Commissioner Of Income Tax, Ward Xiii (2), Chennai v. M/S.deco De Trend 5[Th] Floor, Nelson Towers

In the High Court of Judicature at Madras Dated: 02.07.2013 Coram The Honourable Mrs.JUSTICE CHITRA VENKATARAMAN andThe Honourable Ms.JUSTICE K.B.K.VASUKI Tax Case (Appeal) Nos.299, 804 and 805 of 2010 and 342 of 2012 Commissioner of Income Tax, Ward XIII (2), Chennai. .... Appellant in the above T.CsVs. M/s.Deco De Trend5[th] Floor, Nelson Towers117, Nelson Manickam Road,Chennai – 29..... Respondent in the T.C (Appeal) Nos. 299, 804 & 805/10 M/s. Deco De TrendNo.4/371 David NAgarVandalur- walajabad RoadPaddappai VillageSriperumbudur Taluk,Kancheepuram- 601 301...Respondent in T.c.(Appeal)No.342No.342 of 2012 APPEALs under Section 260 A of the Income Tax Act against theorder dated 18.9.2009, 04.12.2009, 04.12.2009 and 03.05.2012 madein I.T.A.Nos.1692/Mds/2008; 1169/Mad/2009; 1170/Mad/2009 and288/Mds/2012 respectively on the file of the Income Tax AppellateTribunal, Madras 'C' Bench; 'B' Bench, 'B' Bench and 'D' Benchrespectively for the assessment years 2005-06, 2004-05, 2006-07 and2008-09. Tax Case (Appeal) NO.299 of 2010: Arising against the order of theCommissioner of Income Tax (Appeals)-XII, 121,Mahatma Gandhi Road,Nungambakkam, Chennai-34 in I.T.A.NO.509/07-08 dated 26/05/2008 forthe Assessment year 2005-2006 against the order of the Income Taxofficer ward XIII,(2), Chennai for the Assessment year 2005-06. GIRNo.ADDFD4304P dated 28.12.2007 Tax case (Appeal) No.804 of 2010: Arising against the order of theCommissioner of Income Tax (Appeals)-XII, chennai-34 inI.T.A.NO.156/08-09 dated 31.03.2009 for Assessment year 2004-05arising against the order of Income Tax officer ward XIII (2),Chennai, for Assessment year 2004-05 dated 24.12.2008 Tax case (Appeal) NO.805 of 2010: Arising against the order of theCommissioner of Income tax (Appeals)-XII Chennai-34 inI.T.A.NO.155/08-09 dated 31.03.2009 for Assessment year 2006-2007against the order of Income Tax officer Ward XIII (2),Chennai forAssessment year 2006-07 order dated 29.12.2008. Tax cases (Appeal)No.342 of 2012: Arising against the order ofCommissioner of Income Tax (Appeals)-XII, Chennai-34 inI.T.A.NO.217/2010-11 order dated 21.11.2011 Assessment year 2008-09against the order of Income Tax officer Business ward-XIII (2)Chennai-34 for the Assessment year 2008-09 order dated 29.12.2010.For Appellant : Mr.J.Narayanasamy Standing Counsel for Income Tax For Respondent : Mr.B.Kumar, S.C. For M/s.T.Chezhiyan-----------C O M M O N J U D G M E N T(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) The issues raised in the above Tax Case (Appeals) filed by theRevenue as against the order of the Income Tax Appellate Tribunalare identical in respect of the self-same assessee. Following arethe questions of law arise for consideration in the above Tax Case(Appeals):"1. Whether on the facts and circumstances of thecase, the Tribunal was right in deciding the issue ofmanufacture contrary to law laid down in 292 ITR 444?(ii) Whether on the facts and circumstances ofthe case, the Tribunal was right in finding "splittingup" contrary to Section 10 B(2)(ii) (iii) of the IncomeTax Act and 137 ITR 851?" 2. T.C.(A)No.299 of 2010 relates to the assessment year 2005-2006. T.C.(A)Nos.804 of 2010 and 805 of 2010 relate to theassessment years 2004-05 and 2006-07 respectively and T.C.(A)No.342of 2012 relates to the assessment year 2008-09. The Tribunalpassed separate orders for the assessment years 2005-06 and 2008-09and common order for the assessment years 2004-05 and 2006-07.Since the facts are common, for convenient sake, we are referring https://hcservices.ecourts.gov.in/hcservices/ to the facts relating to T.C.(A)No.299 of 2010. 2. T.C.(A)No.299 of 2010 relates to the assessment year 2005-2006. T.C.(A)Nos.804 of 2010 and 805 of 2010 relate to theassessment years 2004-05 and 2006-07 respectively and T.C.(A)No.342of 2012 relates to the assessment year 2008-09. The Tribunalpassed separate orders for the assessment years 2005-06 and 2008-09and common order for the assessment years 2004-05 and 2006-07.Since the facts are common, for convenient sake, we are referring https://hcservices.ecourts.gov.in/hcservices/ to the facts relating to T.C.(A)No.299 of 2010. 3. The assessee is a partnership firm. In the returns filed,it claimed deduction under Section 10B of the Income Tax Act inrespect of the income earned on the export of handicraft items ofdried flowers and parts of plants. Admittedly, the assessee is a100% EOU having three units at Mananjery, Kunrathur andMoonramkattalai. There is also a closely held private limitedcompany in Kolkata, by name, M/s.Dry De Fashions Private Limited,in which three of the partners in the assessee firm are Directors.It is stated that the company also carries on business on the sameline, namely, manufacturing and exporting dry flower and potpourri.The said Private Limited Company is not a 100% EOU. 4. In considering the claim for deduction under Section 10B ofthe Income Tax Act, the Assessing Officer called for certaindetails with reference to the manufacturing activity undertaken forexport of handicraft items of dried parts of plants. In themanufacturing flow chart given by the assessee, it was stated asfollows: "Raw materials are first cleaned, graded and sizedup with scissors and hand tools"Raw materials are first cleaned, graded and sizedup with scissors and hand tools •The graded raw materials are according to thecreative requirements of the product are bleached,washed and coloured with dip in process and sundried. Laquer is applied wherever required on the aboveprocessed raw materialsLaquer is applied wherever required on the aboveprocessed raw materials After the above preparation, the items againdepending upon final creative design requirementsare cut and drilled upon with hand tools.After the above preparation, the items againdepending upon final creative design requirementsare cut and drilled upon with hand tools. Now these processed materials act as raw materialsfor the various designer products. These are nowbunched together and moulded in various primitiveshapes, or made as handmade flowers by applyingvarious hand cutting skills, gluing techniques andsun drying.Now these processed materials act as raw materialsfor the various designer products. These are nowbunched together and moulded in various primitiveshapes, or made as handmade flowers by applyingvarious hand cutting skills, gluing techniques andsun drying. The above semi finished items which are again sortedand creative design is applied for the manufactureof the products as per the specific requirements ofthe customers.The above semi finished items which are again sortedand creative design is applied for the manufactureof the products as per the specific requirements ofthe customers. The above products wherever required are perfumedand added glitter as per the product design toachieve a creative finish.The above products wherever required are perfumedand added glitter as per the product design toachieve a creative finish. After the products are manufactured, the first levelnovelty ad decorative packaging is applied on theproduct.After the products are manufactured, the first levelnovelty ad decorative packaging is applied on theproduct. Products are suitably grouped and labeled as percustomers requirements.Products are suitably grouped and labeled as percustomers requirements.•After the individual pieces of the products areAfter the individual pieces of the products are https://hcservices.ecourts.gov.in/hcservices/ The above products wherever required are perfumedand added glitter as per the product design toachieve a creative finish.The above products wherever required are perfumedand added glitter as per the product design toachieve a creative finish. After the products are manufactured, the first levelnovelty ad decorative packaging is applied on theproduct.After the products are manufactured, the first levelnovelty ad decorative packaging is applied on theproduct. Products are suitably grouped and labeled as percustomers requirements.Products are suitably grouped and labeled as percustomers requirements.•After the individual pieces of the products areAfter the individual pieces of the products are https://hcservices.ecourts.gov.in/hcservices/ ready, one more level of packaging for display inthe retail departmental chain stores or the retailexclusive décor stores is carried out, whereverrequired. •A final inner and outer corrugated box packaging iscarried out for export purposes.•Packed products are fumigated as per the legal andcustomer country specific requirements. Products are stuffed in containers and shipped forexports."Products are stuffed in containers and shipped forexports." The details of the finished goods manufactured by the assessee wereas follows: "1. Bouquets 2. Potpurrris3. Garlands 4. Homeand Office décor arrangements 5. Wall Decors6.Floor Decors 7. Kitchen Decors 8. Window Decors 9.Christmas Wreaths 10. Christmas Tree ornaments and 11.Gift Sets." The Assessing Officer, however, referred to the website of theassessee, which gave the product catalogue, as follows:"1. Dried flowers 2. Sola (Soft wood) 3.Potpourri 4. Sea shells 5. Stones 6. Ready to sellWreaths, bouquets, pot arrangement, photo frames, wallframes, garland 7. Incense sticks 8. Aroma giftsand 9. Aroma therapy." 5. Based on this, the Assessing Officer made an analysis ofthe shipments made by the assessee. The invoice gave thedescription on decorative items of dried flowers. In theinvoices, the botanical names of the flowers, plant parts and seashells were mentioned. From the purchase bills, it was found thatthe assessee had obtained dry flowers, fern, grass, bajra sticks,palm fruits etc. from West Bengal. On going through the nature ofactivity undertaken, the Assessing Authority came to the conclusionthat there was no manufacturing activity done, as had been claimedby the assessee. Referring to the decision reported in 292 ITR 444(CIT V. Tara Agencies), the Assessing Officer held that out of 13steps mentioned by the assessee, 8 steps involved labeling, barcoding and packing. The raw materials used as per the assessee'sflow chart showed plant parts, sea shells and stone; perfumes,processing chemicals, bleaching and cleaning liquid and bondingmaterials, glitters and metallic powders. In the background of thenature of activity, particularly in making bouquets, Potpourri,Wreaths, Bunches, Garlands and Hobby bags, the Assessing Officercame to the conclusion that there was no manufacturing of anygoods, to qualify for 100% deduction under Section 10B of theIncome Tax Act. splitting up or the reconstruction of a business already inexistence to disqualify the claim as per Section 10B2(ii) of theIncome Tax Act, the Assessing Officer held that the workers in thepay rolls of the company were also employees of the assessee firm;that the assets of the company were utilised by the assessee firm;although the assessee pointed out that the company was dealing inbase or low category products and the assessee firm in premiumproduct line and hence, there was no such thing as splitting up ofthe company in two, yet, the business of the company was split upinto two; consequently the firm was formed through the division andsplitting up of a business already in existence. Thus, as perSection 10B(2)(ii) of the Income Tax Act, the assessee wasdisqualified from claiming deduction under Section 10B of theIncome Tax Act. Aggrieved by this, the assessee went on appealbefore the Commissioner of Income Tax (Appeals). 7. On going through the various processes involved and theactivities undertaken by the assessee to bring out the finalproduct to marketable condition, the Commissioner of Income Tax(Appeals) held that the final product was commercially a differentone from the ingredients or the raw materials used. On goingthrough the provisions of Section 10B of the Income Tax Act, therebeing no definition given to the word 'manufacture', Explanation 4to Section 10B being added only under the Finance Act, 2003, thelaw as it existed relevant to the assessment year alone could beadopted; consequently, in the absence of any definition of the word'manufacture', the word has to be given a meaning as given incommon parlance. Thus, applying the decision reported in 251 ITR323 (Aspinwall & Co. Ltd. V. CIT), the Commissioner of Income Tax(Appeals) agreed with the assessee on the aspect of manufacture, toqualify for deduction under Section 10B of the Income Tax Act. 8. On the aspect of splitting up or re-construction of thebusiness, the Commissioner of Income Tax (Appeals) held that theproducts dealt with by the assessee as well as by the company weretotally different. The expenditure of the firm, even if were to beborne by the company and the employees of the company worked in thefirm, such expenditure was to be a subject matter of disallowanceat the hands of the company. Pointing out that there was notransfer of any assets by the company to the firm or the businessof the company transferred to the firm, the question of holdingthat the firm was formed by splitting up or re-constructing theexisting business could not be presumed. Thus the first AppellateAuthority agreed with the assessee as to its entitlement fordeduction under Section 10B of the Income Tax Act. As regards theallegation of the Assessing Officer that the same labour forceworked in the company as well as in the firm, the Commissioner ofIncome Tax (Appeals) held that even if it be so, the inference onsplitting up cannot be drawn without proper verification. In the light of the above, the claim of the assessee was allowed in toto.Aggrieved by this, the Revenue went on appeal before the Income TaxAppellate Tribunal. 9. The Tribunal dismissed the Revenue's appeal and confirmedthe view of the Commissioner of Income Tax (Appeals). Referring tothe decision reported in 251 ITR 323 (Aspinwall & Co. Ltd. V.CIT), the Tribunal held that in the absence of any definition, theword 'manufacture' has to be understood in common parlance. Whenthe commercially new product had come into existence afterprocessing, the benefit of deduction under Section 10B of theIncome Tax Act, on the manufacturing of item, necessarily appliedto the case of the assessee on hand. light of the above, the claim of the assessee was allowed in toto.Aggrieved by this, the Revenue went on appeal before the Income TaxAppellate Tribunal. 9. The Tribunal dismissed the Revenue's appeal and confirmedthe view of the Commissioner of Income Tax (Appeals). Referring tothe decision reported in 251 ITR 323 (Aspinwall & Co. Ltd. V.CIT), the Tribunal held that in the absence of any definition, theword 'manufacture' has to be understood in common parlance. Whenthe commercially new product had come into existence afterprocessing, the benefit of deduction under Section 10B of theIncome Tax Act, on the manufacturing of item, necessarily appliedto the case of the assessee on hand. 10. As regards the splitting up of the assessee company, theTribunal agreed with the assessee and held that if the AssessingOfficer had had any suspicion that the firm was formed by splittingup of the existing company, then, there must be sufficient evidenceto substantiate such an allegation. Given the fact that theproducts manufactured by the company and the firm were totallydifferent and the constitution of the firm was made out of capitalcontribution by partners from their personal funds, the conclusiondrawn by the Assessing Officer was unfounded and this was not acase of splitting or reconstitution as would take the assessee outof the benefits of Section 10B of the Income Tax Act. Thus theRevenue's appeal was dismissed. Aggrieved by this, the presentappeals have been preferred by the Revenue. 11. Learned standing counsel appearing for the Revenuepointed out that the Tribunal failed to consider that the itemsexported were more of assembling the basic materials procured andin the absence of anything to show that there was manufacturingactivity, the assessee could not be granted the relief. Hesupported the view of the Assessing Officer on the aspect ofsplitting up of the existing unit. Placing heavy reliance on thedecision reported in 292 ITR 444 (CIT V. Tara Agencies), learnedstanding counsel submitted that mere laquering or painting of theplants, by itself, would not result in manufacture. Consequently,the order of the Tribunal has to be set aside. 12. Countering the claim of the Revenue, learned counselappearing for the assessee pointed out to the detailed process thatthe assessee had undertaken to result in a commercially new productto fit in with the export order and submitted that the driedflowers and plants component, which are raw materials, are notexported just by assembling. They should be bunched together andmoulded in various shapes and form as per the desire of the foreignpurchasers; further, the dried flowers and plant components arecleaned, graded, thereafterwards, according to the requirements,they are bleached, washed and coloured, laquer is applied and after 12. Countering the claim of the Revenue, learned counselappearing for the assessee pointed out to the detailed process thatthe assessee had undertaken to result in a commercially new productto fit in with the export order and submitted that the driedflowers and plants component, which are raw materials, are notexported just by assembling. They should be bunched together andmoulded in various shapes and form as per the desire of the foreignpurchasers; further, the dried flowers and plant components arecleaned, graded, thereafterwards, according to the requirements,they are bleached, washed and coloured, laquer is applied and after using necessary preservatives to maintain their shape, the productsare perfumed and added glitter according to the design. Thus theend product is a totally different one from what was purchased asraw material. If the nature of activity involved was just cleaningand grading or sizing up and mere processing thereon, then theRevenue must prove the same to test the requirement of law on theissue of manufacture. However, given the fact that apart fromcleaning and grading, the activity of the assessee has gone furtherto make the dried plants and leaves, fit for being called apotpourri or dried flowers for export, even as per the botanicalname, the contention of the Revenue that there was no manufacturingactivity cannot be accepted. Thus, even applying the subsequentamendments to the provisions under Section 2(29)BA or even as underSection Section 10B Explanation, the end product being differentfrom what was originally purchased as raw material, the processingof the dried leaves or plants had gone to such an extent ofirreversibility, the activity cannot be over-simplified to call itas a mere processing. In the circumstances, the reliance placed onthe decision reported in 292 ITR 444 (CIT V. Tara Agencies) wouldnot be of any avail to the Revenue. 13. On the allegation of splitting up of the company intofirm, he submitted that the business of the company as well as thefirm were on two different lines. While the company deals with thelow category products, the assessee firm deals with the premiumproduct. There is absolutely no material on record for the Revenueto contend that there was splitting up of the company to firm. Themere existence of some of the partners in the company being theDirectors of the firm, per se, would not lead to inference thatthere was a splitting up of a company to a partnership firm. Inthe circumstances, the Tribunal had correctly held that theassessee was entitled to the deduction under Section 10 B of theIncome Tax Act. 14. Heard learned standing counsel appearing for the appellantand the learned senior counsel appearing for the respondent andperused the materials placed before this Court. 15. We agree with the contentions made by the learned seniorcounsel appearing for the assessee that the process which theassessee had undertaken satisfies the test of manufacture toqualify for relief under Section 10B of the Income Tax Act. Asalready narrated in the preceding paragraph, the emphasis of theRevenue is that in the absence of any definition under the Act asto what 'manufacture' is, the decision of the Apex Court reportedin 292 ITR 444 (CIT V. Tara Agencies) would squarely apply. It iscontended that every change is not 'manufacture' and every changein an article as the result of treatment, per se, would not resultin 'manufacture'. There is no dispute on this broad principle.However, it is not denied by the Revenue that apart from cleaning https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ and grading, the assessee had taken further processing; that whatis purchased as raw material and what is exported as a product forexport are totally different items. The process that the assesseehad undertaken clearly points out the irreversible nature of thefinal end product from a raw material purchased and given the abovesaid fact, which the Revenue does not deny, we have no hesitationin accepting the contention of the assessee that there was, infact, 'manufacture'. 16. We accept the contention of the assessee in this regarddrawing support from the decision of the Apex Court reported in 251ITR 323 (Aspinwall & Co. Ltd. V. Commissioner of Income Tax(Appeals)) that the word 'manufacture' has to be understood incommon parlance, there being no definition of the word'manufacture' in the Act. Even if one looks at the definition of'manufacture', as given under Explanation 3 to Section 10B, as itexisted prior to its substitution in 2001, we find, the term wasdefined inclusively that any process or assembling or recording ofprogramme or disc, tape, perforated media or other informationstorage device are brought under the definition of 'manufacture'.In any event, with the definition of 'manufacture' available asunder Explanation 4 to Section 10B of the Income Tax Act, insertedby Finance Act, 2003, with effect from 1.4.2004, which defines'manufacture or produce' to include the cutting and polishing ofprecious and semi-precious stones, as is relevant for theassessment years under consideration, the decision relied on by theRevenue is not of any assistance. Learned Standing counselappearing for the Revenue brought to our attention Section 2(29)BA,inserted under the Finance (No.2) Act 2009, with effect from1.4.2009, which defines 'manufacture' to mean a change in a non-living physical object or article or thing resulting intransformation of the object or article or thing into a new anddistinct object or article or thing having a different name,character and use; or bringing into existence of a new and distinctobject or article or thing with a different chemical composition orintegral structure. 17. Even though the definition of 'manufacture' under Section2(29)BA, as amended under Finance Act 2 of 2009, with effect from1.4.2009 and Explanation 3 to Section 10B, as it stood prior to theFinance Act, 2001 are not of any relevance to the case on handrelating to the assessment years 2004-05, 2005-06, 2006-07 and2008-09, yet, with Explanation 4 to Section 10B of the Income TaxAct, inserted by Finance Act, 2003 with effect from 1.4.2004,defining 'manufacture' or produce' to include the cutting andpolishing of precious and semi-precious stones and the idea ofgranting exemption/deduction under Section 10B being clear, therelief under Section 10B of the Income Tax Act cannot be denied. Ltd. V. Commissioner of Income Tax (Appeals)), the Apex Courtobserved "the word "manufacture" has not been defined in the IncomeTax Act. In the absence of a definition, the word "manufacture" hasto be given a meaning as is understood in common parlance. It is tobe understood as meaning the production of articles for use fromraw or prepared materials by giving such materials new forms,qualities or combinations whether by hand labour or machines. Ifthe change made in the article results in a new and differentarticle then it would amount to manufacturing activity." Thus theApex Court pointed out that if the commodity can no longer beregarded as the original commodity but instead is recognized as anew and distinct article, then the activity of manufacture can besaid to take place. 19. The decision relied on by the Revenue reported in 292 ITR444 (CIT V. Tara Agencies), however, stands on a different footing.There, the assessee was engaged in purchase of different qualitiesof tea and blending the same for the purpose of export. On thequestion as to whether the assessee would be entitled to weighteddeduction under Section 35B(1A) of the Income Tax act, the SupremeCourt pointed out on facts that the assessee's activity amounted toprocessing only and the activity did not amount to production ormanufacture. Thus the case relied on by the Revenue isdistinguishable on facts. 20. Given the admitted fact that what was purchased by theassessee as raw material and exported goods are totally differentitems and commercially known as a different product, going by thedefinition 'manufacture' in Explanation 4 to Section 10B of theIncome Tax Act, we have no hesitation in agreeing with thecontention of the assessee and thereby confirm the order of theTribunal. 21. As regards the splitting up under Section 10B(2)(ii) ofthe Income Tax Act, it is not denied by the Revenue that theassessee firm is a different assessable entity from the company.It is not denied by the Revenue that the mere fact of both theentities carrying on the same business, per se, would not lead to aconclusion that there was a splitting up of a company to a newentity, namely, firm. The Commissioner of Income Tax (Appeals) aswell as the Tribunal had looked into the facts of the case andultimately came to the conclusion that the mere presence of threeof the Directors as partners, by itself, would not make the firm asone, split up from the company and both the entities deal indifferent graded products and they were one and the same – whilethe company dealt with low end products, the assessee deals withhigh end products. The Tribunal, as a final fact findingauthority, has also pointed out that the firm was constituted withthe capital contribution by the partners from their personal funds.Thus, we do not find neither the presence of the partners not the products dealt with would be of any guidance to decide the issueraised by the assessee. So too the workmen working in theassessee's business and in the company. In the absence of anymaterial to substantiate the contention of the Revenue that thefirm was constituted by splitting up of the company, we have nohesitation in rejecting the plea of the Revenue. Consequently, wehave no hesitation in confirming the order of the Tribunal. 22. For the reasons we have already given in the precedingparagraph, the above Tax Case (Appeals) are dismissed. No costs. -s/d-Assistant RegistrarTrue CopySub-Assistant RegistrarTo1. The Income Tax Appellate Tribunal, Madras 'C' Bench2. The Income Tax Appellate Tribunal, Madras 'B' Bench, 3. The Income Tax Appellate Tribunal, Madras 'D' Bench4. The Income Tax Officer, Business Ward XIII(2), Chennai.No.121, Mahatma Gandhi Salai Chennai-600 0345.The commissioner of Income Tax,Ward XIII (2),ChennaiNO.121, Mahathma Gandhi Road, Nungambakkam,chennai-346.The Secretary, Central board of Direct Taxes,New Delhi+2 cc to Mr.T.cheziyan Advocate sr.33434 T.C.(A) Nos.299, 804 and 805 of 2010 and 342 of 2012 skd(co)aa 05/08/2013 https://hcservices.ecourts.gov.in/hcservices/