Swarovski India Pvt. Ltd v. Deputy Commissioner Of Income Tax,Circle

$~ *IN THE HIGH COURT OF DELHI AT NEW DELHI+W.P.(C) 5807/2014 Reserved on : 17[th]August, 2017Decision on :30[th]August, 2017 SWAROVSKI INDIA PVT. LTD. ..... Petitioner Through:Mr. M. S. Syali, Senior Advocatewith Mr. Mayank Nagi and Mr. TarunSingh, Advocates. Versus DEPUTY COMMISSIONER OF INCOME TAX,CIRCLE NO. 7(1), NEW DELH. ..... Respondent Through:Mr. Zoheb Hossain, Senior Standing Counsel. CORAM:JUSTICE S.MURALIDHARJUSTICE PRATHIBA M. SINGH JUDGMENT % Prathiba M. Singh, J. 1. The Petitioner seeks quashing of a notice dated 25[th]March, 2014 issuedunder Section 148 of the Income Tax Act, 1961 (hereafter referred to as ‘theAct’) by which the Deputy Commissioner of Income Tax (‘DCIT’) sought tore-assess the Petitioner's income for the Assessment Year (‘AY’) 2007-08on the ground that the income chargeable to tax had escaped assessment,within the meaning of Section 147 of the Act. Background facts 2. The Petitioner is engaged in the business of manufacturing, production of W.P.(C) No.5807/2014 imitation pearls as also import and sale of crystals and crystal related itemsin India. It has two units, one in Pune and another in Delhi. According tothe Petitioner, the Pune unit is a 100% a export oriented unit, set up forcoating of raw beads and producing commercially usable goods and theDelhi unit has been set up for importing and trading/sale of crystal andcrystal related products. 3. The Petitioner had filed its return for AY 2007-08 declaring a loss ofRs.5,36,96,344/-, after claiming benefit of Rs.4,67,89,966/- as deductionunder Section 10B of the Act in respect of the Pune unit. The Petitioner wasissued notice by the Assessing Officer (‘AO’) under Section 143 (2) of theAct. The AO also made a reference of the Petitioner’s case to the TransferPricing Officer (‘TPO’) under Section 92 CA of the Act. Post the TPO’sreport, a draft order under Section 144 C of the Act was passed by the AO.Thereafter, the final assessment order under Section 143 (3) of the Act cameto be passed by the AO on 28[th]January, 2011. The further proceedingsarising from the said assessment order are currently pending before theIncome Tax Appellate Tribunal (‘ITAT’). It is relevant to point out that inthe draft assessment order, passed under Section 144 C of the Act, thePetitioner was given the benefit of the deduction under Section 10B of theAct. 4. Thereafter, a notice under Sections 154/155 was also issued on 28[th]June,2013 of the Act on the ground that the computation of income under Section143 (3) of the Act dated 28[th]January, 2011 is required to be amended due toa mistake apparent on the face of the record. In the said notice, the AO W.P.(C) No.5807/2014 Page 2 of 18 captured the particulars of the mistake proposed to be rectified, as under: “The assessment of M/s Swarovski India Pvt. Ltd. forthe assessment year 2007-08 was completed undersection 143(3) of the Income Tax Act, 1961 in January,2011 determining an income of Rs. 68524800 afterallowing deduction of Rs.46789966 u/s 10B andcreating a demand of Rs. 6567190. Perusal of recordsrevealed that the assessee company is running twounits viz Delhi unit which is doing trading whereas thePune unit is doing manufacturing activities. Theassessee has shown taxable income of Rs. 47017800from Pune unit on which exemption u/s 10B has beenclaimed at Rs. 46789966. The assessee has loss fromDelhi unit amounting to Rs. 53924178. Over all theassessee has a negative profit in the Gross TotalIncome amounting to Rs. 6906378. Thus when theGross total income of the assessee is negative, theassessee is not entitled to exemption of income from the10B unit separately and to carry forward the loss ofthe not 10B unit only. The view is also supported by theAssessing Officer himself while finalizing assessmentof A. Y 2008-09 and disallowed the deduction u/s 10B.Thismistakeresultedinincorrectallowanceofdeductionu/s10BamountingtoRs.46789966involving tax effect of Rs.15749503 including interest.” 5. Thus, the main reason set out in the said notice under Section 153/154was that since the gross total income in respect of both the units at Pune andDelhi was in the negative, the Assessee was not entitled to exemptionseparately for the Pune unit. The Assessee replied to the said notice.However, thereafter no order was passed by the AO thereon. 6. On 25[th]March 2014, a notice under Section 148 of the Act came to beissued to the Assessee by the AO. The ‘reasons to believe’ as recorded by W.P.(C) No.5807/2014 the AO, and as communicated to the Assessee upon request, were withrespect to the deduction of Rs.4,67,89,966/- under Section 10B of the Act.The said reasons to believe contained the following two grounds, on whichthe AO proposed to re-assess the taxable income of the Assessee for the AY2007-08:- “(ii) It is observed that the assessee company isrunning two units viz Delhi unit which is doing tradingwhereasthePuneunitisdoingmanufacturingactivities. The assessee has shown taxable income ofRs.4,70,17,800/- from Pune unit on which exemptionu/s10B has been claimed at 4,67,89,966. The assesseehas also shown loss from Delhi Unit amounting toRs.5,39,24,178. Over all the assessee has a negativeprofit in the Gross total income amounting to Rs.69,06,378/-. It is clear that when the Gross totalincome of the assessee is negative, the assessee is notentitled to exemption of income from the 10B unitseparately and to carry forward the loss of the non 10Bunit only. (iii) It is also noticed that the assessee is not bringingany sale proceeds inIndia and only providingmanufacturing services to its AEs and receivingcharges on cost plus basis. It is also contended that thepractice adopted by the assessee, legal position andsubmission of the assessee was not held covered by theprovision of section 10B. Same view as taken by theAO in the A Y 2008-09 & 2009-10 and exemption u/s10B was disallowed by the then AO. In view of this thedeductionof4,67,89,966/-hasbeenerroneouslyclaimed by the assessee for A Y 2007-08.” 7. The Assessee filed its objections and contended that the notice underSection 148 of the Act was barred as it had been issued beyond the period offour years. The Assessee also contended that the proceedings under Section W.P.(C) No.5807/2014 Page 4 of 18 143 (3) of the Act were completed on the very same facts. The Assesseerecapitulated the entire history of the dispute by referring to the variousnotices that had been issued to it qua this AY and the proceedings initiatedtherefrom by the authorities. The Assessee pointed out that its accounts forthis year were examined by the AO on several occasions.In short, theAssessee contended that there was no ground for reopening the assessment. 8. The objections were disposed of by the AO on 11[th]June, 2014. The AOupheld the validity of the initiation of the re-assessment proceedings. ThePetitioner has thus challenged, in this writ petition, the initial notice dated25[th]March, 2014 issued under Section 148 of the Act as also the order dated11[th]June, 2014 disposing of the objections of the Assessee. Petitioner’s Submissions 9. Mr. M. S. Syali, learned Senior Advocate appearing for the Petitionercontends that the Section 148 proceedings are untenable in law, inasmuchas, the same issues that have already been examined while passing the initialassessment order under 143 (3) and the other proceedings under Section153, are being raked up again and again by the authorities without any freshmaterial or facts. 10. The foundation of Mr. Syali's argument is that the very same issuerelating to the entitlement of the Pune unit for deduction under Section 10Bof the Act has been now adjudicated in favour of the Petitioner for AY2008-09. According to Mr. Syali both the reasons for re-opening theassessment are not tenable. His submission in brief, for each reason, is as W.P.(C) No.5807/2014 under: 9. Mr. M. S. Syali, learned Senior Advocate appearing for the Petitionercontends that the Section 148 proceedings are untenable in law, inasmuchas, the same issues that have already been examined while passing the initialassessment order under 143 (3) and the other proceedings under Section153, are being raked up again and again by the authorities without any freshmaterial or facts. 10. The foundation of Mr. Syali's argument is that the very same issuerelating to the entitlement of the Pune unit for deduction under Section 10Bof the Act has been now adjudicated in favour of the Petitioner for AY2008-09. According to Mr. Syali both the reasons for re-opening theassessment are not tenable. His submission in brief, for each reason, is as W.P.(C) No.5807/2014 under: 10.1 In respect of the first reason for re-opening the assessment i.e. that theoverall income of the Assessee being negative and that the Assessee is notentitled to exemption under Section 10B of the Act, the same is not tenablein view of the decision of the Supreme Court in CIT v. Yokogawa IndiaLtd., [2017] 391 ITR 274 (SC) (hereafter ‘Yokogawa’). He relies upon theobjections filed by the Assessee to the impugned notice wherein theAssessee had disclosed to the AO all the details relating to the adjustment ofthe losses of the Delhi unit against the profits of the Pune unit. The detailedbifurcation of the returned and assessed brought forward losses, between thePune unit and Delhi unit for the previous assessment years, was alsodisclosed vide letters dated 10[th]/18[th]December, 2012. On merits, Mr. Syalirelies upon the judgment of the Supreme Court in Yokogawa (supra) tosubmit that the present case is similar to the case decided by the SupremeCourt in Yokogawa (supra). As regards the first reason for re-opening hesubmits that Yokogawa (supra) is the authority on the proposition that thededuction under Section 10B has to be with reference to the gross totalincome of the eligible undertaking, which in this case is the Pune unit of theAssessee. Such deduction has to be made before arriving at the total incomeof the Assessee. 10.2 Insofar as the second reason for re-opening, viz., that the Assesseemerely merely providing manufacturing services to its AEs on cost plusbasis, at the Pune Unit, Mr. Syali explained that this was factually incorrect.He relies upon the Transfer Pricing Report to submit that the Assessee was W.P.(C) No.5807/2014 Page 6 of 18 not rendering its services on the cost plus basis but in fact the cost plusmethodology was adopted to determine the comparables for the purpose offixing the arm’s length price. Thus, according to Mr. Syali, the AOcommitted an error in wrongly presuming that the Assessee was receivingthe charges on a cost plus basis.Mr. Syali further relies upon the Form3CEB for the AY 2007-08 issued by the external auditors, which contain thedetails of the purchases made, the details of invoices to demonstrate that thecost plus method was used for determining the arm’s length price. He alsoplaced reliance upon an order passed by this Court in ITA No.1223/2011(CIT v. Lovlesh Jain (hereafter ‘Lovlesh Jain’)) to submit that the term`manufacturing' has a wide connotation and the interpretation of the AO iswrong on this count. 10.3 Finally, on the third reason cited in the reasons to believe, i.e., theassessment order for AY 2008-09, Mr. Syali refers to the order of theCIT(A) to submit that the AO's order for the said AY 2008-09 has now beenreversed and the CIT(A) has now held in favour of the Assessee. Mr. Syalispecifically relies upon the order of the CIT(A) which, in turn relied uponthe decision of the Supreme Court in Yokogawa (supra), and granted thebenefit of exemption under Section 10B of the Act to the Assessee. 10.3 Finally, on the third reason cited in the reasons to believe, i.e., theassessment order for AY 2008-09, Mr. Syali refers to the order of theCIT(A) to submit that the AO's order for the said AY 2008-09 has now beenreversed and the CIT(A) has now held in favour of the Assessee. Mr. Syalispecifically relies upon the order of the CIT(A) which, in turn relied uponthe decision of the Supreme Court in Yokogawa (supra), and granted thebenefit of exemption under Section 10B of the Act to the Assessee. 10.4. Mr. Syali, thereafter relies upon the grounds of the appeal, filed by theRevenue before the ITAT against the order of the CIT (A) to submit that theRevenue has not challenged the grant of deduction under Section 10B of theAct to the Assessee. Thus, according to Mr. Syali, the matter has attainedfinality insofar as the deduction under Section 10B is concerned and hence W.P.(C) No.5807/2014 Page 7 of 18 the basis for reopening the assessment for AY 2007-08 no longer survives. 11. In support of these contentions, Mr. Syali has relied upon the followingthree orders wherein Courts have ruled in favour of the Assessee when thebasis of `reasons' is itself non-existent due to subsequent developments: (i) A. T. Kearney India Ltd. v. ITO, 371 ITR 179 (Del) (hereafter ‘A. T. Kearney’) (ii) Order passed in W.P.(C) No.5895/2010 (National AgriculturalCooperative Marketing Federation of India Ltd. v. ACIT) (hereafter‘National Agricultural’) (iii) Ultra Marine Air Aids (P) Ltd.v. Inspecting AssistantCommissioner, 322 ITR 273 (Del) (hereafter ‘Ultra Marine’) (iv)OrderpassedinW.P.(C)No.17719-20/2006(SilverOakLaboratories Pvt. Ltd. & Anr. v. DCIT) (hereafter ‘Silver Oak’) 12. Mr. Syali relied upon the DCIT v. Simplex Concrete Piles (India) Ltd.,(2013) 358 ITR 129 (SC) (hereafter ‘Simplex Concrete’) to argue thatmerely on the basis of a subsequent opinion of a higher forum, anassessment cannot be re-opened under Section 148 of the Act. According toMr. Syali, there was no basis for the reasons to believe and he relies uponSwarovski India Pvt. Ltd. v. DCIT 368 ITR 601 (hereafter ‘SwarovskiIndia’) and Hindustan Lever Ltd. v. R. B. Wadkar 268 ITR 332 (hereafter‘Hindustan Lever’). Mr. Syali places heavy reliance on the view taken bythis Court in Orcale India Pvt. Ltd. v. ACIT 2017 SCC OnLine Del 9360(hereafter 'Oracle India’) to submit that the jurisdictional requirement forreopening of the assessment is not satisfied. Mr. Syali further relies upon W.P.(C) No.5807/2014Page 8 of 18 Hindustan Lever (supra) to submit that there exists some vital link tosafeguard against arbitrary reopening of a concluded assessment and thatoral submissions cannot be used to strengthen the reasons to believerecorded by the AO. Respondent’s Submissions 13. Mr. Zoheb Hossain, learned Senior Standing Counsel for the Revenuesubmits that at the stage of issuance of notice under Sections 147 and 148 ofthe Act, the AO only needs to take a prima facie view that income hasescaped assessment and that the order passed for the subsequent year couldform the basis for reopening of the assessment of an earlier year. He reliesupon Sitara Diamonds Pvt. Ltd. v. ITO 8(3)(2), ACIT Tax Circle -8, CIT(2013) 358 ITR 424 (hereafter ‘Sitara Diamonds’), and Ess Ess KayEngineering Co. Pvt. Ltd. v. CIT (2001) 247 ITR 818 (hereafter ‘Ess EssKay 2001’). Mr. Hossain points out that if the assessing authority discoversa fact later on, he is entitled to form an opinion that the primary factsdisclosed in the previous years were untrue and in such circumstances, theAO is permitted to reopen the assessment. In support of this contention, Mr.Hossain places heavy reliance on Siemens Informations Systems Ltd. v.ACIT (2012) 343 ITR 188 (hereafter ‘Siemens Informations Systems’) andCIT v. Ess Ess Kay Engineering Co. Pvt. Ltd. (1982) 137 ITR 446(hereafter ‘Ess Ess Kay 1982’). 14. Mr. Hossain further submits that the Assessee is not bringing any saleproceeds in India and it is merely providing manufacturing services to itsAEs and receiving the service charges on a cost plus basis. According to W.P.(C) No.5807/2014 Page 9 of 18 him, the Assessee is also not exporting any articles/things but merelycarrying out the job work. Since the Assessee cannot purchase the goodsfrom the AEs and cannot sell these goods to anyone else or deal with themas per its wishes, the business activities cannot be considered as exports,thus disentitling the Assessee for the benefit of Section 10B of the Act.According to Mr. Hossain, since the nature of activity at the Pune unit byitself did not qualify for the benefit under Section 10B and also since theoverall income of the Assessee is in the negative, it is not entitled to theexemption under Section 10B of the Act. 15.Mr. Hossain submits that the Assessee ought to be directed toparticipate in the assessment proceedings wherein it can rely upon the orderspassed in the subsequent AY 2008-09. Mr. Hossain specifically relies uponAGR Investment Ltd. v. ACIT [2011] 333 ITR 146 (Del) (hereafter ‘AGRInvestment’) to submit that the sufficiency or correctness of the material isnot to be considered at the stage of notice under Section 148 of the Act. Mr.Hossain submits that mere production of account books or other evidencebefore the AO would not per se be sufficient disclosure. He relies onExplanation 2 to Section 142 of the Act and the judgment of this Court inRakesh Agarwal v. ACIT (1996) 221 ITR 492 (hereafter ‘RakeshAgarwal’). Analysis and Findings 16. The undisputed facts in the present case are that a detailed analysis of theAssessee’s accounts, financial statements, computation etc. was undertakenas part of the original assessment proceedings. The Assessee had, during the W.P.(C) No.5807/2014 Page 10 of 18 original assessment proceedings, disclosed the existence of its Pune unit andthe exports undertaken therefrom. It had made a full disclosure of the factsrelating to its Delhi unit. Thus, all the facts were well within the knowledgeof the AO since inception. 17. The notice under Section 154 of the Act, questioning the deductionclaimed and allowed under Section 10B was also issued on the same basis.However, the said notice does not appear to have been pursued further afterthe Assessee filed its submissions in response thereto. 18. While the proceedings under Section 143 (2) had culminated into anorder under Section 143 (3), the issuance of the notice under Section 148after a period of four years requires that there ought to be a failure todisclose fully and truly all material facts. This is the settled principle asheld in Oracle India (supra), BDR Builders and Developers Pvt. Ltd. v.ACIT 2017 SCC OnLine Del 9425 (hereafter ‘BDR Builders’), and UnitechLimited v. DCIT 2017 SCC OnLine Del 9408 which are all recentjudgements of this Court. 19. The Revenue’s stand, that the proceedings of subsequent years couldform the basis to reopen the assessment of an earlier year, if acceptedunconditionally, could lead to unending assessment proceedings. Suchreopening cannot be permitted if there is no fresh material or factsdiscovered later on. This is clear from both the judgments cited by Mr.Hossain namely Ess Ess Kay 2001 (supra) and Siemens InformationsSystems (supra). In Ess Ess Kay 2001 (supra) the Supreme Court observed W.P.(C) No.5807/2014Page 11 of 18 19. The Revenue’s stand, that the proceedings of subsequent years couldform the basis to reopen the assessment of an earlier year, if acceptedunconditionally, could lead to unending assessment proceedings. Suchreopening cannot be permitted if there is no fresh material or factsdiscovered later on. This is clear from both the judgments cited by Mr.Hossain namely Ess Ess Kay 2001 (supra) and Siemens InformationsSystems (supra). In Ess Ess Kay 2001 (supra) the Supreme Court observed W.P.(C) No.5807/2014Page 11 of 18 that a reopening of assessment by the AO `of an earlier year on the basis ofthe findings of fact made on the basis of fresh materialsin the course ofassessment of the next assessment year' would not be precluded. Thus, thisCourt does not accept the proposition that in every case it would bepermissible for the assessing authority to reopen the assessment of an earlieryear on the basis of assessment of a subsequent year. While it is possiblethat on the same set of facts, the AO could, in a subsequent year, form adifferent opinion, that by itself would not justify the reopening of anassessment of the previous year made under Section 143 (3) of the Act.However, if fresh material is discovered or facts are discovered later on inrespect of the said earlier assessment year, in a subsequent year, dependingon the facts of each case, the validity of the reopening of assessment wouldhave to be adjudicated. 20. In the present case, there is no fresh fact or fresh material which formsthe reasons to believe for reopening of the assessment except the orderpassed by the AO for the subsequent AY 2008-09. 21. The impugned notice contains three reasons on the basis of which theAO proposes to re-assess the taxable income.AO proposes to re-assess the taxable income. (i) Reason no. 1 - that the gross total income of the Assessee is in thenegative and hence exemption under Section 10B of the Act cannot begranted separately for the Pune unit.negative and hence exemption under Section 10B of the Act cannot begranted separately for the Pune unit. (ii) Reason no. 2 - that the Assessee is not bringing any sale proceedsinto India but only providing manufacturing services to its AEs and W.P.(C) No.5807/2014 Page 12 of 18 receiving charges on a cost plus basis. (ii) Reason no. 3 - that the AO in the subsequent AY 2008-09 hasdisallowed the exemption under Section 10B of the Act. Each of the reasons is considered hereinafter. 22. Insofar as the first reason is concerned, it is the admitted position thatduring the assessment proceedings a questionnaire dated 27[th]October, 2010had been issued to the Assessee wherein the Assessee had provided all thedetails relating to income, the exempted income as also background of thebusiness and revenue streams of the Assessee. In its computation of incomefiled with the AO, the Assessee had disclosed the position of losses underthe Delhi unit and profits of the Pune unit. The detailed bifurcation of thereturned and assessed brought forward losses, between the Pune unit andDelhi unit for the previous AY, were also disclosed. The AO had, in theorder dated 28[th]January, 2011 under Section 143 (3) of the Act, assessed theAssessee at an income of Rs.6,85,24,800/- and hence the first reason of theincome being negative is plainly contrary to the record. 23. In any event, while allowing deduction under Section 10B, the deductionis to be qua an eligible undertaking i.e. in this case the Pune unit. This issettled by the Supreme Court in no uncertain terms in Yokogawa (supra)wherein the Supreme Court has held as under: “…16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible W.P.(C) No.5807/2014 Page 13 of 18 undertaking of an Assessee standing on its own and-without reference to the other eligible or noneligibleunits or undertakings of the Assessee.The benefit ofdeduction is given by the Act to the individualundertaking and resultantly flows to the Assessee….” 23. In any event, while allowing deduction under Section 10B, the deductionis to be qua an eligible undertaking i.e. in this case the Pune unit. This issettled by the Supreme Court in no uncertain terms in Yokogawa (supra)wherein the Supreme Court has held as under: “…16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible W.P.(C) No.5807/2014 Page 13 of 18 undertaking of an Assessee standing on its own and-without reference to the other eligible or noneligibleunits or undertakings of the Assessee.The benefit ofdeduction is given by the Act to the individualundertaking and resultantly flows to the Assessee….” The Pune unit being an export unit is an eligible undertaking and is entitledto the benefit under Section 10B. All the material relating to the Pune andDelhi units and their respective businesses, having been filed with the AO,there being nothing new, this reason is not tenable. 24. The second reason for re-opening the assessment - that the Assessee isnot bringing sale proceeds into India and only providing manufacturingservices to its AEs on a cost plus basis. A perusal of the Form 3CEBspecially Annexure-II (Particulars in respect of transactions in TangibleProperty International Transaction (s) in respect of purchase of rawmaterial,consumablesoranyothersuppliesforassembling/processing/manufacturing of goods/articles from associatedenterprise) and Annexure-V (Particulars in respect of providing ofServices International Transaction (s) in respect of services such asfinancial, administrative, technical commercial services, etc.) reveals thatthe Assessee has earned revenues from manufacturing of goods/articles.The reasons recorded seem to suggest that no sale proceeds are brought toIndia and that the Assessee is only providing the manufacturing services toits AEs and receiving the charges on a cost plus basis. This is not correct asper the record. 25. It appears that the AO has completely missed the fact that this issue hadbeen examined in detail in the Transfer Pricing Report prepared by the TPO,which was considered for the purpose of computing the Assessee’s income,when the order under Section 143 (3) of the Act was passed. Afterexamining the various documents on record, the TPO had recommended anenhancement of the income by an amount of Rs.9,57,56,877/- whilecomputing the total income. This recommendation of the TPO had beenaccepted by the AO in the order passed under Section 143 (3) of the Act.Moreover, the audited financial statement of the Assessee clearly reflects thepurchases made by the Assessee for its Pune unit as is also reflected in theForm 3CEB. In respect of the transactions entered into by the Assessee withits AEs and the relationship between the Assessee and its AEs, it wasdiscussed in detail that the Assessee has purchased the goods includingchemicals, packing material, twinklet material, touchstone material etc. andhas sold the same after duly manufacturing the final products. The impugnednotice has misconstrued the term manufacturing, inasmuch as, for anyprocess to constitute manufacturing, it is not essential that the entity ought tobe involved in manufacturing of the finished article alone. 26. It is settled law that any process which renders the commodity or articlefit for use constitutes manufacture. This Court has in Lovlesh Jain (supra),after discussing the entire law on the subject held : “…10. The word "manufacture" can be given, both awider as well as a narrower connotation. In widersense, it simply means to make, fabricate or bring intoexistence an article or product either by physicallabour or by mechanical power. Given a narrower W.P.(C) No.5807/2014 26. It is settled law that any process which renders the commodity or articlefit for use constitutes manufacture. This Court has in Lovlesh Jain (supra),after discussing the entire law on the subject held : “…10. The word "manufacture" can be given, both awider as well as a narrower connotation. In widersense, it simply means to make, fabricate or bring intoexistence an article or product either by physicallabour or by mechanical power. Given a narrower W.P.(C) No.5807/2014 connotation it means transforming of the raw materialinto a commercial product/commodity or finishedproduct which has a new, separate entity but this doesnot necessarily mean that the material by which thecommodity is manufactured must lose its identity. Thelatter connotation has been accepted and applied withsome moderation/clarification in several decisions,keeping in view the context in which the word"manufacture" has been used. ........... If an operation or process that renders a commodity orarticle fit for use, which it is otherwise not fit, thechange/process falls within the meaning of the word"manufacture"….” 27. It is not in dispute that Explanation 4 to Section 10B of the Actspecifically describes `the cutting and polishing of precious and semiprecious stones' as manufacture. The Assessee claims to be carrying out thesaid processes. The Assessee performs cutting and polishing beads andcrystals at different stage of manufacturing processes and earns convertibleforeign exchange on the sale of the same to the AEs. This process, clearly,constitutes manufacturing as contemplated under Section 10B of the Act. 28. The Assessee’s Pune unit is a 100 % export oriented unit carrying onmanufacturing activities. The AO, during the assessment proceedings, hadaccepted this position and had assessed the income of the Assessee atRs.6,85,24,800/- after allowing the benefit under Section 10B of the Act.There was no reason for the AO to seek re-assessment on this ground. 29. Coming to the third reason for reopening the assessment, the AO hadrelied on the assessment order passed in the AY 2008-09 and AY 2009-10 as W.P.(C) No.5807/2014 Page 16 of 18 one of the grounds for issuing notice for re-assessment under Section 148 ofthe Act. The main plank of the arguments of Mr. Syali is that thefundamental basis of the reasons to believe itself does not subsist, inasmuchas, in the AY 2008-09 the AO had disallowed the deduction under Section10B for the Pune unit but in appeal, the CIT(A) granted the benefit ofdeduction under Section 10B. 30. This order of the CIT (A) has been challenged by the Revenue before theITAT but the exemption granted under Section 10B is not under challengetherein. 31. This Court, therefore, agrees with the submission of Mr. Syali that thebasis for the reasons to believe do not survive any more, as held by thisCourt in A. T. Kearney (supra), Silver Oak (supra) and in Ultra Marine(supra), the reopening does not survive. The observation by this Court inUltra Marine (supra) is apt and reads as under: “…As the notification- has been quashed and, the samehas not been assailed by the Revenue Department, thereasons for reopening the assessment under section147/148 of the Income Tax Act, 1961, do not survive. Thevery basis and foundation for issue of reassessment noticehave ceased to exist.Consequently, the writ petition isallowed…” 32. In Silver Oak (supra), this Court has held as under:- “…We have heard the counsel for the parties. It isapparent that the reasons recorded do not contain anyspecific allegation with regard to the year in question,i.e., the assessment year 1999-2000. The sole and entirebasis of re-opening the assessment is the additions madein respect of the assessment years 1998-99 and 2001-02. W.P.(C) No.5807/2014 “…As the notification- has been quashed and, the samehas not been assailed by the Revenue Department, thereasons for reopening the assessment under section147/148 of the Income Tax Act, 1961, do not survive. Thevery basis and foundation for issue of reassessment noticehave ceased to exist.Consequently, the writ petition isallowed…” 32. In Silver Oak (supra), this Court has held as under:- “…We have heard the counsel for the parties. It isapparent that the reasons recorded do not contain anyspecific allegation with regard to the year in question,i.e., the assessment year 1999-2000. The sole and entirebasis of re-opening the assessment is the additions madein respect of the assessment years 1998-99 and 2001-02. W.P.(C) No.5807/2014 There is no other reason given by the Assessing Officerfor re-opening the assessment. Since the tribunal hasalready deleted the additions in respect of the assessmentyears 1998-99 and 2001-02, the very basis for continuingany further with the re assessment proceedings does notsurvive any more. We have also indicated above thatthere is no specific allegation with regard to theassessment year 1999-2000 regarding suppression of salefigures….” Thus, all the three reasons for re-opening the assessment under Sections147/148 of the Act do not stand. 33. The Pune unit of the Assessee being an eligible undertaking by itself, asheld by the Supreme Court in Yokogawa (supra), is entitled to the benefit ofSection 10B of the Act. It is also held that the activities conducted by thePune unit constitute `manufacture' and in the subsequent year, on a similarset of facts, the issue of benefit under Section 10B having attained finality,the impugned order deserves to be quashed. Accordingly, notice dated 25[th]March, 2014 issued under Section 148 of the Act is quashed and the orderdated 11[th]June, 2014 passed by the Respondent, disposing of the objectionsof the Assessee for AY 2007-08, is set aside. 34. The writ petition is allowed in the above terms. However, there will beno order as to the costs. PRATHIBA M. SINGH, J AUGUST 30, 2017dk W.P.(C) No.5807/2014 S.MURALIDHAR, J