The Commissioner Of Income Tax,Aayakar Bhavan, Patto, Panaji, Goa v. M/S. Sesa Goa Ltd

& 25 of 2014 IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEALS NO.13 &14 of 2013 & 25 OF 2014 WITH STAMP NUMBER APPLICATION NO. 3436 & 3428 OF 2013 The Commissioner of Income Tax,Aayakar Bhavan, Patto, Panaji, Goa. …. Appellant Versus M/s. Sesa Goa Ltd., Sesa Ghor, 20 EDC Complex,Patto Plaza,Panaji-Goa, 403 001.PAN : …. Respondent Ms. Susan Linhares, Standing Counsel for the Appellant. Mr. P. Pardiwala, Senior Advocate with Mr. P. Kakodkar, Advocate forthe Respondent. Coram: - M.S. SONAK & DAMA SESHADRI NAIDU, JJ. Reserved on : 26 OCTOBER 2020 Pronounced on : 7 MAY 2021 JUDGMENT: (Per Dama Seshadri Naidu, J.) Facts: Respondent-Assessee Company mines and exports iron ore, besidesdealing in shipping and shipbuilding, manufacturing and selling low-ashmetallurgical coke. In September 2009, it filed its return declaring a total & 25 of 2014 income of 2007,48,80,920/-. The appellate Department processed the₹return of income under section 143 (1) and took the case up for scrutiny.First, ACIT, Circle-I, Panaji, notified the assessee under section 143 (2) ofIncome Tax Act. Later, the case was assigned to the Joint Commissionerof Income Tax, Range-1, Panaji, who issued a notice under section 129 ofthe Act in August 2011. In response to the notices, the assessee furnishedinformation and produced the relevant documents. 2. Eventually, on 30.12.2011, the Assessment Officer did thefollowing: (a) Disallowed expenditure of 12,29,25,049/- under section ₹14A ofthe IT Act, read with Rule 8D of IT Rules; (b) Declared that the assessee was ineligible for deduction ofexpenditure incurred on ‘Scientific Research and Developments’(R&D) under section 37 of Act. So, the AO disallowed theexpenditure of 1,94,55,376/- and added it back to the profit and₹loss account; (c) Following the pattern of assessment for AY 2006-07 regardingthe same assessee, the AO disallowed the commission payment. As aresult, 9,88,29,729/- was added back to the total income; ₹(d) 1,55,76,549/- was added back to the total income. It was on₹account of demurrages the assessee paid to a shipping company inPakistan; (e) The assessee claimed as expenditure education cess and fringebenefit tax, totalling to 19,72,00,814/-. But that was disallowed. ₹(f) The assessee claimed deductions under section 10B of the Act forits three EOUs, totalling to 4,51,27,84,122/-. But the AO₹disallowed the benefits claimed by the assessee for all the threeunits. 3 & 25 of 2014 (g) The foreign remittances of 57,80,379/- (sale proceeds) relating₹to 100% EOU of Assessee’s Amona Division was not receivedwithin the time limit specified under section 10B of the Act. So, theAO disallowed the deduction of that amount, too. (h) The assessee showed notional loss of 9.08 crores on foreign₹exchange transactions. The AO treated that loss from forwardcontracts as speculation loss and, accordingly, disallowed that lossof 1,59,00,000/-. ₹ (i) The assessee claimed additional depreciation on metallurgicalcoke division, totalling to 10,91,79,435/- on purchase of new plant₹and machinery during the year. That was disallowed. (j) The AO also disallowed 61,35,482/-, the expenditure the₹assessee incurred to increase the authorised share capital. (k) The AO also initiated penalty proceeding under section 271(l)(c)of the Act for furnishing inaccurate particulars of income. 3. Aggrieved, the assessee appealed to the Commissioner of IncomeTax (Appeals), Panaji. The Ld. CIT(Appeals), through Order, dated31/08/2012, allowed the appeal in part : (a) Confirmed the disallowance under section 14A of the Act; (b) Deleted the addition of expenditure on disallowance ofexpenditure on R & D. (c) Confirmed the disallowance of commission paid to non-residentagents. (d) Confirmed the disallowance of demurrage payment u/s. 40(a)(i)of the Act. (e) Confirmed the disallowance of education cess. 4 txa nos.13,14 of 2013 & 25 of 2014 (k) The AO also initiated penalty proceeding under section 271(l)(c)of the Act for furnishing inaccurate particulars of income. 3. Aggrieved, the assessee appealed to the Commissioner of IncomeTax (Appeals), Panaji. The Ld. CIT(Appeals), through Order, dated31/08/2012, allowed the appeal in part : (a) Confirmed the disallowance under section 14A of the Act; (b) Deleted the addition of expenditure on disallowance ofexpenditure on R & D. (c) Confirmed the disallowance of commission paid to non-residentagents. (d) Confirmed the disallowance of demurrage payment u/s. 40(a)(i)of the Act. (e) Confirmed the disallowance of education cess. 4 txa nos.13,14 of 2013 & 25 of 2014 (f) Confirmed disallowance of deductions u/s.10B regarding thethree EOUs. (g) Deleted the additions made because of the losses inforeign exchange transactions. (h) Confirmed the disallowance of additional depreciation. (i) Deleted the expenditure incurred in respect of bonus shares. txa nos.13,14 of 2013 & 25 of 2014 6 txa nos.13,14 of 2013 & 25 of 2014 4. Then, both the Assessee and the Revenue filed appeals before theIncome Tax Appellate Tribunal, Panaji Bench, Goa. The learned Tribunaltook up the appeals together and disposed them of by a common order,dated 08/03/2012 : (a) Reversed the disallowance under section 14A of the Act. (b) Confirmed the CIT (A)’s findings on the R&D expenditure inthe Assessee’s favour.the Assessee’s favour. (c) On the demurrage charges, it ruled in Assessee’s favour. (d) On the Assessee’s claim for deduction under section 10B of theAct regarding the three 100% export-oriented units, it ruled in theAssessee’s favour. Act regarding the three 100% export-oriented units, it ruled in theAssessee’s favour. (e) On the Assessee’s claim for depreciation under section 32 (l) (iia)of the Act, the Tribunal ruled in the Assessee’s favour. of the Act, the Tribunal ruled in the Assessee’s favour. (f) It confirmed the CIT (A)’s finding in Assessee’s favour on theissue of the losses in foreign exchange transactions.issue of the losses in foreign exchange transactions. 5. Aggrieved, the Revenue has filed this Tax Appeal before thisCourt. While admitting the appeal, the Court framed these substantialquestions of law: (I) Has the Tribunal correctly applied the definition of ‘manufacture’given in SEZ Act 2005, which is applicable only for section 10AA ofthe IT Act and which imposes various conditions for the utilisationof profits?given in SEZ Act 2005, which is applicable only for section 10AA ofthe IT Act and which imposes various conditions for the utilisationof profits? 7 txa nos.13,14 of 2013 & 25 of 2014 (II) Has the Tribunal correctly directed the AO to restrict the openmarket right of the iron ore to average purchase value by applyingsection 10B (7) read with section 80 IA (8) of the IT Act thoughthere are differences in grade/quality and though it was not atarm’s length price? (IIa) Is the Tribunal right in not considering pro rata overhead costsin determining profits from EVUs? (III) Has the Tribunal correctly deleted the disallowance of ₹12.29crore under section 14A of the IT Act in accordance with Rule 8Dof IT Rules as held by the Mumbai Special Bench of the Tribunal inITO v. Daga Capital Management Pvt. Ltd.?[1] Arguments: Appellant-Revenue: 7 txa nos.13,14 of 2013 & 25 of 2014 (II) Has the Tribunal correctly directed the AO to restrict the openmarket right of the iron ore to average purchase value by applyingsection 10B (7) read with section 80 IA (8) of the IT Act thoughthere are differences in grade/quality and though it was not atarm’s length price? (IIa) Is the Tribunal right in not considering pro rata overhead costsin determining profits from EVUs? (III) Has the Tribunal correctly deleted the disallowance of ₹12.29crore under section 14A of the IT Act in accordance with Rule 8Dof IT Rules as held by the Mumbai Special Bench of the Tribunal inITO v. Daga Capital Management Pvt. Ltd.?[1] Arguments: Appellant-Revenue: 6. Ms. Linhares, the learned Standing Counsel for the Revenue, tobegin with, has drawn our attention to the expression “manufacture” asdefined in the SEZ Act, 2005. According to her, the ITAT (Tribunal) haserred in holding that processing itself amounts to "manufacturing" of ironore; what has been manufactured must be a distinct commodity. Tosupplement her submissions on what amounts to manufacturing, Ms.Linares also points out that the Assessee has not brought into existence anew and distinct object or article by using the processing plants (theEOUs). Besides, she asserts that the definition given in SEZ Act appliesonly to section 10AA of the IT Act. The Tribunal has also erred ininterpreting section 2(29BA) widely and applying it to section 10B of theIT Act. For this proposition, she relies on the Supreme Court’s decision in 8 txa nos.13,14 of 2013 & 25 of 2014 Chowgule & Co. Pvt. v. Union of India,[2] and this Court’s decision inassessee's own case— Commissioner of Income Tax vs. Sesa Goa Ltd.[3] 7. Ms. Linhares has argued that a renovated unit cannot be treatedas a new EOU, especially, when there were only additions or replacementsto an existing unit. There is no cogent evidence, according to her, aboutthe Assessee’s dismantling the existing units. 8. On the second substantial question of law, Ms Linhares submitsthat the Tribunal has misapplied section 10B(7), read with section80IA(8), of the IT Act. According to her, its direction to the AO to restrictthe open market rate of the iron ore to average purchase value despite thedifferences in grade or quality cannot be sustained. Besides, she pointsthat he ought to have considered the pro rata overhead costs indetermining profits from the EOUs. 9. On the third substantial question of law, Ms. Linhares has drawnour attention to section 14A of the IT Act and Rule 8D of the IT Rules,besides the decision of Tribunal Mumbai Special Bench in Daga CapitalManagement. 10. To summarise, Ms. Linhares has submitted that (1) the Tribunalought not to have been swayed by the definitional dynamics of section10AA of the IT Act and section 2 (29) of IT Act; (2) it misunderstood theratio of Chowgule’s case; (3) blending of iron ore does not amount tomanufacturing; (4) addition of machinery does not turn an old unit into anew one; and (5) the Tribunal has misapplied the concept of ‘averagepurchase price’. Respondent-Assessee: 2AIR 1981 SC 1014 3ITR 266 ITR 126 9 txa nos.13,14 of 2013 & 25 of 2014 11. Shri Pardiwala has, to begin with, submitted that the Assessee’sthree Units are 100% EOUs; that aspect, according to him, has not beendisputed. As a matter of fact, the Tribunal has ruled on how new Unitshave come into existence. Then, he has taken us to section 10B of the ITAct. Shri Pardiwala has explained how that section suffered anamendment and what applied to the Assessment Year in question. Respondent-Assessee: 2AIR 1981 SC 1014 3ITR 266 ITR 126 9 txa nos.13,14 of 2013 & 25 of 2014 11. Shri Pardiwala has, to begin with, submitted that the Assessee’sthree Units are 100% EOUs; that aspect, according to him, has not beendisputed. As a matter of fact, the Tribunal has ruled on how new Unitshave come into existence. Then, he has taken us to section 10B of the ITAct. Shri Pardiwala has explained how that section suffered anamendment and what applied to the Assessment Year in question. 12. To elaborate, Shri Pardiwala has submitted that the conversionof tailings or making crude run of iron ore into marketable end-product—that is, processing crude ore into lumps or fines—does amount toproduction or manufacture. According to him, Tribunal has neithermisunderstood nor misinterpreted Chowgule. In other words, Chowguledeals with one facet of production, whereas the Assessee’s processing ofiron ore is much more elaborate, involving various other steps, too. Sowhat the Assessee does in the three Units is more than mere processing; itis production, which is synonymous with manufacturing. Even thechemical combination, in that process, changes. 13. According to Shri Pardiwala, the Assessee’s units do more thanmere blending. The run of iron ore used as the raw material has nocommercial application. On the other hand, the finished product—thelumps or fines—does have commercial value, for that has a differentchemical composition. That is, what comes out is a new product. Then, thelearned counsel has taken us through a few paragraphs of the Tribunaljudgment, besides drawing our attention to certain precedents. 14. On the second substantial question of law, the learned counselreckons that the Revenue has treated the Tribunal’s remand as if it werepartial. But it is a clean remand with a direction to the Assessing Officerto decide the issue as per the law. In the end, the learned counsel has 10 txa nos.13,14 of 2013 & 25 of 2014 urged this court to dismiss all the appeals: TXA No. 13 of 2014, TXA No.14 of 2014, and TXA No. 25 of 2014.Discussion: Substantial Question of Law No. 1: (I) Has the Tribunal correctly applied the definition of ‘manufacture’given in SEZ Act 2005, which is applicable only for section 10AA of theIT Act and which imposes various conditions for the utilisation of profits? 15. The Revenue, as we have noted, has argued that the definitiongiven in SEZ Act applies only to section 10AA of the IT Act. TheTribunal has also erred in interpreting section 2(29BA) of the IT Actwidely and applying it to the process under section 10B of the IT Act. So,let us examine the statutory scheme. Statutory Scheme: 16. Section 10AA was introduced in the Act by the SpecialEconomic Zones Act, 2005, with effect from 10 February 2006. Thededuction under the section is available for fifteen consecutive assessmentyears: (i) for the first five years 100 per cent of profits and gains derivedfrom the export of the goods, articles or services; (ii) for the next fiveyears 50 per cent.; and (iii) for the last five years 50 per cent. Of course, itis subject to the creation of a special economic zone reinvestment reserveaccount. To that account, 50 per cent of profits is to be debited andutilized for the business. 17. The exemption is available to units commencing activity afterApril 1, 2006 but before April 1, 2021. Section 10AA stands, according toKanga & Palkivala[4], on an identical footing as section 10A, since the 4Kanga & Palkivala’s Law and Practice of Income Tax, Arvind P. Datar, 11 ed., e-book. 11 txa nos.13,14 of 2013 & 25 of 2014 17. The exemption is available to units commencing activity afterApril 1, 2006 but before April 1, 2021. Section 10AA stands, according toKanga & Palkivala[4], on an identical footing as section 10A, since the 4Kanga & Palkivala’s Law and Practice of Income Tax, Arvind P. Datar, 11 ed., e-book. 11 txa nos.13,14 of 2013 & 25 of 2014 language of both sections is similar. Besides, they are both in Chapter III,so the principles laid down in judgments under s 10A would apply to thissection as well. The renowned commentary also notes that the servicesmust be provided, or articles or things must be manufactured from theSEZ unit. Where the core of the Assessee's services are provided from theunit, the assessee cannot be denied the benefit because some activitieswere performed outside of it. 18. Section 10B of the Act is a special provision concerning newlyestablished 100% export-oriented undertakings. This section grants adeduction of the profits and gains derived by a hundred per cent. exportoriented undertaking (EOU) from the export of articles or things orcomputer software. The nature of this deduction is very similar to thatunder section 10A. The deduction is granted for ten years from theassessment year relevant to the previous year in which the undertakingbegins manufacture of articles or things or computer software. Theapproval granted by the Board of Approval as a hundred per cent. Itearlier granted a tax holiday for five consecutive years for hundred percent. export oriented undertakings. By the Income-tax (SecondAmendment) Act, 1998, the tax benefit or tax holiday was extended forten consecutive assessment yea Of course, the entire section was recast₹by the Finance Act, 2000, with effect from April 1, 2001, when s 10A wasalso recast in a similar manner. Thus, the two sections are substantiallysimilar. 19. Factually, the dispute concerns the Assessee’s claim of deductionunder section 10B of the Act for its 100% export-oriented units at Amonain Goa, at Chitradurga in Karnataka, and at Codli in Goa. The AO hasconcluded that there was no production or manufacturing in the threeunits. To be explicit, the AO reasoned that Amona and Chitradurga units 12 txa nos.13,14 of 2013 & 25 of 2014 commenced production in 1985 and 1994 respectively; they cannot betreated as new units eligible for the benefit under section 10B merelybecause these units were expanded with a new plant or machinery in2002-03 and 2005-06 respectively. 20. Regarding the Unit at Codli, the AO reasoned that it does notfulfill the conditions of manufacture or production as required undersection 10B (b) of the Act. Nor has the Assessee produced any satisfactoryevidence about the date of commencement of manufacturing orproduction. Of course, the AO has entered a finding regarding the allegedlack of fresh approval by the Board, too. 21. In a nutshell, the AO has held that (a) the iron ore processingcannot be treated as "manufacturing” or production because of the newsection 2 (29BA), defining “manufacture/production”; (b) the assessee hasnot maintained separate books of accounts for the EOU units and for non-EOU units; the old units cannot be treated as new ones merely because aplant or some machinery has been added. Indeed, the CIT (A) hasconfirmed these findings. Then, the Tribunal has reversed these findings. (a) Do the Assessee’s Units manufacture or produce any product? 22. Chitradurga Beneficiation Plant processes crude iron ore (Runof Mines or ROM) extracted from the mines. As a part of the process, theoversized crude iron ore lumps are crushed and are subjected to furtherprocessing. What finally emerges is iron ore lumps and fines. Differentsizes of lumps having different chemical and physical compositions aremixed mechanically as per the product composition ordered by theoverseas buyers. 22. Chitradurga Beneficiation Plant processes crude iron ore (Runof Mines or ROM) extracted from the mines. As a part of the process, theoversized crude iron ore lumps are crushed and are subjected to furtherprocessing. What finally emerges is iron ore lumps and fines. Differentsizes of lumps having different chemical and physical compositions aremixed mechanically as per the product composition ordered by theoverseas buyers. 23. Processes undertaken at Codli Ultra Fine Recovery (UFR) Plantthe waste called ‘tailings’ generated at the iron ore beneficiation plant isfurther processed and low-grade iron ore is produced. Eventually, The 13 txa nos.13,14 of 2013 & 25 of 2014dewatered "Ultra Fines", which is the final product, is exported. And, as amatter of record, all the Units gained approval as EOUs from theDevelopment Commissioner. 24. As to the Unit at Amona, the question was whether it is a newUnit. In paragraph 42.2 of the judgment, the Tribunal has recorded itsfindings on facts. It accepted the Assessee’s application for a personal visitto the Unit, and its Members, along with the IT officials, did visit theUnit. It was to “understand the type of plant & machinery installed at theiron ore Beneficiation plant and also the processes undertaken forproduction”. 25. In the end, the Tribunal has recorded the finding that the natureof activities at Amona plant and Chitradurga plant are similar. Both theseunits as well as Codli plant are approved as 100% EOU units, for theAssessee has placed on record the necessary Board approvals. For CodliUnit, the approval was given initially for five years; it was subsequentlyextended. 26. Then, the Tribunal has addressed the issue whether all theseunits are manufacturing or producing any article or thing. Let us examinethe respective spheres of sections 10A, 10AA, and 10B of the IT Act.Section 10A is a special provision dealing with the newly establishedundertakings in free-trade zone, and so on; section 10AA deals with thenewly established units in special economic zones; section 10B deals withthe newly established 100% EOUs. 27. Section 10B provides that any profits and gains derived by anassessee from a 100% EOU shall not be included in the assessee’s totalincome. This provision applies to any undertaking manufacturing orproducing any article or thing. Explanation (i) to section 10B clarifies thatthe expression “100% Export Oriented Unit” means an undertaking 14 txa nos.13,14 of 2013 & 25 of 2014 approved by the Board appointed in this behalf by the CentralGovernment in exercise of the powers confirmed by section 14 of theIndustries (Development and Regulation) Act, 1951, and the Rules madeunder that Act. 28. The initial Explanation (iii), which was later removed, definedthe word “manufacture” and treated these activities as manufacture: (a)process; (b) assembling; (c) recording of programme on disc, tape,perforated media or other information storage device. Explanation (iv) ofsection 10B further elaborated on the meaning of “produce”. 29. True, this definition of “manufacture” was removed whensections 10A and 10B of the Act were amended by the Finance Act, 2001.These two provisions suffered a further amendment through the FinanceAct, 2003. Explanation (iv) is merely inclusive as it declares that“manufacture or produce” shall include the cutting and polishing ofprecious and semi-precious stones. On the other hand, clause (iii) ofExplanation to section 10AA adopts the definition of "manufacture" clause(r) of section 2 of the SEZ Act, 2005. 29. True, this definition of “manufacture” was removed whensections 10A and 10B of the Act were amended by the Finance Act, 2001.These two provisions suffered a further amendment through the FinanceAct, 2003. Explanation (iv) is merely inclusive as it declares that“manufacture or produce” shall include the cutting and polishing ofprecious and semi-precious stones. On the other hand, clause (iii) ofExplanation to section 10AA adopts the definition of "manufacture" clause(r) of section 2 of the SEZ Act, 2005. 30. As defined under clause (r) of section 2 of the SEZ Act,“manufacture” means “to make, produce, fabricate, assemble, process orbring into existence, by hand or by machine, a new product having adistinctive name, character or use and shall include processes such asrefrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry,floriculture, horticulture, pisciculture, poultry, sericulture, viticulture andmining”. This definition is both exhaustive (“means”) and inclusive (“shallinclude”), too. The inclusive part is merely clarificatory, though. 31. Later, through the Finance Act, 2009, clause (29BA) wasinserted in section 2 of the IT Act, defining the expression "manufacture”: 15 txa nos.13,14 of 2013 & 25 of 2014 “manufacture”, with its grammatical variations, means a change in a non-aliving physical object or article or thing,— () resulting in transformationof the object or article or thing into a new and distinct object or article orthing having a different name, character and use; or (b) bringing intoexistence of a new and distinct object or article or thing with a differentchemical composition or integral structure. 32. The Tribunal has heavily relied on Chowgule. But the Revenuecaseinsists that the Tribunal has misread and misapplied Chowgule’s holding to these appeals. First, this decision was under the Central SalesTax Act, 1956; second, “manufacturing” was in the context of thedefinitional dynamics of that Act, not that of the IT Act. 33. In Chowgule, the appellant mines iron ore and blends diversequantities of ore. These diverse quantities possess different chemical andphysical compositions. This blending results in the production of ore ofthe requisite chemical and physical composition demanded by the foreignpurchaser. When the appellant purchased certain items, they wantedlesser sales tax applied because those items of goods were purchased forthe use in producing exportable commodity. 34. In the above context, the Supreme Court has examined whetherthe appellant, in the first place, involves itself in any manufacturing orprocessing. Section 13 of CST Act allows the Central Government toenumerate goods or class of goods used in “the manufacture or processingof goods for sale or in mining or in the generation or distribution ofelectricity or any other form of power”. Rule 13 mandates that the goods aregistered dealer may purchase shall be goods intended for use by him asraw materials, processing materials, machinery, plant, equipment, tools,stores, spare parts, accessories, fuel, or lubricants, “in the manufacture orprocessing of goods for sales or mining, or in the generation or 16 txa nos.13,14 of 2013 & 25 of 2014 distribution of electricity or any other form of power”. After referring tothe ratio of Deputy Commissioner of Sales Tax v. Pio Food Packers,[5]Chowgulehas answered this question: does the processing of the original commoditybring into existence a commercially different and distinct commodity? 16 txa nos.13,14 of 2013 & 25 of 2014 distribution of electricity or any other form of power”. After referring tothe ratio of Deputy Commissioner of Sales Tax v. Pio Food Packers,[5]Chowgulehas answered this question: does the processing of the original commoditybring into existence a commercially different and distinct commodity? 35. Answering the above question, Chowgule has held that theblending of different qualities of ore possessing different chemical andphysical compositions so as to produce ore of the contractual specificationscannot be said to involve the process of manufacture, since the ore that isproduced cannot be regarded as a commercially new and distinctcommodity from the ore of different specifications blended together. Whatis produced because of blending is commercially the same article, namely,ore, though with different specifications than the ore blended and hence itcannot be said that any process of manufacture is involved in blending ofore. That said, Chowgule has posed unto itself another question: Does theore blending in the course of loading through the mechanical ore handlingplant amount to processing? The answer to this question, according toChowgule, depends on what “the true meaning and connotation” of theword ‘processing’ is. It holds: “[T]his word has not been defined in the Act and it must therefore beinterpreted according to its plain natural meaning. Webster's Dictionarygives the following meaning of the word “process”: “to subject to somespecial process or treatment; to subject (especially raw material) to aprocess of manufacture, development of preparation for the market etc.;to convert into marketable form as livestock by slaughtering, grain bymilling, cotton by spinning, milk by pasteurizing fruits and vegetables bysorting and repacking.” Where therefore any commodity is subjected to aprocess or treatment with a view to its “development or preparation forthe market”, as, for example, by sorting and repacking fruits andvegetables, it would amount to processing of the commodity within themeaning of Section 8(3)(b) and Rule 13. The nature and extent ofprocessing may vary from case to case; in one case the processing may beslight and in another it may be extensive; but with each process suffered, 17 txa nos.13,14 of 2013 & 25 of 2014 the commodity would experience a change. Wherever a commodityundergoes a change as a result of some operation performed on it or inregard to it, such operation would amount to processing of thecommodity. The nature and extent of the change is not material. It maybe that camphor powder may just be compressed into camphor cubes byapplication of mechanical force or pressure without addition oradmixture of any other material and yet the operation may [ Correctedvide letter No. F.3/79 (Ed. J), dated January 30, 1981] amount toprocessing of camphor powder as held by the Calcutta High Court in Om v. Prakash GuptaCommissioner of Commercial Taxes [16 STC 935 (CalHC)] . What is necessary in order to characterise an operation as“processing” is that the commodity must, as a result of the operation,experience some change”. 36. On facts, Chowgule has held that diverse quantities of orepossessing different chemical and physical compositions are blended toproduce ore of the requisite chemical and physical composition demandedby the foreign purchaser. And obviously, as a result of this blending, thequantities of ore mixed in the course of loading through the mechanicalore handling plant experience change in their respective chemical andphysical compositions. Thus, what is produced by such blending is ore of adifferent chemical and physical composition. In other words, when thechemical and physical composition of each kind of ore which goes into theblending is changed, “there can be no doubt that the operation of blendingwould amount to ‘processing’ of ore. 36. On facts, Chowgule has held that diverse quantities of orepossessing different chemical and physical compositions are blended toproduce ore of the requisite chemical and physical composition demandedby the foreign purchaser. And obviously, as a result of this blending, thequantities of ore mixed in the course of loading through the mechanicalore handling plant experience change in their respective chemical andphysical compositions. Thus, what is produced by such blending is ore of adifferent chemical and physical composition. In other words, when thechemical and physical composition of each kind of ore which goes into theblending is changed, “there can be no doubt that the operation of blendingwould amount to ‘processing’ of ore. 37. After relying on Chowgule, the Tribunal has concluded that evenblending of iron ore for export involves change in the chemical andphysical composition of iron ore. It has, then, gone one step ahead andobserved that the Assessee is not only blending iron ore but also carryingout various processes to make the crude ore usable. In this context, it hasreferred to clause (b) of section 2 (29BA) of the Act—that bringing intoexistence a new and distinct object or article or thing with a differentchemical composition or integral structure is tantamount to ‘manufacture’. 18 txa nos.13,14 of 2013 & 25 of 2014 38. We do accept that Chowgule was rendered in a differentstatutory backdrop. But under the CST Act, too, the term ‘processing’ hasnot been defined. Then, applying the common parlance meaning of‘processing’ Chowgule ruled. In Pio Food Packers, as quoted by Chowgule,the Supreme Court has examined whether there is any manufacturing ifthe commodity ‘subjected to the process of manufacture’ can no longer beregarded as the original commodity but is recognised in the trade as a newand distinct commodity. 39. According to Pio Food Packers, commonly 'manufacture' is theend result of one or more processes through which the originalcommodity is made to pass. The nature and extent of processing may varyfrom one case to another. Indeed, there may be several stages ofprocessing and, perhaps, a different processing at each stage. With eachprocess suffered, the original commodity experiences a change. But it isonly when the change, or a series of changes, takes the commodity to thepoint where commercially it can no longer be regarded as the originalcommodity but, instead, is recognised as a new and distinct article that amanufacture can be said to take place." 40. Does the processing of the original commodity bring intoexistence a commercially different and distinct commodity? In fact, PioFood Packers has answered that question affirmatively. If we interpretsection 2 (29BA) in the context of the case-holdings of both Chowgule andPio Food Packers, the inevitable conclusion is that for the purposes ofIncome Tax Act, both ‘manufacture’ and ‘process’ are synonymous. 41. In Saraswati Sugar Mills v. Haryana State Board,[6] the SupremeCourt has held that the essence of manufacturing is changing one objectinto another for making it marketable. 6(1992) 1 SCC 418 19 txa nos.13,14 of 2013 & 25 of 2014 42. In Aman Marble Industries Pvt. Ltd. v. Collector of Central Excise,[7]the question was whether cutting of marble blocks into marble slabsamounted to manufacture under the Central Excise Act. In ITO v. ArihantTiles and Marbles (P) Ltd.,[8] the Supreme Court has noted that in AmanMarble Industries the question concerned "manufacture" but not“production”. It has further noted that in Arihant the issue required thedetermination of what "production" is in the context of Section 80IA ofthe IT Act. According to it, “production” has a wider meaning ascompared to the word "manufacture". Further, when one refers to theword "production", it means “manufacture plus something in additionthereto”. 19 txa nos.13,14 of 2013 & 25 of 2014 42. In Aman Marble Industries Pvt. Ltd. v. Collector of Central Excise,[7]the question was whether cutting of marble blocks into marble slabsamounted to manufacture under the Central Excise Act. In ITO v. ArihantTiles and Marbles (P) Ltd.,[8] the Supreme Court has noted that in AmanMarble Industries the question concerned "manufacture" but not“production”. It has further noted that in Arihant the issue required thedetermination of what "production" is in the context of Section 80IA ofthe IT Act. According to it, “production” has a wider meaning ascompared to the word "manufacture". Further, when one refers to theword "production", it means “manufacture plus something in additionthereto”. 43. Then, elaborating on the interpretative intricacies and theprecedential problems, Arihant cautions that the Court has to go by thefacts of each case. In each case one has to examine the nature of theactivity undertaken by an assessee. Mere extraction of stones may notconstitute manufacture. Similarly, after extraction, if marble blocks are cutinto slabs per se will not amount to the activity of manufacture. 44. On facts, Arihant has held that the process involved not only ofcutting the marble blocks into slabs but also of “polishing and ultimateconversion of blocks into polished slabs and tiles”. According to Arihant,“there is certainly an activity which will come in the category of‘manufacture’ or ‘production’ under Section 80IA of the Income Tax Act.We may note that Arihant has treated both manufacture and production assynonymous. Rather, it has treated ‘production’ as more expansive than‘manufacture’ and as inclusive of ‘manufacture’, too. 7157 ELT 393(SC)8(2010) 2 SCC 699 20 txa nos.13,14 of 2013 & 25 of 2014 45. The Assessee’s own case on an earlier occasion—CIT v. SesaGoa Ltd.,[9]—has articulated the same view. In that case, the word"production" came to be interpreted. The question was whether theTribunal was justified in holding that the assessee was entitled todeduction under Section 32A of the IT Act in respect of the machinery theAssessee used in mining activity. This question was in the face of the factthat the Assessee was engaged in extraction and processing of iron ore,not amounting to manufacture or production of any article or thing. 46. On appeal from Tribunal, this Court held that extraction andprocessing of iron ore did not amount to "manufacture". It has, however,concluded that extraction of iron ore and the various processes wouldinvolve "production" within the meaning of Section 32A(2)(b)(iii) of theIT Act. So, it has declared that the Assessee was entitled to the benefit ofinvestment allowance under Section 32A of the Act. Eventually, the ApexCourt has upheld this Court’s view. It has, in fact, held that the word"production" is wider in ambit and it has a wider connotation than theword "manufacture". 47. In CIT v. Fateh Granite (P) Ltd.,[10] this Court interpreted theunamended section 10B of the IT Act. It has held that the expression“manufacture” or “production” are different expressions and the word“production” has a wider meaning. The word “production” under section10B, being analogous to the expression in section 80IB, will have to begiven a wider meaning. The only difference between section 80-IB andsection 10B, according to Fateh Granite, is that section 10B applicable to a100 per cent. export oriented unit, whereas section 80-IB can be regardingany unit. In our opinion, therefore, the expression “production” will have9271 ITR 331 (SC)10314 ITR 32 21 txa nos.13,14 of 2013 & 25 of 2014 the same meaning as in Sesa Goa Ltd.,[11] and consequently, the questionframed is devoid of merits. 48 For the reasons mentioned above, we hold that on the firstsubstantial question of law, the Tribunal has rightly rendered its findingsand those findings require no interference. Second Substantial Question Of Law: 21 txa nos.13,14 of 2013 & 25 of 2014 the same meaning as in Sesa Goa Ltd.,[11] and consequently, the questionframed is devoid of merits. 48 For the reasons mentioned above, we hold that on the firstsubstantial question of law, the Tribunal has rightly rendered its findingsand those findings require no interference. Second Substantial Question Of Law: (II) Has the Tribunal correctly directed the AO to restrict the openmarket right of the iron ore to average purchase value by applyingsection 10B (7) read with section 80 IA (8) of the IT Act thoughthere are differences in grade/quality and though it was not atarm’s length price? (IIa) Is Tribunal right in not considering pro rata overhead costs indetermining profits from EVUs? 49 Sub-section (7) of section 10B declares that sub-section (8) andsub-section (10) of section 80-IA shall, so far as may be, apply in relationto the undertaking referred to in this section, as they apply for theundertaking referred to in section 80-IA. So, now, let us examine section80-IA of the Act. This provision deals with deductions regarding profitsand gains from industrial undertakings or enterprises engaged ininfrastructure development, and so on. As per sub-section (8), If any goodsor services held for the eligible business are transferred to any otherbusiness carried on by the assessee, or if any goods or services held forany other business carried on by the assessee are transferred to theeligible business, in either case, the consideration, if any, for such transferas recorded in the accounts of the eligible business must correspond to themarket value of such goods or services as on the date of the transfer. 11[2004]271 ITR 331 (SC) 22 txa nos.13,14 of 2013 & 25 of 2014 50. But if the consideration does not correspond to the marketvalue, then, for effecting deductions under this section, the profits andgains of that eligible business shall be computed as if the transfer, in eithercase, had been made at the market value of those goods or services as onthat date. But if the computation of the profits and gains of the eligiblebusiness in the above manner presents exceptional difficulties, theAssessing Officer may compute such profits and gains on such reasonablebasis as he may deem fit. 51. Indeed, according to the Explanation appended to sub-section"market value" means (i) the price that such goods or services wouldordinarily fetch in the open market; or (ii) the arm's length price as definedin clause (ii) of section 92F, where transferring such goods or services is aspecified domestic transaction as referred to in section 92BA. 52. Sometimes there may be a close connection between theassessee’s eligible business and any other person’s business. In thealternative, the courses of business between them are so arranged that thebusiness transacted between them produces to the assessee more than the‘ordinary profits’ expected from the eligible business. Then, in computingthe profits and gains of that eligible business for determining thedeductions under this section, the Assessing Officer shall take the profits“as may be reasonably deemed to have been derived therefrom”.Nevertheless, if the above-mentioned arrangement involves a specifieddomestic transaction referred to in section 92BA, the profits from suchtransaction shall be determined having regard to arm's length price asdefined in clause (ii) of section 92F. 53. To uncover this camouflage, the Act applies “arm’s length price”method. Section 92F of the Act defines certain terms relevant tocomputation of arm's length price. As per clause (ii), "arm's length price" 23 txa nos.13,14 of 2013 & 25 of 2014 53. To uncover this camouflage, the Act applies “arm’s length price”method. Section 92F of the Act defines certain terms relevant tocomputation of arm's length price. As per clause (ii), "arm's length price" 23 txa nos.13,14 of 2013 & 25 of 2014 means a price applied or proposed to be applied in a transaction betweenpersons other than associated enterprises, in uncontrolled conditions. Toappreciate the concept of “arm’s length price”, we need to remember thatsection 80-IA covers inter-unit transfer of goods and services by an entityclaiming deductions. Arm’s length price is to be determined by applyingany of the following methods: Comparable Uncontrolled Price Method;Resale Price Method; Cost Plus Method; Profit Split Method;Transactional Net Margin Method, or any other method as may beprescribed by the CBDT. 54. The Revenue has contended that the Tribunal has misappliedsection 10B(7) and section 80IA(8) of the IT Act. It finds fault with theTribunal direction to the AO to restrict the open market rate of the ironore to average purchase value. In this context, the Revenue has contendedthat the Tribunal ought to have noted the differences in grade or quality.Besides, the Revenue has also insisted that the remand is restrictive; thatis, the Tribunal has not given freehand to the AO to determine the issueuntrammeled by the Tribunal’s observations. 55. It is a fact that the Assessee has also purchased crude ore,ROM, from outside parties, that is from the mines belonging to otherparties. The price paid by the Assessee to these outside parties, accordingto the Tribunal, can be regarded as the best evidence for determining themarket value of the crude ore the Assessee extracted from its own mineand used. Tribunal has felt that “the determination of market valuerequires verification” by the Revenue. So, it has restored this issue. Thatrestoration or remand is to enable the AO to determine the market valueof the crude ore the Assessee consumed, based on the value paid by theassessee for the crude ore from the third parties during the year. Thus, 24 txa nos.13,14 of 2013 & 25 of 2014 there should be recomputation of the profit the Assessee derived from the100% EOU units eligible for exemption u/s 10B. 56. In the end, the Tribunal has directed the AO “to recompute theexemption available u/s 10B to the assessee in respect of Amona as well asChitradurga units after ascertaining the market value of the crude orestransferred by the assessee to these units from its extraction divisions. Itmust be based on the average market value as the assessee has paid to thethird-party suppliers the crude ore. And the determination must be afterthe AO’s giving proper and sufficient opportunity to the assessee toadduce material evidence in this regard. 57. At any rate, we reiterate that the remand or the restoration ofthe issue is complete, and the AO shall determine the price untrammelledby the Tribunal’s observations, if any. And that determination is inaccordance with law and only after accounting for the quality or grade ofthe iron ore supplied. Third Substantial Question of Law: (III) Has the Tribunal correctly deleted the disallowance of ₹12.29crore under section 14A of the IT Act in accordance with Rule 8Dof IT Rules as held by the Mumbai Special Bench at Tribunal inITO v. Daga Capital Management Pvt. Ltd,? 58. As the record reveals, the Assessee has contended that it hasborrowed no funds for the investment in mutual funds. So, it has notdebited any interest. In other words, the Assessee has merely parked itssurplus funds in mutual funds. Nor has the Assessee invested in anyequity shares. So it has not analysed the market conditions, stockinvestments, and so on. That is how the Assessee claimed thedisallowance at 25,78,156/-. ₹ 25