THE FINDING OF THE FIRST TRIBUNAL IT IS ESSENTIAL THAT THERE MUST BE SOME FRESH FACTS WHICH MUST BE PLACED BEFORE THE SECOND TRIBUNAL WHICH WERE NOT PLACED BEFORE THE FIRST TRIBUNAL. IF THE FIRST TRIBUNAL FAILED TO TAKE INTO CONSIDERATION MAT ERIAL FACTS, FACTS WHICH HAD A CONSIDERABLE BEARING UPON THE ULTIMATE DECISION, AND IF THE SECOND TRIBUNAL WAS SATISFIED THAT THE DECISION WAS ARRIVED AT BECAUSE OF THE FAILURE TO TAKE INTO CONSIDERATION THOSE MATERIAL FACTS AND THAT IF THESE MATERIAL FACT S HAD BEEN TAKEN INTO CONSIDERATION THE DECISION WOULD HAVE BEEN DIFFERENT, THEN THE SECOND TRIBUNAL WOULD BE IN THE SAME POSITION TO REVISE THE EARLIER DECISION AS IF FRESH FACTS HAD BEEN PLACED BEFORE IT. ON PRINCIPLE THERE IS NOT MUCH DIFFERENCE BETWEEN FRESH FACTS BEING PLACED BEFORE THE SECOND TRIBUNAL AND THE SECOND TRIBUNAL TAKING INTO CONSIDERATION CERTAIN MATERIAL FACTS WHICH THE FIRST TRIBUNAL FAILED TO TAKE INTO CONSIDERATION. 57 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 45.5 THE OTHER EXCEPTION IS FOR NON - BINDING OF THE COORDINATE BENCH DECISION IS WHEN THERE HAD BEEN AMENDMENT IN LAW SUBSEQUENT TO THE DECISION ON THE BASIS OF WHICH THE COORDINATE BENCH RENDERED THE DECISION AND THE CO - ORDINATE BENCH COULD NOT BE ABLE TO CONSI DER THE SAID AMENDMENTS, THE DECISION OF THE CO - ORDINATE BENCH IS NOT BINDING. FROM PARA 14 OF THE ORDER OF THE CO - ORDINATE BENCH IT IS APPARENTLY CLEAR WHILE DECIDING THE APPEAL IN THE CASE OF CHOWGULE & CO. (ITA 162 & 184), IT HAD GOT IMPRESSED THAT THE EXPRESSION PROCESSING IS OMITTED IN SECTION 10B. THE APPEAL RELATES TO A.Y.2002 - 03 NOT RELATING TO IMPUGNED A.Y. CLAUSE (III) OF EXPLANATION 1 TO SECTION 1OAA, WHICH LAYS DOWN THAT THE EXPRESSION 'MANUFACTURE' SHALL HAVE THE SAME MEANING AS ASSIGNED T O IT IN SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005, AND SECTION 2(29BA) WERE SUBSEQUENTLY BROUGHT INTO THE STATUTE AFTER THE RENDERING OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SESA GOA 271 ITR ON THE BASIS OF CO - ORDINATE BENCH DECI DED THE CASE OF CHOWGULE & CO. EVEN THESE PROVISIONS WERE NOT IN THE STATUTE DURING THE ASSESSMENT YEAR 2002 - 03 TO WHICH YEAR THE CO - ORDINATE BENCH WAS ENTRUSTED WITH THE ISSUE OF CLAIM OF EXEMPTION U/S 10B. THE CO - ORDINATE BENCH COULD NOT HAVE ANY OCCASI ON TO CONSIDER THE SAME EVEN THOUGH THE CLAUSE (III) OF EXPLANATION 1 TO SECTION 10AA HAS ALREADY COME INTO FORCE AFTER THE DECISION OF HONBLE APEX COURT IN THE CASE OF SESA GOA LTD 271 ITR 331 WHEN THE DECISIONS WAS RENDERED BUT WAS NOT INSERTED WITH RET ROSPECTIVE EFFECT. EVEN THE PROVISION OF SECTION 2(29BA) WAS ALSO INSERTED AFTER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SESA GOA LTD(SUPRA). BOTH THESE AMENDMENTS ARE IN THE STATUTE AS ON TODAY AND ARE TO BE CONSIDERED FOR THE IMPUGNED ASSE SSMENT YEAR. THE DECISION OF SUPREME COURT IN THE CASE OF CHOWGULE & CO AS CITED BY US EARLIER WAS ALSO NOT CONSIDERED BY THE COORDINATE BENCH AS THE WORD PROCESSING WAS OMITTED IN SECTION 10B DURING THAT YEAR FOR WHICH CASE WAS DECIDED. BOTH THESE AMEN DMENTS HAVE DULY BEEN CONSIDERED BY THE SUBSEQUENT DECISION OF SPECIAL BENCH, HIGH COURT AND THE SUPREME COURT CITED BY US IN DISCUSSION HELD HERE IN ABOVE. WE NOTED THAT SUBSEQUENT TO THE DECISION OF THIS TRIBUNAL IN ITA NO. 162/PNJ/2006 DT. 12 TH JULY, 20 07, THE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. [2012 - TIOL - 424 - ITAT - KOL - SB] HAS DEALT WITH THE ISSUE EXHAUSTIBLY WHETHER THE ASSESSEES WHO ARE IN THE BUSINESS OF BLENDING OF TEA I.E PROCESSING OF TEA AND EXPORT THEREO F IN 100% EOU CAN BE SAID TO BE MANUFACTURER / PRODUCER OF TEA FOR THE PURPOSE OF SECTION 10A/10B. WHEN THE SUPREME COURT HAS ALREADY HELD IN THE CASE OF TARA AGENCIES 292 ITR 444 THAT BLENDING OF TEA IS PROCESSING. THUS, THE SPECIAL BENCH HAS DECIDED THE ISSUE IN RESPECT OF 100% EOU FOR THE PURPOSE OF EXEMPTION UNDER SECTION 10B WHETHER AN ASSESSEE WHO IS ENGAGED IN PROCESSING CAN BE SAID TO BE ENGAGED IN MANUFACTURE / PROCESSING. WE ALSO NOTED THAT KERALA HIGH COURT IN THE CASE OF TATA TEA LTD. VS. ACIT 3 38 ITR 285 DEALT WITH THE ISSUE IN RESPECT OF 100% EOU FOR THE PURPOSE OF EXEMPTION UNDER SECTION 10B WHETHER THE PROCESSING OF TEA IS TREATED AS MANUFACTURE OR PRODUCTION OF AN ARTICLE QUALIFYING FOR EXEMPTION. NOT ONLY THESE DECISIONS SUBSEQUENT TO THE D ECISION OF THE COORDINATE BENCH, SUPREME COURT HAS ALSO DECIDED FOLLOWING CASES IN WHICH ALSO, IN OUR OPINION, SIMILAR ISSUE WHETHER PROCESSING IS MANUFACTURE OR PRODUCTION HAS BEEN DECIDED. THESE DECISIONS ARE GIVEN AS UNDER: - I ) INDIA CINE AGENCIES 308 ITR 98 (SC) II ) ORACLE SOFTWARE INDIA LTD. 320 ITR 546 (SC) III ) ARIHANT TILES AND MARBLES (P) LTD. 320 ITR 79 (SC). 58 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 45.6 WE NOTED THAT IN ALL THESE DECISIONS EXCEPT IN THE CASE OF ORACLE SOFTWARE THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. SESA GOA LTD. 271 ITR 331 WAS REFERRED TO BY THE COURT. HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H) HAS OBSERVED AS UNDER ON THE RESPONSIBILITY OF THE TRIBUNAL WHILE DECIDING THE CASE: THE TRIBUNAL BEIN G THE LAST FACT - FINDING AUTHORITY, A HIGHER RESPONSIBILITY IS CAST BY THE LEGISLATURE ON IT TO DECIDE THE CASES BY RECORDING COMPLETE FACTS AND ASSIGNING COGENT REASONS. IT IS THE DUTY OF THE TRIBUNAL TO DECIDE THE CASES ON THE BASIS OF THE LAW LAID DOWN BY THE SUPREME COURT/HIGH COURT AND NOT WHAT THE TRIBUNAL DECIDES ON THE PARTICULAR ISSUE. EVERY EFFORT MUST BE MADE BY THE TRIBUNAL TO DECIDE THE ISSUE BY TAKING HELP FROM THE DECISIONS OF THE SUPREME COURT AND IF THERE IS NO DIRECT AUTHORITY OF THE SUPR EME COURT ON THE POINT THEN OF THE JURISDICTIONAL HIGH COURT AND LASTLY OF ANY OTHER HIGH COURT. 45.7 WE NOTED THAT THE COORDINATE BENCH IN THE CASE OF CHOWGULE & CO. LTD. ITA NO. 162/PNJ/2006 DECIDED THE ISSUE ONLY ON THE BASIS OF THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. GEM INDIA MANUFACTURING CO. 249 ITR 307, WHILE THE SAID DECISION HAS NOT BEEN FOLLOWED BY THE SUPREME COURT IN THEIR SUBSEQUENT D ECISIONS. EVEN THE CASE RELATE TO A.Y.2002 - 03. NO CONTRARY DECISION SUBSEQUENT TO THE DECISION OF THE SPECIAL BENCH, KERALA HIGH COURT AND THAT OF THE SUPREME COURT RENDERED IN THE CASE OF INDIA CINE AGENCY (SUPRA) AS WELL AS ARIHANT TILES & MARBLES (SUPRA ) WAS BROUGHT TO OUR KNOWLEDGE WHICH MAY HAVE TAKEN A DIFFERENT VIEW THAT 100% EOU APPROVED BY THE COMPETENT AUTHORITY IF ENGAGED IN PROCESSING ACTIVITY FOR UPGRADING A COMMODITY FOR THE PURPOSE OF MARKETABILITY FOR EXPORT WOULD NOT BE ALLOWED EXEMPTION U/ S 10B. THE LD. SPECIAL COUNSEL EVEN COULD NOT BRING TO OUR KNOWLEDGE ANY DECISION SUBSEQUENT TO THE DECISION OF THE SPECIAL BENCH AND ARIHANT TILES & MARBLES (SC) AS WELL AS KERALA HIGH COURT IN THE CASE OF TATA TEA (SUPRA) WHICH WOULD HAVE DISALLOWED THE CLAIM OF THE ASSESSEE U/S 10B ON THIS BASIS AFTER CONSIDERING THE EXPLANATION (III) OF SECTION 10AA AS WELL AS DEFINITION GIVEN U/S 2(29BA). THUS, DUE TO THE DECISION RENDERED BY THE SPECIAL BENCH, HIGH COURTS AND SUPREME COURT SUBSEQUENT TO THE DATE OF OR DER IN THE CASE OF CHOWGULE & CO. LTD. VS. ACIT IN ITA NO. 162/PNJ/2006 IN OUR OPINION, THE ISSUE RAISED BY THE REVENUE IS NOT FIT TO BE REFERRED TO SPECIAL BENCH AS THE DECISIONS OF SPECIAL BENCH / HIGH COURT / SUPREME COURT ARE BINDING ON US IN PREFERENC E TO THE DECISION OF THE COORDINATE BENCH. THUS, WE HAVE IN OUR OPINION GERMANE REASON NOT TO REFER THIS ISSUE FOR CONSTITUTION OF A SPECIAL BENCH AS IN OUR OPINION EVEN IF THE SPECIAL BENCH IS CONSTITUTED THE EARLIER DECISION OF THE SPECIAL BENCH IN THE C ASE OF MADHU JAYANTI WILL BE BINDING UNTIL AND UNLESS THERE ARE SPECIAL AND GERMANE REASONS FOR CONSTITUTING A LARGE SPECIAL BENCH. WE, THEREFORE, DISMISS THE APPLICATION DT. 18/01/2013 MOVED BY THE REVENUE FOR CONSTITUTING THE SPECIAL BENCH. 45.8 NOW CO MING BACK TO THE ISSUE WHETHER AN ASSESSEE WHO IS ENGAGED IN PROCESSING FOR UPGRADING AND MAKING THE COMMODITY FIT FOR EXPORT AND WHICH IS A 100% EOU APPROVED BY THE COMPETENT AUTHORITY CAN BE SAID TO HAVE BEEN ENGAGED IN MANUFACTURE OR PRODUCTION OF AN A RTICLE OR THING. WE HAVE NOTED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THE SPECIAL BENCH IN THE CASE OF MADHU JAYANTI INTERNATIONAL 59 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) LTD.(SUPRA). THE RELEVANT PARAGRAPH OF THIS JUDGEMENT HAS BEEN REPRODUCED BY US IN THE PRECEDING PARAS. 45.9 IN THIS DECISION, SPECIAL BENCH HAS EXHAUSTIVELY DEALT WITH THE PROVISIONS OF SECTION 10B, SECTION 2(29BA) OF THE INCOME - TAX ACT, 1961 AND SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005; AND THE VARIOUS DECISIONS OF THE SUPREME COURT AS WELL AS THE HIGH COURT WHICH DEALT WITH THE SIMILAR ISSUE AND EVEN THE DECISION OF CHOWGULE & CO (SC) AS WAS REFERRED TO BY US IN THE PRECEDING PARAS HEREIN ABOVE. THE SPECIAL BENCH CLEARLY NOTED IN THIS DECISION, THE DECISION OF THE SUPREME COURT IN TARA AGENCIES CASE 2 92 ITR 444 IN WHICH IT WAS HELD BLENDING AND PACKING OF TEA AMOUNTS TO PROCESSING AND IS NOT MANUFACTURING OR PRODUCING OF AN ARTICLE OR THING. IN THIS DECISION THE SPECIAL BENCH ALSO NOTED THAT KERALA HIGH COURT IN THE CASE OF TATA TEA LTD. VS. ACIT 338 I TR 285 (KER.) WHICH TOOK THE VIEW THAT 100% EOU ENGAGED IN PROCESSING CANNOT BE DENIED EXEMPTION ON THE BASIS THAT THE UNITS ARE NOT ENGAGED IN MANUFACTURE OR PRODUCTION. MOREOVER, ON FACTS EXACTLY SIMILAR TO THE FACTS OF THE ASSESSEE, IN THE CASE OF CHOW GULE & CO. PVT. LTD. VS UNION OF INDIA (1981) 1 SCC 653 AIR 1981 SC 014, HONBLE SUPREME COURT WERE CONCERNED WITH THE QUESTION WHETHER THE BLENDING OF ORE, WHILST LOADING IT IN THE SHIP BY MEANS OF THE MECHANICAL ORE HANDLING PLANT, CONSTITUTED MANUFACTU RE OR PROCESSING OF ORE FOR SALE WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13 OF CENTRAL SALES TAX ACT, 1956. THE HONBLE SUPREME COURT, IN CONSTRUING THE EXPRESSION PROCESSING ALLOWED THE APPEAL OF THE ASSESSEE, IN CHOWGULE & CO. PVT. LTD. (SUPR A), HOLDING, INTER ALIA, THAT WHERE ANY COMMODITY IS SUBJECTED TO A PROCESS OR TREATMENT WITH A VIEW TO ITS DEVELOPMENT OR PREPARATION FOR THE MARKET IT WOULD AMOUNT TO PROCESSING OF THE COMMODITY WITHIN THE MEANING OF CENTRAL SALES TAX ACT, 1956. THE SP ECIAL BENCH ULTIMATELY ALLOWED EXEMPTION TO THE ASSESSEE ON THE SIMILAR ISSUE WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF BLENDING THE TEA FOR UPGRADING FOR MARKETING. THUS, IN VIEW OF THE DECISION OF THE SPECIAL BENCH AND OTHER DECISIONS DISCUSSED I N THE PRECEDING PARAGRAPHS AND THAT OF HONBLE SUPREME COURT IN THE CASE OF CHOWGULE & CO (SUPRA) AS WELL AS DEFINITION OF MANUFACTURE AS INSERTED W.E.F 1.4.2009 BY WAY OF SECTION 2 (29AB) OF THE INCOME TAX ACT AS REFERRED TO BY BOTH THE PARTIES, WE HOLD THAT ALL THE THREE 100% EOU ENGAGED IN PROCESSING SO AS TO MAKE CRUDE ORE AND WASTE I.E TAILINGS USABLE OR MARKETABLE ARE ENTITLED FOR EXEMPTION U/S 10B SUBJECT TO THE OTHER CONDITIONS FOR EXEMPTION UNDER SECTION 10B ARE BEING FULFILLED. 45.10 NOW, WE WILL DEAL WITH THE CONTENTION WHETHER THE ASSESSEE HAS SET NEW UNITS OR HAS MERELY RECONSTRUCTED THE BUSINESS WHICH WAS ALREADY IN EXISTENCE. WE NOTED THAT THE ASSESSEE HAD MADE THE FOLLOWING INVESTMENTS IN INSTALLING THE PLANT & MACHINERY IN THESE EOUS: - FIN.YEAR AMONA CHITRADURGA CODLI 1999 - 2000 9,00,78,574 2002 - 03 3,96,10,020 2005 - 06 93,84,633 (PHASE - I) 2006 - 07 35,67,257 (PHASE - II) 2008 - 09 7,03,82,158 (PHASE - III) TOTAL: 3,96,10,020 8,33,34,046 (ALL PHS) 9,00,78,574 60 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) THE CONTENTION OF THE ASSESSEE IS THAT IT HAD SET UP ALL THESE UNITS AS NEW UNITS AND HAD ALSO GOT THE APPROVAL FOR THEM FROM THE COMPETENT AUTHORITY AS 100% EOU UNITS. THE OLD MACHINERY AND PART OF OLD MACHINERIES WHEREVER USED, THE VALUE OF THESE MACHINE RIES WERE LESS THAN 20% IN EACH UNITS. THE OLD UNITS SITUATED IN AMONA, CHTRADURGA AND CODLI WERE ERODED, NON - PRODUCTIVE AND NON - ECONOMICAL. THE REVENUE HAS STRONGLY CONTENDED THAT NONE OF THESE UNITS EVEN THOUGH 100% EOU BUT WERE SETUP LONG AGO. THE ASSE SSEE HAD MERELY RENOVATED THESE UNITS DURING THE PERIOD AS CLAIMED BY THE ASSESSEE. THE REVENUE ON THE OTHER HAND ACCEPTED THAT THE ASSESSEE HAD INVESTED IN AMONA PLANT RS.3,96,10,020/ - DURING THE YEAR 2002 - 03 AND IN CHITRADURGA UNIT DURING F.Y. 2005 - 06 T O 2008 - 09 RS.8,33,34,046/ - BUT THE ASSESSEE HAD NOT SUBMITTED ANY EVIDENCE IN RESPECT OF THE INVESTMENTS MADE IN THE CODLI UNIT AND IN WHICH YEAR. WE NOTED THAT CIT(A) IN HIS APPELLATE ORDER AT PAGE NOS. 48 - 50 HAS GIVEN DEPRECIATION CHARTS IN RESPECT OF PLANT & MACHINERY PREVIOUSLY USED AT AMONA PLANT. LIKEWISE, AT PAGE NOS. 65 - 66 SIMILAR CHARTS IN RESPECT OF CHITRADURGA UNIT HAVE BEEN GIVEN. COLUMN ADDITIONS HAS BEEN LEFT BLANK. THESE CHARTS HAVE BEEN COMPILED BY THE CIT(A) OR BY THE DEPARTMENT. THIS G IVES AN IMPRESSION AS IF NO ADDITION TO PLANT & MACHINERY HAD BEEN MADE DURING THE FINANCIAL YEARS CONCERNED IN THESE PLANTS BY THE ASSESSEE WHILE WE VERIFIED FROM PAGE 45 TO 58 OF FIRST PB THAT THERE ARE ADDITIONS IN THE PLANT AND MACHINERY OF THE UNITS. THIS FACT IS ALSO VERIFIABLE FROM THE MINUTES OF THE BOARD MEETING AND SCHEDULE OF FIXED ASSETS FORMING PART OF THE BALANCE SHEET FOR THE RESPECTIVE FINANCIAL YEARS, WHICH WERE DULY AUDITED. THE ASSESSEE PRODUCED THE FOLLOWING DOCUMENTS IN SUPPORT OF THE F RESH CAPITAL INVESTMENT MADE BY IT IN ACQUISITION OF PLANT & MACHINERY FOR ITS EOUS IN EACH RELEVANT FINANCIAL YEAR: I . MINUTES OF THE MEETINGS OF BOARD OF DIRECTORS OF THE APPELLANT - COMPANY APPROVING CAPITAL EXPENDITURE AT AMONA AND CHITRADURGA PLANTS AT PA GE NOS. 696, 699 - 700 & 702 OF THE PAPER BOOK. II . PHOTOGRAPHS OF PANTS AT AMONA & CHITRADURGA EOUS AT PAGE NOS. 704 - 713 OF THE PAPER BOOK. III . YEAR - WISE TABLES OF PLANT & MACHINERY CAPITALIZED FOR (A) AMONA EOU FOR THE FYS 2002 - 03 TO 2008 - 09 (AT PAGE NOS. 45 - 48 OF THE PAPER BOOK), (B) CHITRADURGA EOU FOR THE FYS 2005 - 06 TO 2008 - 09 (AT PAGE NOS. 54 - 55 OF THE PAPER BOOK), AND (C) CODLI EOU FOR THE FYS 1999 - 2000 TO 2008 - 09 (AT PAGE NOS. 38 - 40 OF THE PAPER BOOK). IV . AUDITED ANNUAL ACCOUNTS OF THE APPELLANT - COMP ANY FOR THE FINANCIAL YEARS ENDED ON 31/03/2003, 31/03/2006, 31/03/2007 AND 31/03/2009 AT PAGE NOS. 91 - 632 OF THE ADDITIONAL PAPER BOOK. V . COPIES OF BILLS OF PLANT & MACHINERY ITEMS WERE SUBMITTED IN RESPECT OF THE EOUS AS UNDER: 61 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) ( A ) AMONA EOU FOR RS. 3,57,03,426/ - OUT OF TOTAL INVESTMENT OF RS. 3,96,10,020/ - AT PAGE NOS. 794 - 1146 AND 1378 - 1435 OF THE ADDITIONAL PAPER BOOKS. ( B ) CHITRADURA EOU FOR RS. 8,18,50,910/ - OUT OF TOTAL INVESTMENT OF RS. 8,33,34,046/ - AT PAGE NOS. 1147 - 1355 AND 1436 - 147 2 OF THE ADDITIONAL PAPER BOOKS. 45.11 THESE EVIDENCES CLEARLY PROVE, IN OUR OPINION, THAT THE ASSESSEE MADE HUGE INVESTMENTS IN THESE UNITS. EVEN THE ASSESSEE SUBMITTED THE EVIDENCES FOR SELLING THE OLD AND OBSOLETE DISMANTLED MACHINES AS SCRAP SALES. WE DO AGREE THAT THE ASSESSEE HAD NOT REDUCED THE BLOCK OF ASSETS WITH THESE AMOUNTS BUT THIS IN OUR OPINION WILL NOT CHANGE THE TRUE CHARACTER OF THE TRANSACTION. WE FIND FORCE IN THE SUBMISSION OF THE ASSESSEE THAT IN THE CASE OF AMONA EOU, OLD UNIT SE T - UP IN 1985 HAD BECOME OUTDATED, OBSOLETE, EVEN DANGEROUS AND UNECONOMICAL TO RUN AFTER A SPAN OF 17 YEARS. THEREFORE, THE ASSESSEE HAD TO TAKE AN IMMEDIATE ACTION TO EITHER ABANDON IT OR REVAMP IT ENTIRELY. THIS FACT IS ALSO PROVED WITH THE FACT THAT THE PRODUCTION CAPACITY OF THIS PLANT WHICH WAS 1 MTPA EARLIER GOT DOUBLED AT 2 MTPA COUPLED WITH FURTHER FLEXIBILITY CREATED TO INCREASE IT MORE IN FUTURE AFTER SETTING UP NEW UNIT. THE NEWLY INCREASED PRODUCTION CAPACITY HAD NOT BEEN DENIED BY THE REVENUE. THE COST OF NEW PLANT AND MACHINERY FOR ALL MAJOR / CRITICAL PROCESSES AND CIVIL STRUCTURES FOR THOSE PLANTS AMOUNTED TO RS. 3,96,10,020/ - DURING THE FY 2002 - 03, WHEREAS THE WDV OF THE OLD PLANT USED IN THE NEW UNDERTAKING WAS JUST RS. 26,17,714/ - , WHICH IS A MERE 6.7% OF THE COST OF NEW PLANT & MACHINERY, I.E., WITHIN THE PERMISSIBLE LIMIT OF 20%. THE CIT(A), IN OUR OPINION, WAS NOT CORRECT IN COMPARING THE NUMBER OF MACHINES AND EQUIPMENTS INSTALLED IN MINING DIVISION TO BE PART OF OLD PLANT AND MACHIN ERY INSTALLED IN 100% EOU UNITS WHEN IN FACT MINING DIVISION IS NOT PART OF 100% EOU AS PER THE APPLICATION MADE BY THE ASSESSEE AND THE APPROVAL ALLOWED BY THE COMPETENT AUTHORITIES TO ASCERTAIN WHETHER SUBSTANTIAL EXPANSION HAD TAKEN PLACE IN THE FY 20 02 - 03 AT AMONA PLANT OR NOT. SIMILARLY, WE FIND FORCE IN THE SUBMISSIONS OF THE LD. AR IN THE ABSENCE OF ANY CONTRARY EVIDENCE THAT THE PRESENT UNIT IN CHITRADURGA, KARNATAKA WAS INITIALLY SET - UP AND RUN BY A COMPANY CALLED M/S A. NARRAIN MINES LTD. THE S AID COMPANY WAS ACQUIRED BY THE ASSESSEE - COMPANY IN THE FY 1998 - 99 AND IT WAS LATER MERGED INTO THE ASSESSEE - COMPANY. THE EXISTING PLANT IN THE SAID UNIT WAS QUITE OLD AND HAD BECOME INEFFICIENT DUE TO THE COMPLETION OF ITS ECONOMIC LIFE. THE ASSESSEE UNDE RTOOK A PROJECT TO SET UP A NEW UNDERTAKING DURING THE FY 2005 - 06 IN A PHASED MANNER TO INCREASE THE CAPACITY BY EMPLOYING LATEST TECHNOLOGY/FACILITY IN PLACE OF EXISTING PRODUCTION FACILITY. THE ASSESSEE APPLIED TO THE KARNATAKA STATE POLLUTION CONTROL BO ARD VIDE ITS APPLICATION DATED 09/09/2005 FOR ITS CONSENT FOR ESTABLISHMENT UNDER THE WATER AND AIR ACTS FOR EXPANSION OF IRON ORE MINING CAPACITY FROM 1.6 MTPA TO 2.5 MTPA. SUBSEQUENTLY, THE MANAGEMENT OF THE COMPANY ALSO UNDERWENT A CHANGE FROM MITSUI GR OUP WITH M/S VEDANTA GROUP. DUE TO THIS EXPANSION/ESTABLISHMENT PROJECT COULD BE COMPLETED DURING THE FY 2008 - 09 IN THREE PHASES HAVING A TOTAL PRODUCTION CAPACITY OF 6 MTPA. THE INVESTMENTS WERE MADE IN A PHASED MANNER WHICH RESULTED IN CREATION OF NEW UN IT IN PLACE OF THE EXISTING UNIT. IN THE FY 2005 - 06, I.E., THE INITIAL YEAR FOR THE PURPOSE OF SECTION 10B, TOTAL INVESTMENT OF RS. 93,84,633/ - WAS MADE IN ACQUISITION OF NEW PLANT & MACHINERY INCLUDING DISMANTLING OF THE OLD PLANT & STRUCTURES. THE PHASE - II OF PROJECT ESTABLISHMENT WAS COMPLETED NEXT YEAR, I.E., FY 2006 - 07 IN WHICH FRESH CAPITAL INVESTMENT OF RS. 35,67,257/ - WAS MADE IN PLANT & MACHINERY. FINALLY THE THIRD PHASE OF NEW PLANT WAS COMPLETED IN THE FY 2008 - 09 WITH AN ADDITION OF RS.7,03,82,15 8/ - TO PLANT & MACHINERY. THE WDV AS ON 01/04/2005 OF 62 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) THE PLANT & MACHINERY AT CHITRADURGA WAS JUST RS.6,93,596/ - WHICH WAS EITHER DISMANTLED COMPLETELY OR WHEREVER STRUCTURAL STEEL WAS USABLE IT WAS UTILIZED IN THE ERECTION OF NEW MACHINERY. THE COST OF NEW MACHINERY ACQUIRED IN FY 2005 - 06 WAS RS. 93,84,633/ - . THUS, THE VALUE OF PLANT & MACHINERY EXISTING AS ON 01/04/2005 WAS MERELY 7.4% OF THE COST OF NEW PLANT & MACHINERY; WHICH IS ALSO WITHIN THE PERMISSIBLE LIMIT. THE ACCOUNTS BOOKS IN THAT YEAR WERE DULY AUDITED AND WERE NOT REJECTED BY THE ASSESSING OFFICER IN THOSE ASSESSMENT YEARS. NOW COMING TO CODLI UFR UNIT, WE NOTED THAT NEITHER THE ASSESSING OFFICER NOR THE CIT (APPEALS) HAS DISPUTED THE CAPITAL INVESTMENT MADE IN NEW PLANT & MACHINERY IN THE FY 1999 - 2000, THEY HAVE MERELY EXPRESSED THEIR DISSATISFACTION ON THE EVIDENCES FURNISHED BY THE ASSESSEE IN RESPECT OF THE DATE OF COMMENCEMENT OF MANUFACTURING OR PRODUCTION, WHICH WAS STATED AS 08/03/2000 BY THE ASSESSEE ON THE STRENGTH OF DOCUMENTARY EVIDENCES SUCH AS THE APPROVAL FROM THE BOARD OF APPROVALS, INTIMATION OF COMMENCEMENT OF COMMERCIAL PRODUCTION ON 08/03/2000 TO THE MINISTRY OF INDUSTRIES, ETC., WHICH HAVE DISCUSSED SEPARATELY IN THIS ORDER BY US. THE MAIN CONTENTIONS OF THE REVENUE BEFO RE US ARE AS UNDER: - ( I ) THAT ALL OLD MACHINES WERE NOT REPLACED SINCE THERE WAS NO DELETION IN THE BOOK VALUE OF THE EXISTING PLANT SHOWN IN THE DEPRECIATION CHARTS FOR THE CONCERNED YEARS. ( II ) THAT BY CARRYING OUT REPAIRS A NEW UNIT IS NOT SET - UP. IN THE CASE OF CHITRADURGA UNIT, SOME BILLS WERE FOUND FOR UNDERTAKING FABRICATION, ERECTION AND OTHER SUCH WORKS WHICH APPEAR TO BE REVENUE IN NATURE AND NOT CAPITAL IN NATURE. ( III ) THAT IN THE CASE OF AMONA PLANT, CORRESPONDENCE WITH VILLAGE PANCHAYAT SHOWS THAT THE CO NSTRUCTION ACTIVITIES WERE ACTUALLY IN THE NATURE OF REPAIRS AND RENOVATION. ( IV ) THAT THE ASSESSEE HAD INCORRECTLY CLAIMED THAT THE ENTIRE EXISTING PLANT AT CHITRADURGA WAS DEMOLISHED IN THE FY 2005 - 06 ITSELF, WHEREAS ONLY ONE BILL OF RS. 3,522/ - CONTAINED DE MOLITION OR DISMANTLING CHARGES. ( V ) THAT FOR DETERMINING THE PERCENTAGE OF OLD EQUIPMENT USED IN THE NEW UNIT, EVEN THE ASSETS HELD AT THE EXTRACTION UNITS MUST BE TAKEN INTO CONSIDERATION. ( VI ) THAT YEAR - WISE PRODUCTION DATA OF CHITRADURGA UNIT SHOWS THAT THE P RODUCTION INCREASED WITHOUT NEW INVESTMENT IN PLANT & MACHINERY. MOREOVER, NO MAJOR PLANT & MACHINERY WAS INSTALLED AT CHITRADURGA AS COULD HELP IN INCREASING THE PRODUCTION CAPACITY. 45.12 ACCORDING TO REVENUE, ALL OLD MACHINES WERE NOT REPLACED SINCE THERE WAS NO DELETION IN THE BOOK VALUE OF THE EXISTING PLANT SHOWN IN THE DEPRECIATION CHARTS FOR THE CONCERNED YEARS. CIT(A) HAS COMPLIED CHARTS IN RESPECT OF AMONA AND CHITRADURGA UNITS IN H IS APPELLATE ORDER. IN THIS REGARD THE LD. AR EXPLAINED THE BASIC COST OF PLANT & MACHINERY IN THE CASE OF AN IRON ORE BENEFICIATION PLANT IS INCURRED ON RAISING STEEL AND CONCRETE STRUCTURES ON WHICH THE CONVEYOR BELTS, CRUSHERS, SCREENS, ETC. ARE INSTALL ED. THOUGH ALL EXISTING ITEMS OF MACHINE WERE SCRAPPED USABLE STEEL FROM THE SAME WAS UTILIZED IN THE ERECTION OF NEW MACHINES AND EQUIPMENTS FOR WHICH ONLY SOME ADDITIONAL CHARGES WERE PAID. THUS, THE EXISTING DISMANTLED STRUCTURE GOT MERGED 63 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) WITHIN THE NE W PLANT TO THAT EXTENT. ACCORDINGLY, INSTEAD OF DELETING THE RELATABLE VALUE OF EXISTING PLANT, THE COST OF ADDITIONAL PLANT ACQUIRED DURING THE YEAR WAS RECORDED AT NET VALUE. ALSO THE SCRAP OF THE REMAINING EXISTING PLANT WAS SOLD AND SHOWN SEPARATELY I N THE RELEVANT AUDITED PROFIT & LOSS ACCOUNT FOR THE CONCERNED FINANCIAL YEAR UNDER THE HEAD SERVICE AND OTHER PROCEEDS FOR WHICH ATTENTION WAS DRAWN TO P & L ACCOUNT AND ACCORDINGLY THESE MEAGER SUMS WERE NOT REDUCED FROM THE SCHEDULE OF FIXED ASSETS. I N THIS REGARD, OUR ATTENTION WAS DRAWN TO SCHEDULE 14 OF THE PROFIT & LOSS ACCOUNT FOR THE YEARS ENDED ON 31/03/2003 AND 31/03/2006 AND ALSO THE BREAK - UP OF SERVICE AND OTHER PROCEEDS PROVIDED AT PAGE NOS. 1356 AND 1365 OF THE PAPER BOOK FOR THE SAID TWO FINANCIAL YEARS RESPECTIVELY. GROSS RECEIPT FROM SALE OF SCRAP FOR GOA (AMONA UNIT) AMOUNTING TO RS. 71,41,971/ - WAS DECLARED IN THE FY 2002 - 03; AND THAT OF RS. 4,67,163/ - WAS DECLARED FOR THE YEAR ENDED ON 31/03/2006 IN RESPECT OF KARNATAKA (CHITRADURGA UNIT). WE FIND SUBSTANCE IN THE EXPLANATION OF THE LD. AR THAT THE SAID CONTENTION OF THE REVENUE DOES NOT, THEREFORE, HOLD GOOD IN OUR OPINION. OTHERWISE ALSO, WE HAVE NOTED THAT THE VALUE OF THE EXISTING PLANT WAS MUCH BELOW THE THRESHOLD LIMIT OF 20% RE QUIRED FOR SUBSTANTIAL INVESTMENT FOR SETTING - UP OF A NEW UNIT FOR THE PURPOSE OF SECTION 10B. 45.13 WITH REGARD TO THE CONTENTION OF THE REVENUE THAT IN THE CASE OF CHITRADURGA UNIT, SOME BILLS WERE FOUND FOR UNDERTAKING FABRICATION, ERECTION AND OTHER S UCH WORKS WHICH APPEAR TO BE REVENUE IN NATURE AND NOT CAPITAL IN NATURE. WE NOTED THE EXPLANATION OF THE LD. AR THAT THE ASSESSMENTS FOR THE AYS 2006 - 07 AND 2007 - 08 HAD BEEN FRAMED U/S 143(3) WHERE DEPRECIATION VIS - - VIS CAPITAL EXPENDITURE (FIXED ASSETS) HAD DULY BEEN EXAMINED BY THE AOS AND EVEN SOME DISALLOWANCES HAD BEEN MADE IN RESPECT OF DEPRECIATION ON ASSETS OTHER THAN PLANT & MACHINERY, WHICH WAS NOT DISTURBED, HENCE, ACCEPTED AS CORRECT BY THE AOS. THE COPIES OF THE SAID ASSESSMENT ORDERS WERE FU RNISHED. THUS, WHEN THE FACTUM OF CAPITAL INVESTMENT IN PLANT & MACHINERY IN THOSE YEARS STOOD ACCEPTED BY THE DEPARTMENT, IT IS BEYOND THE JURISDICTION OF THE FIRST APPELLATE AUTHORITY TO TRAVEL BACK TO THE COMPLETED ASSESSMENTS AND HOLD OTHERWISE. MOREOV ER, THESE BILLS SUPPORT THE EXPLANATION OF THE ASSESSEE THAT IT HAD PAID FABRICATION AND OTHER SUCH CHARGES FOR REUSING THE EXISTING STEEL AND CONCRETE STRUCTURES WHEREVER POSSIBLE IN THE PROCESS OF ERECTING ITS NEW PLANTS. WE FIND NO FAULT WITH THE EXPLAN ATION OF THE LD. AR AND THEREFORE DO NOT AGREE ON THIS WITH THE AUTHORITIES BELOW. 45.14 WE HAVE EXAMINED THE CONTENTION OF THE REVENUE THAT IN THE CASE OF AMONA PLANT, CORRESPONDENCE WITH VILLAGE PANCHAYAT SHOWS THAT THE CONSTRUCTION ACTIVITIES WERE ACTU ALLY IN THE NATURE OF REPAIRS AND RENOVATION. THE CIT(A) HAD REFERRED TO ONLY A FEW CORRESPONDENCE EXCHANGED WITH PANCHAYAT TO MAKE A CASE THAT IT WAS ONLY SOME REPAIRS OR AT BEST A RENOVATION WORK UNDERTAKEN AT AMONA, WHEREAS SEVERAL OTHER PIECES OF CORRE SPONDENCE WERE IGNORED BY HIM WHICH PROVE THAT THE APPELLANT HAD FACTUALLY UNDERTAKEN A MAJOR DISMANTLING AND DEMOLITION OF THE EXISTING PLANT AS WELL AS ERECTION AND INSTALLATION OF NEW PLANT IN ITS PLACE THERE. FROM THE CORRESPONDENCE EXCHANGED WITH PANC HAYAT AND NEWSPAPER CLIPPINGS FILED IN PB (PAGES 293,294,299 & 409 - 411), WE NOTED THE CIT(A) IGNORED THE LOCAL NEWSPAPER CLIPPINGS WHICH IN OUR OPINION ARE VITAL PIECE OF EVIDENCE IN THIS REGARD. THESE CLIPPINGS CLEARLY BRING OUT THE FACT THAT A COMPLETE D ESTRUCTION OF OLD UNIT WAS DONE AND ALTOGETHER NEW PLANT WAS SET - UP AT AMONA, ALBEIT, WITH THE AID OF SOME OLD MACHINERY AND PARTS THEREOF. REGARDING 64 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) THE CONTENTION OF THE REVENUE THAT THERE IS ONLY ONE BILL OF RS.3,522/ - WHICH CONTAINS DEMOLITION OR DISMA NTLING CHARGES, WE NOTED THAT IN THE SAME BILL RS. 65,346/ - AND RS. 79,060/ - AT SL. NOS. 13 & 14 FOR DISMANTLING OF STRUCTURAL STEEL AND CRUSHER HOPPER RESPECTIVELY WERE ALSO STATED (PAGE NOS. 1443 - 1445 OF THE ADDITIONAL PAPER BOOK VOL.III). IN THE CASE O F THE ASSESSEE WE NOTED AND AS HAS BEEN ACCEPTED BY THE REVENUE ITSELF THAT THE EXTRACTION DIVISION AND EOU UNITS ARE ENTIRELY DIFFERENT, AND THE DISPUTE BEFORE US RELATE ONLY TO THE EOU UNITS WHETHER THEY ARE NEW OR NOT, THEREFORE IN OUR VIEW, REVENUE IS NOT CORRECT IN ADDING THE VALUE OF THE EXTRACTION DIVISION FOR DETERMINING 20% THRESHOLD LIMIT OF OLD PLANT AND MACHINERY FOR ESTABLISHING THE NEW UNIT. ON THE ONE SIDE, THE REVENUE IS TAKING THE CONTENTION THAT EXTRACTION DIVISION IS NOT THE PART OF 100% EOU, THEREFORE THE ASSESSEES EOU UNITS CANNOT BE REGARDED TO HAVE BEEN ENGAGED IN EXTRACTION OF ORE AND IRON ORE PROCESSING, ON THE OTHER HAND, WHILE DETERMINING THE THRESHOLD LIMIT OF 20% OF OLD PLANT AND MACHINERY, THE REVENUE CANNOT BE PERMITTED TO TA KE A CONTRARY CONTENTION. WE ARE OF THE FIRM VIEW THAT WHILE DETERMINING THE ELIGIBILITY OF A PARTICULAR UNIT U/S 10B, ITS ONLY THE VALUE OF OLD PLANT AND MACHINERY INSTALLED IN THAT VERY UNIT WILL BE CONSIDERED FOR DETERMINING THE THRESHOLD LIMIT OF 20%. THUS, THIS CONTENTION OF THE REVENUE STAND DISMISSED. PRODUCTION DATE SUBMITTED BY THE ASSESSEE ON RECORD CLEARLY PROVE THAT THE PRODUCTION IN EACH OF THESE UNITS GOT SUBSTANTIALLY INCREASED AS COMPARED TO THE PRODUCTION IN THE OLD UNITS DISMANTLED OR DISC ARDED. THERE IS NO COGENT EVIDENCE OR MATERIAL BEING BROUGHT ON RECORD BY THE REVENUE WHICH MAY PROVE THAT THE OLD UNIT REMAINS IN EXISTENCE MERELY BY RECONSTITUTING THE SAME. 45.15 WE HAVE GONE THROUGH THE VARIOUS CASES RELIED ON BEFORE US. THESE CASES LAID DOWN AS UNDER: - ( I ) CIT VS. MAHAAN FOODS LTD. (2009) 177 TAXMAN 274 (DEL) : (2008) 216 CTR (DEL) 148: 12. AS PER FINDINGS OF FACT RECORDED BY THE TRIBUNAL, IT HAS BEEN STATED THAT IN THE PRESENT CASE THE OLD UNDERTAKING NO LONGER EXISTED AND REMAINED IDENTIFIABLE. IT WAS COMPLETELY SUBMERGED IN THE NEW INDUSTRIAL UNDERTAKING OF THE ASSESSEE. THE PROVIS IONS OF SECTION 80IA OF THE ACT WITH REFERENCE TO EXPLANATION 2 DO NOT REQUIRE THAT NEW INDUSTRIAL UNDERTAKING SHOULD BE RAISED ON SEPARATE PLOT OF LAND LEAVING THE EARLIER UNDERTAKING TOTALLY UNTOUCHED. WE FIND THAT THE PROCESSES FOR WHICH THE ASSESSEE E NTERED INTO TECHNOLOGICAL COLLABORATIONS WITH M/S ROTACOM INDUSTRIES, B.V., NETHERLANDS AND M/S SEPPO RALLI OY, FINLAND WERE THE KEY PROCESSES OF THE ASSESSEES INDUSTRIAL UNDERTAKING AND OTHER PROCESSES SUCH AS STORAGE OF MILK IN STAINLESS STEEL STORAGE T ANKS, PRE - WARMING, PRE - HEATING, PASTEURIZATION WERE ONLY OF PREPARATORY NATURE FOR THE MANUFACTURING OF THE PRODUCT OF THE ASSESSEE. THE ASSESSEE APPEARS TO HAVE INTRODUCED ALMOST ENTIRELY NEW MANUFACTURING TECHNOLOGY AND PROCESSES. 13. THE RECONSTRUCTIO N OF A BUSINESS OR AN INDUSTRIAL UNDERTAKING MUST NECESSARILY INVOLVE THE CONCEPT THAT THE ORIGINAL BUSINESS OR UNDERTAKING IS NOT TO CEASE FUNCTIONING, AND ITS IDENTITY IS NOT TO BE SET TO BE LOST OR ABANDONED. THE 65 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) CONCEPT ESSENTIALLY RESTS ON CHANGES BU T THE CHANGES MUST BE CONSTRUCTIVE AND NOT DESTRUCTIVE. THERE MUST BE SOMETHING POSITIVE ABOUT THE WHOLE MATTER AS OPPOSED TO NEGATIVE. THE UNDERLYING IDEA OF A RECONSTRUCTION EVIDENTLY MUST BE - AND THIS IS BROUGHT OUT BY THE SECTION ITSELF - OF A 'BUSINE SS ALREADY IN EXISTENCE'. THERE MUST BE A CONTINUATION OF THE ACTIVITIES AND BUSINESS OF THE SAME INDUSTRIAL UNDERTAKING. THE UNDERTAKING MUST CONTINUE TO CARRY ON THE SAME BUSINESS THOUGH IN SOME ALTERED OR VARIED FORM. IF THE ALTERATION AND CHANGES ARE SUBSTANTIAL, THERE WOULD BE LITTLE SCOPE FOR DESCRIBING WHAT EMERGES AS A RECONSTRUCTION OF THE BUSINESS. (SEE CIT V. GAEKWAR FOAM AND RUBBER CO. LTD. [1959] 35 ITR 662 [BOM.] 14. FROM THE PERUSAL OF SECTION 80 - IA OF THE ACT IT IS CLEAR THAT THE STATUTE ITSELF HAS ENVISAGED AND APPROVED OF A SITUATION IN WHICH AN OLD EXISTING SMALLER INDUSTRIAL UNDERTAKING IS ABSORBED BY A NEW MUCH BIGGER INDUSTRIAL UNDERTAKING. 15. IN THE PRESENT CASE, ONLY CAPACITY WAS INCREASED AND THERE WAS EXPANSION OF OLD BUSINESS WITH SOME MODIFICATIONS. AS FOR RECONSTRUCTION OF THE BUSINESS, IT IS NOWHERE EVIDENT THAT THE OLD INDUSTRIAL UNIT WAS SPLIT UP OR DAMAGED OR DESTROYED THAT WAS SUPPOSED LY RECONSTRUCTED AS A NEW UNIT BY THE ASSESSEE. WHAT THE ASSESSEE HAS DONE IS TO SET UP AN INDUSTRIAL UNDERTAKING WITH LATEST TECHNOLOGY AND WITH INCREASED CAPACITY AND OF COURSE, WITH A FAIRLY GOOD AMOUNT OF FRESH INVESTMENT. ( II ) METTUR CHEMICALS & INDUSTRI AL CORPORATION LTD. VS. CIT (1996) 217 ITR 768 (SC) 11. IT IS FOUND AS A FACT THAT THE APPELLANT HAD BEGUN TO MANUFACTURE OR PRODUCE ARTICLES IN THE PREVIOUS YEAR ENDED ON 31 - 3 - 1957 WITH THE HELP OF THIRTY HOOKER CELLS. IT IS TRUE THAT RECTIFIER HAD NOT BEEN INSTALLED IN THE YEAR 1957 - 58 BUT IT IS NOT IN DISPUTE THAT WITH SUITABLE ADJUSTMENT BEING MADE TO THE POWER SYSTEM, THE THIRTY HOOKER CELLS WHICH HAD BEEN INSTALLED WERE UTILISED. THE USE OF THESE NEW HOOKER CELLS HAD RESULTED IN THE CAPACITY OF THE UNIT GRADUALLY INCREASING AND THE PRODUCTION SO MADE WAS NOT EXPERIMENTAL BUT WAS COMMERCIAL. THIS BEING SO, THE APPELLANT'S UNDERTAKING MUST BE REGARDED AS HAVING BEEN NEWLY ESTABLISHED WHEN IT HAD BEGUN TO MANUFACTURE OR PRODUCE ARTICLES BY 31 - 3 - 1957. AS 1957 - 58 WAS THE FIRST ASSESSMENT YEAR 13. THIS IS A CASE WHERE THE MANUFACTURING CAPACITY OF THE APPELLANT WAS INCREASED ON A LICENCE BEING GRANTED FROM 13.5 TONS PER DAY TO 20 TONS PER DAY. IN OTHER WORDS, THESE HOOKER CELLS WERE INSTALLED AND THE BILLETER CELLS WERE GRADUALLY REPLACED. THE NEW INDUSTRIAL UNDERTAKING CAME INTO EXISTENCE WHEN THE INITIAL LOT OF THIRTY HOOKER CELLS WERE INSTALLED IN THE YEAR 1957 - 58 WHICH HAD RESULTED IN ENHANCED COMMERCIAL PRODUCTION. THE TRIBUNAL AND THE HIGH COURT, IN OUR OPINION, RIGHTLY CAME TO THE CONCLUSION THAT THE UNDERTAKING COULD FUNCTION WITH THIRTY HOOKER CELLS IN THE YEAR 1957 - 58 AND FURTHER NUMBERS WERE ADDED IN 66 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) THE SUBSEQUENT YEAR. THE UNDERTAKING HAVING THUS STARTED, THE COMMERCIAL MANUFACTURE IN THE Y EAR 1957 - 58 COULD NOT CLAIM THE BENEFIT OF PROVISIONS OF SECTION 84 OF THE ACT BECAUSE THE UNIT AS SUCH HAD COMMENCED IN THE YEAR 1957 - 58 NOTWITHSTANDING THE FACT THAT THERE HAD BEEN AN EXPANSION THERETO IN THE SUBSEQUENT YEAR. ( III ) TAURUS MERCHANDISING (P) L TD. VS. ITO (2012) 143 TTJ (DEL) 1 16. IN JT. CIT VS. ASSOCIATED CAPSULES (P) LTD. (2008) 117 TTJ (MUMBAI) 399 : (2008) 9 DTR (MUMBAI)(TRIB) 95 : (2008) 304 ITR 85 (MUMBAI)(AT), IT HAS BEEN HELD THAT WHERE THE ASSESSEE HAD ESTABLISHED NEW PLANT AND MACH INERY AT THE SAME PREMISES AND WAS PRODUCING THE SAME PRODUCT AS THAT DONE BY THE EXISTING BUSINESS, THE NEW UNITS WERE HAVING SEPARATE AND DISTINCT IDENTITY OF THEIR OWN, PROFITS AND GAINS WERE DERIVED FROM THEM AND THE ASSESSEE WAS TREATING EACH UNIT AS A SEPARATE AND INDEPENDENT UNIT IN ITS ACCOUNTS, THE NEW UNITS COULD NOT BE HELD TO BE PART OF THE EXISTING BUSINESS; AND THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SS. 80 - I AND 80 - IA OF THE ACT. 17. FURTHER, THE EXISTENCE OF BUSINESS IS A PRESUP POSITION FOR THE FORMATION OF A NEW UNDERTAKING BY THE RECONSTRUCTION OR THE SPLITTING UP THEREOF. IN THE PRESENT CASE, THERE HAD BEEN NO BUSINESS IN THE OLD UNIT OF THE ASSESSEE FOR OVER FIVE YEARS BEFORE THE START OF PRODUCTION BY THE NEW EOU. THAT BEIN G SO, THE NEW EOU OF THE ASSESSEE CANNOT, IN ANY MANNER, BE SAID TO BE FORMED BY THE RECONSTRUCTION OR SPLITTING UP OF A BUSINESS ALREADY IN EXISTENCE. THEN, THE AUTHORITIES BELOW HAVE OBSERVED THAT MERE REGISTRATION AS A ONE HUNDRED PER CENT EOU IS NOT TH E SOLE CRITERION FOR GRANT OF DEDUCTION UNDER S. 10B OF THE ACT. THIS OBSERVATION ITSELF AMOUNTS TO AN ADMISSION OF THE UNIT BEING REGISTERED AS A ONE HUNDRED PER CENT UNIT WITH THE DEVELOPMENT COMMR., NEPZ. EXPLANATION 2(IV) TO S. 10B OF THE ACT PROVIDE S FOR A ONE HUNDRED PER CENT EOU TO MEAN AN UNDERTAKING WHICH HAS BEEN APPROVED AS A ONE HUNDRED PER CENT EOU BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFERRED BY S. 14 OF THE INDUSTRIES (DEVELOPMENT AND RE GULATION) ACT, 1951 AND THE RULES MADE THEREUNDER. FOR FACILITY, THE SAID EXPLN. 2(IV) TO S. 10B IS BEING REPRODUCED AS FOLLOWS: - 'HUNDRED PER CENT EXPORT - ORIENTED UNDERTAKING' MEANS AN UNDERTAKING WHICH HAS BEEN APPROVED AS A HUNDRED PER CENT EXPORT - ORIE NTED UNDERTAKING BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFERRED BY S. 14 OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 (65 OF 1951), AND THE RULES MADE UNDER THAT ACT.' 18. THEREFORE, REGIS TRATION AS A ONE HUNDRED PER CENT EOU IS A SINE QUA NON FOR CLAIMING DEDUCTION UNDER S. 10B OF THE ACT. FURTHER, AS IS AVAILABLE FROM THE COPY OF REGISTRATION OF THE UNIT AS A ONE HUNDRED PER CENT EOU (ASSESSEE'S PAPER BOOK 71 TO 74), THE UNIT WAS DULY AP PROVED BY THE BOARD APPOINTED IN THIS 67 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) BEHALF BY THE CENTRAL GOVERNMENT. IN TUBE INVESTMENTS OF INDIA LTD. VS. ASSTT. CIT (2009) 121 TTJ (CHENNAI)(TM) 577 : (2009) 20 DTR (CHENNAI)(TM)(TRIB) 244 : (2009) 117 ITD 239 (CHENNAI)(TM), IT HAS BEEN HELD THAT A O NE HUNDRED PER CENT EOU, AS PER EXPLN. 2(IV) TO S. 10B MEANS AN UNDERTAKING APPROVED AS A ONE HUNDRED PER CENT EOU BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFERRED BY S. 14 OF THE INDUSTRIES (DEVELOPMENT A ND REGULATION) ACT, 1951 AND THE RULES FRAMED UNDER THAT ACT; AND THAT IT WAS NOT THE CASE OF THE DEPARTMENT THAT APPROVAL AS REQUIRED UNDER THE STATUTE HAD NOT BEEN ACCORDED TO THE ASSESSEE ( IV ) GUJARAT ALKALIES AND CHEMICALS LTD. VS. CIT (2012) 249 CTR (GU J.) 82 IN THE PRESENT CASE ALSO, IT IS NOT THE CASE OF THE REVENUE THAT THE NEW UNIT BY ITSELF IS NOT CAPABLE OF PRODUCTION OF GOODS BUT THE CASE OF THE REVENUE IS THAT IT TAKES HELP OF THE OLD EXISTING UNIT. WE ARE OF THE VIEW THAT, THAT ITSELF SHOULD NOT BE T HE REASON TO REJECT THE CLAIM UNDER SECTION 80 - I OF THE ACT. THUS, WHETHER AN UNDERTAKING IS A NEW INDUSTRIAL UNDERTAKING ENTITLED TO THE EXEMPTION UNDER SECTION 80 - I OF THE ACT DEPENDS ON THE FACTS OF EACH CASE. NO HARD AND FAST RULE CAN BE LAID DOWN. USE BY THE ASSESSEE OF THE OLD UNDERTAKING FOR THE PURPOSE OF PRODUCTION IN ITS NEW UNDERTAKING IS NOT A DECISIVE TEST IN CONSTRUING SECTION 80 - I OF THE ACT. THE NEW UNDERTAKING MUST NOT BE SUBSTANTIALLY THE SAME OLD BUSINESS. SUBSTANTIAL INVESTMENT O F NEW CAPITAL IS IMPERATIVE AND IN THE PRESENT CASE, THERE HAS BEEN A HUGE SUBSTANTIAL INVESTMENT OF AROUND RS.7 CRORE ALMOST THREE DECADES AGO. THE WORDS THE CAPITAL EMPLOYED IN THE PRINCIPAL CLAUSE OF SECTION 80 - I OF THE ACT ARE SIGNIFICANT, FOR FRESH CAPITAL MUST BE EMPLOYED IN THE NEW UNDERTAKING CLAIMING EXEMPTION. MANUFACTURE OR PRODUCTION OF ARTICLES YIELDING ADDITIONAL PROFIT ATTRIBUTABLE TO THE NEW OUTLAY OF CAPITAL IN A SEPARATE AND DISTINCT UNIT IS ESSENTIAL TO EARN THE BENEFIT OF SECTION 80 - I. THE FACT THAT AN ASSESSEE BY ESTABLISHMENT OF A NEW INDUSTRIAL UNDERTAKING EXPANDS HIS EXISTING BUSINESS WHICH HE CERTAINLY DOES, WOULD NOT ON THAT SCORE DEPRIVE HIM OF THE BENEFIT UNDER SECTION 80 - I. EVERY NEW CREATION IN BUSINESS IS SOME KIND OF EXP ANSION AND ADVANCEMENT. THE TRUE TEST IS NOT WHETHER THE NEW INDUSTRIAL UNDERTAKING CONNOTES EXPANSION OF THE EXISTING BUSINESS OF THE ASSESSEE BUT WHETHER IT IS A NEW IDENTIFIABLE ENDEAVOUR WHERE SUBSTANTIAL INVESTMENT OF FRESH CAPITAL IS MADE TO ENABLE EARNING OF PROFIT ATTRIBUTABLE TO THAT NEW CAPITAL. IN THE CIRCUMSTANCES, THE QUESTION REFERRED FOR THE OPINION OF THIS COURT IS ANSWERED IN THE NEGATIVE, I.E., AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE ( V ) BAJAJ TEMPO LTD. VS. CIT (1992) 104 CTR (SC) 116 DEDUCTION UNDER S. 15C OF 1922 ACT (S. 80J OF 1961 ACT) ALLOWABILITY INDUSTRIAL UNDERTAKING ESTABLISHED IN A BUILDING TAKEN ON LEASE USED PREVIOUSLY FOR OTHER PURPOSE TOOLS AND IMPLEMENTS WORTH RS. 3,500 OF THE PREVIOUS UNDERTAKING ALSO TRAN SFERRED RELIEF UNDER S. 15C IS ALLOWABLE CLAUSE (I) OF 68 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) SUB - S. (2) OF S. 15C DOES NOT APPLY THE PROVISION GRANTING RELIEF WAS ENACTED TO ENCOURAGE INDUSTRIALIZATION AND HAS TO BE CONSTRUED LIBERALLY TOOLS AND IMPLEMENTS TRANSFERRED WERE OF INSIGNIFI CANT VALUE AS COMPARED TO THE WHOLE ASSETS AND LITERAL CONSTRUCTION OF CL. (I) OF S. 15C(2) WOULD DEFEAT THE VERY PURPOSE OF ENACTING THE PROVISIONS THE KEY TO INTERPRETATION IS THAT THE NEW UNDERTAKING SHOULD NOT BE FORMED' BY TRANSFER OF BUILDING, PLA NT OR MACHINERY EMPHASIS IS ON FORMATION NOT ON USE. 45.16 WE FIND THAT THE FOLLOWING GUIDING PRINCIPLES EMERGE FOR THE RECKONING OF A NEW UNIT BASED UPON VARIOUS LAND MARK RULINGS AND ALSO FIND THAT ( I ) THERE WAS INFUSION OF NEW CAPITAL BY THE ASSESSEE IN THOSE UNITS. ( II ) THERE WAS SUBSTANTIAL MODIFICATION IN THE OLD UNITS SO AS NOT TO DISTURB THE IDENTITY OF THE OLD UNITS, I.E., THE IDENTITY OF THOSE UNITS REMAINED UNCHANGED. ( III ) THERE WAS LEAST POSSIBLE OR INSIGNIFICANT USAGE OF THE PLANT AND MACHINERY OF THE OLD UNITS. ( IV ) THERE WAS A NEGATIVE ACT OF THE ASSESSEE TO DISTURB THE IDENTITY OF THE OLD UNIT AS THE PLANT AND MACHINERY WAS DISMANTLED BY THE ASSESSEE IN ALL THESE UNITS. ( V ) THE ASSESSEE HAD SET UP NEW UNITS ESSENTIALLY PRODUCING THE SAME COMM ODITY AS IN THE EXISTING UNITS, THOUGH THERE IS NO SUCH BAR IMPOSED IN LAW. 45.17 ACCORDINGLY, AFTER HEARING BOTH THE PARTIES AND ALSO GOING THROUGH THE MATERIAL PLACED ON RECORD AND AFTER CONSIDERING THE VARIOUS DECISIONS, WE HOLD THAT NEW UNITS HAD ACTU ALLY BEEN ESTABLISHED BY THE ASSESSEE IN THE FY 1999 - 2000 AT CODLI; IN THE FY 2002 - 03 AT AMONA; AND IN THE FY 2005 - 06 AT CHITRADURGA. 45.18 WE NOTED AFTER GOING THROUGH THE PROVISIONS OF SEC.10B THAT THERE IS NO REQUIREMENT THAT THE ASSESSEE SHOULD MAINTA IN SEPARATE BOOKS OF ACCOUNTS IN RESPECT OF 100% EOU UNIT FOR CLAIMING DEDUCTION. THE ONLY REQUIREMENT IN THIS REGARD U/S 10B(5) IS THAT THE ASSESSEE SHALL NOT BE ALLOWED DEDUCTION UNLESS THE ASSESSEE FURNISHES IN THE PRESCRIBED FORM ALONG WITH THE RETURN OF INCOME THE REPORT OF AN ACCOUNTANT, AS WE FIND IN THE EXPLANATION BELOW SUB - SEC.2 OF SEC.288, CERTIFYING THAT DEDUCTION HAS BEEN CORRECTLY CLAIMED IN ACCORDANCE WITH PROVISIONS OF THE IT ACT, 1961. WE HAVE GONE THROUGH THE CASE LAWS, AS RELIED BY THE L EARNED AR AND WE FIND THAT THE CASE OF THE ASSESSEE IS DULY COVERED BY THE DECISION IN THE CASE OF DCIT VS ARABIAN EXPORTS LTD., (2007) 109 TTJ (MUM.) 440 ON THIS ISSUE. IT IS NOT DENIED BY THE REVENUE THAT THE ASSESSEE HAS FILED THE REPORT IN ACCORDANCE WITH SEC.10B(5) OF THE IT ACT, 1961. WE THEREFORE, DISMISS THIS CLAIM OF THE REVENUE. 45.19 WE NOTED THAT IN RESPECT OF THE AMONA PLANT THE ASSESSEE HAS DULY INFORMED THE DC, SEZ BOMBAY VIDE HIS LETTER DATED 9.3.2008 I.E., COMMERCIAL PRODUCTION STARTED ON 8.3.2000 AND COPY OF THE SAID LETTER WAS DULY SENT TO CUSTOMS DEPARTMENT WHICH WAS NOT DISPUTED BY THESE COMPETENT AUTHORITIES. 45.20 IN THE CASE OF CHITRADURGA PLANT ALSO WE NOTED THAT THE ASSESSEE VIDE ITS LETTER DATED 14.7.2008 DULY INTIMATED TO THE DC, SEZ THAT THE CONVERTED 100% EOU IS STARTED COMMERCIAL PRODUCTION ON 6.6.2008. THE PREMISES OF THE SAID UNIT WAS BONDED AND THE 69 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) LICENCE NO.1/2008 DATED 5.6.2008 WAS ISSUED U/S 58 OF THE CUSTOMS ACT. SIMILARLY, WE NOTED THAT IN THE CASE OF CODLI UNI T THE ASSESSEE HAS DULY INTIMATED TO THE MINISTRY OF INDUSTRY VIDE LETTER DATED 9.3.2000 THAT THE COMMERCIAL PRODUCTION IS STARTED ON 8.3.2000. NONE OF THE AFORESAID GOVERNMENT AUTHORITY HAS DISPUTED THAT THE ASSESSEE HAS NOT STARTED COMMERCIAL PRODUCTIO N ON THAT DATE. 45.21 IN VIEW OF THE AFORESAID DISCUSSION, WE ARE OF THE VIEW THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION U/S 10B IN RESPECT OF ALL THE THREE 100% EXPORT ORIENTED UNITS, BUT DURING THE COURSE OF THE HEARING, WE NOTED THAT THE ASSESSEE WHIL E COMPUTING THE EXEMPTION U/S 10B HAS DEBITED ORE EXTRACTED FROM OWN MINES IN AMONA UNIT AS WELL AS CHITRADURGA UNIT AT COST OF RS. 45,25,23,692/ - AND RS. 20,27,01,458/ - RESPECTIVELY, WHILE IN VIEW OF PROVISIONS OF SECTION 10B(7) READ WITH SECTION 80 - IA(8) THE ASSESSEE IS REQUIRED TO TRANSFER THE CRUDE ORE EXTRACTED FROM ITS OWN MINES AT MARKET VALUE FOR DETERMINING THE TRUE PROFIT DERIVED BY THE 100% EOU FOR THE PURPOSE OF COMPUTING THE INCOME ILLEGIBLE FOR EXEMPTION U/S 10B. WE ALSO NOTED THAT THE ASSESS EE HAS ALSO PURCHASED CRUDE ORE I.E ROM FROM OUTSIDE PARTIES I.E FROM MINING BELONGING TO THE OTHER PARTIES. THE PRICE PAID BY THE ASSESSEE TO THESE OUTSIDE PARTIES, IN OUR OPINION CAN BE REGARDED TO BE THE BEST EVIDENCE FOR DETERMINING THE MARKET VALUE OF THE CRUDE ORE USED BY THE ASSESSEE EXTRACTING IT FROM ITS OWN MINES. SINCE DETERMINATION OF MARKET VALUE REQUIRES VERIFICATION ON THE PART OF THE REVENUE, WE, THEREFORE, RESTORE THIS ISSUE ONLY FOR DETERMINING THE MARKET VALUE OF THE CRUDE ORE CONSUMED BY THE ASSESSEE ON THE BASIS OF THE VALUE PAID BY THE ASSESSEE FOR THE CRUDE ORE TO THE OUTSIDE PARTIES DURING THE YEAR AND THEREBY RECOMPUTING THE PROFIT DERIVED BY THE ASSESSEE FROM THE 100% EOU UNITS ELIGIBLE FOR EXEMPTION U/S 10B. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE EXEMPTION AVAILABLE U/S 10B TO THE ASSESSEE IN RESPECT OF AMONA AS WELL AS CHITRADURGA UNITS AFTER ASCERTAINING THE MARKET VALUE OF THE CRUDE ORES TRANSFERRED BY THE ASSESSEE TO THESE UNITS FROM ITS EXTRACTION DIVISIO NS ON THE BASIS OF THE AVERAGE MARKET VALUE AS THE ASSESSEE HAS PAID TO THE OUTSIDE PARTIES FOR THE CRUDE ORES PURCHASED BY THE ASSESSEE FROM THESE PARTIES DURING THE IMPUGNED ASSESSMENT YEAR AND SUBSTITUTING AS COST OF THE RAW MATERIAL IN PLACE OF COST OF THE CRUDE ORE DERIVED BY THE ASSESSEE FROM ITS OWN MINES AFTER GIVING PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE TO ADDUCE THE MATERIAL AND EVIDENCE IN THIS REGARD. 45.22 WITH REGARD TO CODLI UNIT, THE ASSESSEE CLAIMED BEFORE US THAT THE INPUT I N THIS CASE IS TAILINGS WHICH IS MERELY A WASTE PRODUCT AND DOES NOT INVOLVE ANY COST AND ALSO HAS NOT FETCHED ANY PRICE IN THE OPEN MARKET, THEREFORE, ITS MARKET VALUE IS NIL FOR THE PURPOSE OF COMPUTATION OF PROFIT ELIGIBLE FOR EXEMPTION U/S 10B FROM T HIS UNIT. WE FIND FORCE IN THE SUBMISSION OF THE ASSESSEE BUT IN THE INTEREST OF JUSTICE AND FAIR PLAY TO BOTH THE PARTIES, IN RESPECT OF THIS UNIT ALSO WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE PROFIT OF THIS UNIT ELIGIBLE FOR EXEMPTION AFTER SATI SFYING HIMSELF ABOUT THE FAIR MARKET VALUE OF TAILINGS AFTER GIVING PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE TO PROVE THE MARKET VALUE OF THE TAILINGS USED IN THE CODLI UNIT AND ALLOW THE ASSESSEE EXEMPTION TO THE ASSESSEE U/S 10B OF THE INCOME - TAX ACT, 1961 FOR CODLI UNIT ON THE PROFIT SO RECOMPUTED ACCORDINGLY. THE ASSESSEE IS DIRECTED TO ADDUCE THE NECESSARY EVIDENCE ON WHICH IT MAY RELY TO PROVE THE MARKET VALUE OF INPUTS BEFORE THE ASSESSING OFFICER. THUS, THE GROUND NOS. 7, 8 & 9 ARE PART LY ALLOWED. 70 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 8. 4 RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNAL, WE HOLD THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION UNDER SECTION 10B IN RESPECT OF CODLI UNIT . I N RESPECT OF THE SAID UNIT ALTHOUGH THE ASSESSEE CLAIMED THAT THE INPUT IN THIS CASE IS TAILINGS WHICH DOES NOT INVOLVE ANY COST AND DOES NOT FETCH ANY PRICE IN THE OPEN MARKET AND THE MARKET VALUE OF THE SAME IS NIL, FOR THE PURPOSE OF COMPUTATION, THE PROFIT ELIGIBLE FOR EXEMPTION UNDER SECTION 10B FROM THIS UNIT . WE RESTORE THE ISSUE R ELATING TO THE COMPUTATION OF THE PROFIT OF CODLI UNIT ELIGIBLE FOR EXEMPTION TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION THAT THE ASSESSING OFFICER WILL GET HIMSELF SATISFIED ABOUT THE FAIR MARKET VALUE OF THE TAILINGS AFTER GIVING PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE TO PROVE THE MARKET VALUE OF THE TAILINGS CONSUMED IN THE CODLI UNIT AND ALLOW THE EXEMPTION TO THE ASSESSEE UNDER SECTION 10B OF THE INCOME TAX ACT ON THE PROFIT SO RE - COMPUTED. THE ASSESSEE IS DIRECTED TO ADDUCE NE CESSARY EVIDENCE ON WHICH THE ASSESSEE MAY RELY TO PROVE THE MARKET VALUE OF THE INPUTS BEFORE THE ASSESSING OFFICER. THUS, GROUND NO. 8 IS PARTLY ALLOWED. 9 . GROUND NO. 9 : GROUND NO. 9 RELATES TO THE DISALLOWANCE OF RS. 1,97,91,667/ - CONTRIBUTED BY THE ASSESSEE TO GOA MINERAL ORE EXPORTERS ASSOCIATION TOWARDS CONTRIBUTION OF A BRIDGE ON THE RIVER AT USGAO. THE GOA MINERAL ORE EXPORTERS ASSOCIATION MADE THE FINANCIAL CONTRIBUTION AFTER MAKING COLLECTION FROM ALL THE MEMBERS FOR THE CO NSTRUCTION OF THE BRIDGE. THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE ASSESSEE CLAIMED THESE EXPENSES TO BE A REVENUE EXPENDITURE AS, AS PER THE ASSESSEE THIS EXPENSES HAVE BEEN INCURRED TO HELP BUSINESS OPERATIONS OF THE ASSESSEE MORE EFFICIENTL Y AS THE ASSESSEE AS WELL AS OTHER IRON ORE EXPORTERS W ERE FACING DIFFICULTIES IN TRANSPORTING GOODS THROUGH USGAO VILLAGE ROAD. THE ASSESSING OFFICER DID NOT AGREE WITH THE ASSESSEE AND TREATED IT TO BE CAPITAL EXPENDITURE AS, IN HIS OPINION, THIS CONTRI BUTION GIVES AN ENDURING BENEFIT TO THE ASSESSEE. RELIANCE WAS PLACED IN THIS REGARD IN THE CASE OF MAHESH B. SHAH VS. ACIT (KERALA) 238 ITR 130. 71 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 9. 1 THE LEARNED AR CONTENDED THAT THE ISSUE IS DULY COVERED BY THE DECISION OF MADRAS HIGH COURT IN CIT VS . COATS VIYELLA INDIA LTD. 253 ITR 667 ON MERIT. HE REITERATED THE SUBMISSION MADE BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE AND OTHER EXPORTERS WERE FACING A LOT OF DIFFICULTIES IN TRANSPORTING THEIR CARGO THROUGH THE VILLAGE ROADS DUE TO ENVIRONMENT AL PROBLEMS AND THE TRANSPORT COST WAS VERY HIGH. THEREFORE, THE GOA MINERAL ORE EXPORTERS ASSOCIATION TOOK UP THE ISSUE WITH THE STATE GOVT. THE STATE GOVT. AGREED TO CONSTRUCT THE BRIDGE PROVIDED CONTRIBUTION IS MADE BY THE MEMBERS OF THE ASSOCIATION A ND ACCORDINGLY, THE CONTRIBUTION WAS MADE BY THE ASSESSEE ALSO, BEING ONE OF THE MEMBERS OF GOA MINERAL ORE EXPORTERS ASSOCIATION. THE ASSESSEE HAS NOT GOT ANY OWNERSHIP RIGHT OR PREFERENTIAL ACCESS FOR THE USE OF THE BRIDGE. THE BRIDGE REMAINED PROPERTY OF THE GOVT. OF GOA. EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS. RELIANCE WAS ALSO PLACED IN THIS REGARD ON THE FOLLOWING DECISIONS : I) ITAT PANAJI BENCH IN CHOWGULE & CO. PVT. LTD. FOR A.Y. 2002 - 03 IN ITA NO. 162/PNJ/2006 AND ITA NO. 184/PNJ/2006 DTD. 12.7.2007 II) CIT VS. GUJARAT MINERAL DEVELOPMENT CORPORATION (1981) 132 ITR 377(GUJ) III) CIT VS. CHEMICALS & PLASTICS INDIA LTD. (2007) 292 ITR 115 (MAD) IV) MAFATLAL FINE SPG. & WVG. CO. LTD. VS. CIT (1993) 69 TAXMAN 385 (BOM.) V) PALANI ANDAVAR MILLS LTD. VS. CIT (1977) 110 ITR 742 (MAD) VI) EMPIRE JUTE CO. LTD. VS. CIT (1980) 124 ITR 1 (SC) 9. 2 THE LEARNED D R ON THE OTHER HAND RELIED ON THE ORDER OF THE AUTHORITIES BELOW AS WELL AS THE DECISIONS OF KERALA HIGH COURT IN THE CASE OF MAHESH B. SHAH VS. ACIT ( SUPRA) . 9 . 3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE HAVE ALSO GONE THROUGH THE DECISION OF MAHESH B. SHAH VS. ACIT (SUPRA) . THE FACTS OF THIS CASE WAS THAT THE ASSESSEE BEING MEMBER OF STOCK EXCHANGE MADE CONTRIBUTION TO THE STOCK EXCHANGE BUILDING FUND. THE ASSESSEE AGREED BEFORE THE ASSESSING OFFICER TO TREAT THIS EXPENDITURE TO BE CAPITAL EXPENDITURE. IN THE REVIEW PETITION FILED BEFORE CIT ALSO, THE ASSESSEE AGREED THAT THIS IS A VOLUNTARY CONTRIBUTION TO A CAPITAL FUND AND CAN BE 72 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) DISALLOWED AND BE ADDED BACK TO THE RETURN OF INCOME OF THE ASSESSEE. WE NOTED THAT IN VIEW OF THIS FACT AND CONTRIBUTION BEING VOLUNTARY, THE HONBLE HIGH COURT DID NOT INTERFERE WHEN THE ASSESSEE FILED WRIT AGAINST THE DISALLOWANCE. ON THE FACTS OF THIS CASE, WE ARE OF THE VIEW THAT FACTS IN THIS CASE ARE ENTIRELY DIFFERENT FROM THE FACTS OF THE ASSESSEE AND THIS CASE WILL NOT ASSIST THE REVENUE. IN THE CASE OF RAZA BULAND SUGAR CO. LTD. VS. CIT (1980 ) 122 ITR 817 (ALL.), THE QUARTERS WERE BUILT FOR THE WORKERS FOR WHICH THE ASSESSEE MADE CONTRIBUTION WERE FOR THE EXCLUSIVE USER OF THE ASSESSEE FOR UNLIMITED PERIOD OF TIME AND THUS, ASSESSEE GOT AN ASSET OF ENDURING NATURE. UNDER THESE FACTS, THE ALLA HABAD HIGH COURT TOOK THE VIEW THAT THE EXPENDITURE IS A CAPITAL EXPENDITURE. THIS CASE, IN OUR OPINION, WILL ALSO NOT ASSIST THE REVENUE. THE DECISION OF THE MADRAS HIGH COURT AS REPORTED IN 253 ITR 667 WHICH HAS BEEN RELIED ON BY THE LEARNED AR, IN OUR OPINION, IS DIRECTLY APPLICABLE TO THE FACTS OF THE CASE. IN THIS CASE ALSO, THE ASSESSEE HAS MADE CONTRIBUTION TO THE GOVT. FOR BUILDING A NEW BRIDGE IN PLACE OF OLD ONE WHICH HAD BECOME UNSERVICEABLE. THE BRIDGE WAS ESSENTIAL TO PROVIDE ACCESS TO THE ASSESSEES FACTORY. THE BRIDGE DOES NOT BELONG TO THE ASSESSEE. IT MERELY FACILITATES THE MOVEMENT OF THE WORKMEN TO THE , AND THE GOODS TO THE , ASSESSEE S FACTORY. WHEN THE MATTER WENT TO THE HIGH COURT, THE HIGH COURT TOOK THE VIEW THAT THE EXPENDITURE INCURRED WAS REVENUE EXPENDITURE. WHILE HOLDING SO, THE HIGH COURT RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF L.H. SUGAR FACTORY & OIL MILLS PVT. LTD. (SC) 125 ITR 293. THIS WAS A CASE WHERE THE ROAD WAS CONSTRUCTED IN ORDER TO FACILITATE TRANSPORT OF THE SUGARCANE AND THE OUTFLOW OF THE MANUFACTURED SUGAR TO THE MARKET. THE CONSTRUCTION OF THE SAID ROAD BY THE ASSESSEE EVEN THOUGH HAS GIVEN LONG DURATION ADVANTAGE, BUT THE EXPENDITURE INCURRED THEREON WAS NOT HELD TO BE CAPITAL EXPENDITURE AS NO TANGIBLE OR INTANGIBLE ASSET WAS ACQUIRED BY THE ASSESSEE. IN THE CASE BEFORE US, WE NOTE THE ASSESSEE HAS CONTRIBUTED MONEY TO THE ASSOCIATION TO WHICH THE ASSESSEE IS ONE OF T HE MEMBERS FOR THE CONSTRUCTION OF THE BRIDGE. THE BRIDGE SO CONSTRUCTED DOES NOT GIVE ANY OWNERSHIP RIGHT TO THE ASSESSEE. EVEN IT WAS NOT FOR THE EXCLUSIVE USE OF THE ASSESSEE. THE EXPENDITURE WAS INCURRED, IN OUR OPINION, TO FACILITATE THE BUSINESS O F THE ASSESSEE AND HAS 73 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. WE, ACCORDINGLY, DELETE THE DISALLOWANCE OF RS. 1,97,91,667/ - . THUS, THIS GROUND STANDS ALLOWED. 1 0 . GROUND NO. 10 : GROUND NO. 10 RELATES TO DISALLOWANCE OF ADDITIONAL DEPRECIATION. BOTH THE PARTIES AGREED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS TRIBUNAL IN ITA NO. 72/PNJ/2012. AFTER HEARING THE RIVAL SUBMISSIONS AND GOING THROUGH THE DECISION OF THIS TRIBUNAL IN ITA NO. 72/PNJ/2012 DT. 8.3.2013 IN WHICH THIS TRIBUNAL WHILE DEALING WITH SIMILAR ISSUE REGARDING ALLOWABILITY OF DEPRECIATION TO THE ASSESSEE WHICH WAS DISALLOWED BY THE ASSESSING OFFICER UNDER PARA 46.1 TO 46.2 HELD AS UNDER : 46.1 WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS ALONGWITH THE ORDER OF THE TAX AUTHORITIES. SEC.32(1)(IIA) LAID DOWN AS UNDER; IIA) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT), WHICH HAS BEEN ACQUIRED AND INSTALLED AFTER THE 31 ST DAY OF MARCH, 2005 BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING (OR IN THE BUSINESS OF GENERATION OR GENERATION AND DISTRIBUTION OF POWER ) A FURTHER SUM EQUAL TO TWENTY PERCENT OF THE ACTUAL COST OF SUCH MAC HINERY OR PLANT SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE(II): PROVIDED THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF - A ) ANY MACHINERY OR PLANT WHICH, BEFORE ITS INSTALLATION BY THE ASSESSEE, WAS USED EITHER WITHIN OR OUTSIDE INDIA BY ANY OTHER PERSON ; OR B ) ANY MACHINERY OR PLANT INSTALLED IN ANY OFFICE PREMISES OR ANY RESIDENTIAL ACCOMMODATION, INCLUDING ACCOMMODATION IN THE NATURE OF A GUEST HOUSE; OR C ) ANY OFFICE APPLIANCES O ROAD TRANSPORT VEHICLES; OR D ) ANY MACHINERY OR PLANT, THE WHOLE OF THE ACTUAL COST OF WHICH IS ALLOWED AS A DEDUCTION(WHETHER BY WAY OF DEPRECIATION OR OTHERWISE) IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OF ANY ONE PREVIOUS YEAR. 46.2 FROM THE PROVISIONS OF THE SECTION, IT IS APPARENT THAT THE ASSESSEE IS ENTITLED IN THE CASE OF ANY NEW MACHINERY OR PLANT WHICH HAS BEEN ACQUIRED OR INSTALLED BY HIM AFTER 31.03.2005 FOR THE ADDITIONAL DEPRECIATION IF THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF A NY ARTICLE OR THING. PROVISO TO SECTION DENIES THE DEDUCTION TO AN ASSESSEE OF THE ADDITIONAL DEPRECIATION IN CERTAIN CASES. FROM THE BALANCE SHEET AND ALL OTHER EVIDENCES FILED BEFORE US IT IS APPARENTLY CLEAR THAT THE ASSESSEE IS ENGAGED PRIMARILY IN TH E BUSINESS OF EXTRACTION OF ORE AND ITS PROCESSING. THE AUTHORITIES BELOW INTERPRETED THE PROVISIONS OF SECTION, CORRECTLY TAKING THE VIEW THAT THE PLANT AND MACHINERY SHOULD BE INSTALLED FOR THE PRODUCTION OF AN ARTICLE OR THING. THE ASSESSEES PLANTS AT CODLI, AMONA AND CHITRADURGA WHETHER ENGAGED FOR THE MANUFACTURE OR PRODUCTION INDEPENDENTLY, IN OUR VIEW, 74 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) IS NOT RELEVANT. THE RELEVANT CONSIDERATION IS THAT THE ASSESSEE MUST BE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING AND THE NEW PLANT AND MACHINERY MUST BE ACQUIRED AND INSTALLED. THE ASSESSEE HAS EXTRACTED THE IRON ORE AND ALSO PROCESSED IT. THE CASE OF THE ASSESSEE IS DULY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN ASSESSEES OWN CASE REPORTED IN 271 ITR 331(SC) (SUPRA). THIS SECTION USED THE WORD BUSINESS OF MANUFACTURE OR PRODUCTION NOT THE WORD MANUFACTURE AND PRODUCTION. WE DO NOT AGREE WITH THE REVENUE THAT THE CASE OF THE ASSESSEE IS NOT COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN A SSESSEES OWN CASE. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN ASSESSEES OWN CASE, WE DELETE THE DISALLOWANCE AND ALLOW THE ADDITIONAL DEPRECIATION TO THE ASSESSEE AMOUNTING TO RS.10,91,75,435/ - . 1 0. 1 NO CONTRARY DECISION OR FACTS WERE BROUGHT TO OUR NOTICE. RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF THE ASSESSEE AS REPRODUCED HEREINABOVE, WE DELETE THE DISALLOWANCE. THUS, THIS GROUND STANDS ALLOWED. 1 1. GROUND NO. 11 : GROUND NO. 11 RELATES TO THE DISALLOWANCE OF RS. 28,96,685/ - BEING NOTIONAL LOSS INCURRED DUE TO THE REVALUATION OF THE DEBTORS AS AT THE YEAR END, DUE TO FLUCTUATIONS OF THE EXCHANGE RATE. THE BRIEF FACTS OF THIS GROUND ARE THAT THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE CLAIMED NOTIONAL LOSS OF RS. 28,96,685/ - IN RESPECT OF AMOUNT PAYABLE/RECEIVABLE IN FOREIGN CURRENCY AS ON 31.3.2008. THIS LOSS IS DUE TO THE RESTATEMENT OF THE RUPEE VALUE IN RESPECT OF AMOUNTS RECEIVABLE/PAYABLE WITH REFERENCE TO DOLLAR RATE AS ON 31.3.2 008. WHEN INQUIRED, THE ASSESSEE EXPLAINED THAT AS PER THE ACCOUNTING STANDARDS BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA BEING AS - 11, THE ASSESSEE IS REQUIRED TO ACCOUNT FOREIGN EXCHANGE GAIN/LOSS BASED ON THE DOLLAR RATE PREVALENT AS ON 31.3.20 08 IN RESPECT OF PAYMENTS/RECEIPTS IN TERMS OF FOREIGN EXCHANGE AND ACCORDINGLY THIS LOSS IS ALLOWABLE. THE ASSESSING OFFICER DISALLOWED THE SAME R ELYING ON THE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF INDIAN OVERSEAS BANK VS. CIT 250 ITR 146 AS W ELL AS THAT OF THE SUPREME COURT IN THE CASE OF CIT VS. SHOORJI VALLABHDAS & CO. 46 ITR 144. 11.1 THE LEARNED AR BEFORE US VEHEMENTLY CONTENDED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE SUPREME COURT IN CIT VS. WOODWORD GOVERNOR INDIA PV T. LTD. 312 ITR 254. THE LOSS RELATES TO THE RESTATEMENT OF THE 75 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) AMOUNTS PAYABLE AND RECEIVABLE IN FOREIGN CURRENCY AT THE YEAR END AT THE PREVAILING EXCHANGE RATE. THE LOSS ARISING FROM THE DIFFERENCE IN RATE OF EXCHANGE HAD ACTUALLY OCCURRED AS PER MERC ANTILE METHOD OF ACCOUNTING. IT IS NOT A NOTIONAL OR CONTINGENT LOSS BUT WAS COMPUTED ON THE BASIS OF ACCOUNTING STANDARD AS - 11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) WHICH IS MANDATORY TO BE FOLLOWED. IT IS NOT A SPECULATIVE LO SS AS STIPULATED IN CBDTS INSTRUCTIONS. DELHI HIGH COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. 294 ITR 451 HELD THAT THE ACCOUNTING STANDARD ISSUED BY ICAI WOULD HAVE TO BE FOLLOWED AND APPLIED AND THE INCREASE IN LIABILITY DUE TO THE FOREIGN E XCHANGE FLUCTUATIONS AS PER EXCHANGE RATE PREVAILING ON THE LAST DAY OF THE FINANCIAL YEAR IS ALLOWABLE AS A DEDUCTION AND IS NOT MERELY NOTIONAL OR CONTINGENT LIABILITY. THIS DECISION WAS CONFIRMED BY THE SUPREME COURT IN 312 ITR 254. RELIANCE WAS ALSO PLACED ON THE LATEST DECISION OF THE MUMBAI TRIBUNAL IN RELIANCE COMMUNICATIONS LTD. VS. ACIT [2013 - TIOL - 134 - ITAT - MUM] IN WHICH THE TRIBUNAL HELD THAT THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUC TUATION AS ON LAST DAY OF PREVIOUS YEAR WAS DEDUCTABLE UNDER SECTION 37(1) OF THE INCOME TAX ACT. THE DECISION RELIED BY THE ASSESSING OFFICER IN THE CASE OF CIT VS. SHOORJI VALLABHDAS & CO. (SUPRA) AND INDIAN OVERSEAS BANK (SUPRA) ARE TOTALLY DISTINGUISH ABLE. THE ASSESSEE HAS DECLARED IN PRECEDING YEAR, GAIN ARISING DUE TO FOREIGN EXCHANGE FLUCTUATION AMOUNTING TO RS.37,02,412/ - WHICH WAS DULY TAXED BY THE REVENUE. 11.2 THE LEARNED DR ON THE OTHER HAND RELIED ON THE ORDER OF THE ASSESSING OFFICER. 11.3 WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IN OUR VIEW, THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (2009) 312 ITR 254 IN WHICH THE SUPREME COURT CONFIRMED THE DECISION OF THE DELHI HIGH COURT IN CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (2007) 294 ITR 451 AS UNDER : 76 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) HAVING COME TO THE CONCLUSION THAT VALUATION IS A PART OF THE ACCOUNTING SYSTEM AND HAVING COME TO THE CONCLUSION THAT BUSINESS LOSSES ARE DEDUCTIBLE UNDER SECTION 37(1) ON THE BASIS OF ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING AND HAVING COME TO THE CONCLUSION THAT THE CENTRAL GOVERNMENT HAS MADE ACCOUNTING STANDARD - 11 MANDATORY, WE ARE NOW REQUIRED T O EXAMINE THE SAID ACCOUNTING STANDARD (AS). AS - 11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. AS - 11 DEALS WITH EFFECTS OF EXCHANGE DIFFERENCES. UNDER PARAGRAPH 2, REPORTING CURRENCY IS DEFINED TO ME AN THE CURRENCY USED IN PRESENTING THE FINANCIAL STATEMENTS. SIMILARLY, THE WORDS MONETARY ITEMS ARE DEFINED TO MEAN MONEY HELD AND ASSETS AND LIABILITIES TO BE RECEIVED OR PAID IN FIXED AMOUNTS, E.G., CASH, RECEIVABLES AND PAYABLES. THE WORD PAID IS DEFINED UNDER SECTION 43(2). THIS HAS BEEN DISCUSSED EARLIER. SIMILARLY, IT IS IMPORTANT TO NOTE THAT FOREIGN CURRENCY NOTES, BALANCES IN BANK ACCOUNTS DENOMINATED IN A FOREIGN CURRENCY, AND RECEIVABLES/PAYABLES AND LOANS DENOMINATED IN A FOREIGN CURREN CY AS WELL AS SUNDRY CREDITORS ARE ALL MONETARY ITEMS WHICH HAVE TO BE VALUED AT THE CLOSING RATE UNDER AS - 11. UNDER PARAGRAPH 5, A TRANSACTION IN A FOREIGN CURRENCY HAS TO BE RECORDED IN THE REPORTING CURRENCY BY APPLYING TO THE FOREIGN CURRENCY AMOUNT T HE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSACTION. THIS IS KNOWN AS RECORDING OF TRANSACTION OF THE EFFECTS OF CHANGES IN EXCHANGE RATES SUBSEQUENT TO INITIAL RECOGNITION. PARAGRAPH 7(A), INTER ALIA, STATES THAT ON EACH BALANCE - SHEET DATE MONETARY ITEMS, ENUMERATED ABOVE, DENOMINATED IN A FOREIGN CURRENCY SHOULD BE REPORTED USING THE CLOSING RATE. IN CASE OF REVENUE ITEMS FALLING UNDER SECTION 37(1), PARAGRAPH 9 OF AS - 11 WHICH DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCES, NEEDS TO BE CONSIDERED. UNDER THAT PARAGRAPH, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNISED AS INCOME OR AS EXPENSE IN THE PERIOD IN WHICH THEY ARISE, EXCEPT AS STATED IN PARAGRAPH 10 AND PARA GRAPH 11 WHICH DEALS WITH EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH TOPIC FALLS UNDER SECTION 43A OF THE 1961 ACT. AT THIS STAGE, WE ARE CONCERNED ONLY WITH PARAGRAPH 9 WHICH DEALS W ITH REVENUE ITEMS. PARAGRAPH 9 OF AS - 11 RECOGNISES EXCHANGE DIFFERENCES AS INCOME OR EXPENSE. IN CASES WHERE, E.G., THE RATE OF DOLLAR RISES VIS - - VIS THE INDIAN RUPEES, THERE IS AN EXPENSE DURING THAT PERIOD. THE IMPORTANT POINT TO BE NOTED IS THAT AS - 11 STIPULATES EFFECT OF CHANGES IN EXCHANGE RATE VIS - - VIS MONETARY ITEMS DENOMINATED IN A FOREIGN CURRENCY TO BE TAKEN INTO ACCOUNT FOR GIVING ACCOUNTING TREATMENT ON THE BALANCE SHEET DATE. THEREFORE, AN ENTERPRISE HAS TO REPORT THE OUTSTANDING LIABILIT Y RELATING TO IMPORT OF RAW MATERIALS USING THE CLOSING RATE OF EXCHANGE. ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF THE SAID LIABILITY AT THE CLOSING RATE, SHOULD BE RECOGNISED IN THE PROFIT AND LOSS ACCOUNT FOR THE REPORTING PERIOD. A COMPA NY IMPORTS RAW MATERIAL WORTH US $ 250000 ON JANUARY 15, 2002, WHEN THE EXCHANGE RATE WAS RS. 46 PER US $. THE COMPANY RECORDS THE TRANSACTION AT THAT RATE. THE PAYMENT FOR THE IMPORTS IS MADE ON APRIL 15, 2002, WHEN THE EXCHANGE RATE IS RS. 49 PER US $. HOWEVER, ON THE BALANCE - SHEET DATE, MARCH 31, 2002, THE RATE OF EXCHANGE IS RS. 50 PER US $. IN SUCH A CASE, IN TERMS OF AS - 11, THE EFFECT OF THE EXCHANGE DIFFERENCE HAS TO BE TAKEN INTO THE PROFIT AND LOSS ACCOUNT. SUNDRY CREDITORS 77 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) IS A MONETARY ITEM AND HENCE SUCH ITEM HAS TO BE VALUED AT THE CLOSING RATE, I.E., RS. 50 AT MARCH 31, 2002, IRRESPECTIVE OF THE PAYMENT FOR THE SALE SUBSEQUENTLY AT A LOWER RATE. THE DIFFERENCE OF RS. 4 (50 - 46) PER US $ IS TO BE SHOWN AS AN EXCHANGE LOSS IN THE PROFIT AND LOSS ACCOUNT AND IS NOT TO BE ADJUSTED AGAINST THE COST OF RAW MATERIALS. IN THE CASE OF SUTLEJ COTTON MILLS LTD. V. CIT REPORTED IN [1979] 116 ITR 1 THIS COURT HAS OBSERVED AS UNDER (PAGE 13) : THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SETTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADING PROFIT OR LOSS IF THE FOREIGN CUR RENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE. (EMPHASIS SUPPLIED) IN CONCLUSION, WE MAY STATE THAT IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS THE MERCANTILE SY STEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYST EM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS P ER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 11 . 4 WE HAVE ALSO GONE THROUGH THE DECISION OF THE MADRAS HIGH COURT IN INDIAN OVERSEAS BANK VS. CIT 250 ITR 146 (SUPRA) . THIS DECISION, IN OUR OPINION, IS NOT APPLICABLE. THIS RELATES TO ESTIMATED PROFIT ON EXCHANGE HOLDING AND DOES NOT RELATE TO LOSS INCURRED DUE TO EXCHANGE FLUCTUATIONS AT THE END OF THE YEAR. SIMILARLY, THE DECISION OF THE HONBLE SUPREME COURT IN TH E CASE OF CIT VS. SHOORJI VALLABHDAS & CO. (SUPRA) IS ALSO NOT APPLICABLE IN THE CASE OF THE ASSESSEE. BOTH THESE DECISIONS RELATE TO THE INCOME AND INCOME IS RECOGNIZED ON THE BASIS OF PRUDENCY PRINCIPLES OF ACCOUNTING WHEN THE INCOME HAS ACTUALLY ACCRUE D TO THE ASSESSEE. THE DECISION OF THE SUPREME COURT IS BINDING ON US. WE, ACCORDINGLY, RESPECTFULLY FOLLOWING THE DECISION 78 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) OF THE HONBLE SUPREME COURT DELETE THE DISALLOWANCE. THUS, THIS GROUND IS ALLOWED. 12 . GROUND NO. 12 DEALS WITH THE ACTUAL LOSS INCURRED ON ACCOUNT OF FORWARD CONTRACT IN FOREIGN EXCHANGE AMOUNTING TO RS. 26,01,697/ - . THE LEARNED AR CONTENDED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS TRIBUNAL IN ITA NO. 72/PNJ/2012 FOR THE A.Y. 2009 - 10 DTD. 8.3.2013 . ON THE OTHER, THE LEARNED DR CONTENDED THAT FORWARD CONTRACT LOSS IS TO BE TREATED AS SPECULATIVE LOSS AND HENCE SAME CANNOT BE SET OFF AGAINST REGULAR BUSINESS INCOME. RELIANCE WAS PLACED IN THIS REGARD TO THE CASE OF K. MOHAN & CO. (EXPORTS) PVT. LTD. REPORTED IN ITA NO. 113/BANG/2009 COPY OF WHICH IS FILED BEFORE US. 12.1 . WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS TRIBUNAL IN ITA NO. 72 /PNJ/2012 FOR THE A.Y. 2009 - 10 DTD. 8.3.2013 IN WHICH THIS TRIBUNAL UNDER PARA 50 OF ITS ORDER HELD AS UNDER: 50. THE THIRD GROUND RELATE TO THE DELETION OF THE DISALLOWANCE MADE BY THE AO AS EXCHANGE LOSS INCURRED ON THE FOREIGN EXCHANGE FORWARD CONTRACT. THE AO NOTED THAT THE ASSESSEE HAS DEBITED FORWARD CONTRACT LOSS ON THE BASIS OF THE ACTUAL SETTLEMENT OF FORWAR D CONTRACTS. IF THE ASSESSEE HAS ENTERED INTO FOREIGN EXCHANGE FORWARD CONTRACTS, ACCORDING TO THE ASSESSEE, TO HEDGE LOSS ON RECEIPT OF THE EXPORT PROCEEDS. THE AO APPLIED PROVISIONS OF SEC. 43(5) AND TREATED IT TO BE THE SPECULATIVE LOSS. WHEN THE MAT TER WENT BEFORE THE CIT(A), THE CIT(A) ON THE BASIS OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS BADRIDA GAURIDU(P) LTD.,(261 ITR 256) TOOK THE VIEW THAT THE LOSS INCURRED BY THE ASSESSEE ON FORWARD CONTRACTS HAD A DIRECT NEXUS W ITH IT EXPORT ACTIVITIES AND THEREFORE, SUCH LOSS IS A LOSS INCIDENTAL TO THE BUSINESS ACTIVITIES OF THE ASSESSEE. THIS LOSS CANNOT BE REGARDED TO BE THE SPECULATION LOSS. THE LEARNED DR EVEN THOUGH, BEFORE RELIED ON THE ORDER OF THE AO COULD NOT BRING TO OUR KNOWLEDGE ANY OTHER DECISION OF THE JURISDICTIONAL HIGH COURT OR THAT OF THE SUPREME COURT WHICH WOULD HAVE TAKEN A CONTRARY VIEW, WHAT HAS BEEN TAKEN BY THE HONBLE MUMBAI HIGH COURT INTO 261 ITR 256. EVEN THIS WAS NOT THE CASE OF THE REVENUE THAT THE SAID DECISION WAS NOT APPLICABLE IN THIS CASE. UNDER THESE FACTS OF THE CASE, WE ARE OF THE VIEW, THAT NO ILLEGALITY AND INFIRMITY IS CAUSED IN THE ORDER OF THE CIT(A) WHILE DELETING THE DISALLOWANCE ON ACCOUNT OF FOREIGN EXCHANGE ON FORWARD CONTRACT . THUS, THIS IS NOT A FIT CASE WHICH WARRANTS OUR INTERFERENCE AND WE ACCORDINGLY, DISMISS THE THIRD GROUND TAKEN BY THE REVENUE. 79 ITA NO. 8 9 /PNJ/2012 (ASST. YEAR : 2008 - 09) 12.2 RESPECTFULLY FOLLOWING THE SAID DECISION OF THE TRIBUNAL, WE DELETE THE DISALLOWANCE BY SETTING ASIDE THE ORDER OF CIT (A). IN THE RESULT, GROUND NO. 12 STANDS ALLOWED. 13 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 14 . ORDER PRONOUNCED IN THE OPEN COURT ON 17 . 05 .2013. SD/ - SD/ - (D.T. GARASIA) (P.K. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 17 . 05 .2013 *SSL* COPY TO : ( 1 ) APPELLANT ( 2 ) RESPONDENT ( 3 ) CIT, PANAJI ( 4 ) CIT(A), PANAJI ( 5 ) D.R ( 6 ) GUARD FILE TRUE COPY, BY ORDER SR. PRIVATE SECRETARY ITAT, PANAJI, GOA