(1.) THESE are the cross appeals directed against different orders of the CIT(A) for the assessment years 2006 -07 to 2009 -10. The assessee also filed cross objections for all the assessment years under consideration. As the issues are identical in these appeals and COs., the same were clubbed and heard together and, therefore, these appeals and C Os. are disposed of by way of this common order for the sake of convenience.
(2.) TO dispose of these appeals, we refer to the facts from AY 2006 -07 in ITA No. 398/V/12. Briefly the facts of the case are that the assessee is a partnership firm and 100% Export Oriented Undertaking (EOU), engaged in the business of manufacturing and trade of biological products, pharmaceuticals, ayurvedic products and herbal extracts. The original assessment for AY 2006 -07 was completed on 17/12/2008, allowing deduction u/s. 10B of the Act. Subsequently, survey operation u/s. 133A of the Act was carried out by Dy. Director of Income tax (Inv.), Vijayawada and based on the findings during the survey, the assessment was reopened u/s. 147 of the Act, after duly recording the reasons therefor. Thereafter, the reassessment was completed on an income of Rs. 23,03,43,847/ - after denying the exemption claimed u/s. 10B of the Act. The main reasons for denying deduction u/s. 10B of the Act, was that a) machinery was not installed during the FY 2005 -06 relevant to AY 2006 -07, b) As some part of the manufacturing activity was given on job work to M/s. Laila Impex, that the AO doubted the claim of the assessee that it is carrying out manufacturing activity within the premises of the assessee and c) The assessee is not carrying out any manufacturing activity. 2.1 The manufacturing process of the appellant firm involves the following six steps: Step 1: Process of solution: Herbal raw materials are taken into Extractor, then water/hydro alcohol (which is required for extraction) is added and then the raw materials are heated in at 70 to 80 degrees centigrade for one to one and half -hour by using of steam and then circulate the solution through pump for 2 to 3 hours.
Step 2: Process of concentration: The solution as per the above process is taken into the reactor and mixed with the required chemicals like activated carbon, potassiumhydroxide, sodium hydroxide etc. Thereafter, the solution is filtered with the aid of filter to remove the herbal particles and concentrate the filtrate by using of vaccum (removing of excess water, hydro alcohol) and this process is repeated till thick paste or residue is obtained.
Step 3: Process of drying: The above thick paste is dried in sinplast drier/spray drier. After drying, paste will become solid dry flakes.
Step 4: Process of pulverization: The dried flakes are milled in multi mill and thereby it becomes powder.
Step 5: Process of sieving: The milled powder is sieved on sifter by using required meshes to get fine powder as per requirement of the customers. These products have a separate name and entity in the market.
Step 6: Packing: The above powdered extract is packed into air tight HOPE Carboys having double polythene bags in different sizes as per requirement of the buyers.
2.2 The appellant firm took permission vide letter dt. 14th October, 2005 to send its raw material to its sister concern Laila Impex for job work. As per customs regulations, subcontracting of both production and production processes may be undertaken without any limit through other EOU. Laila Impex is also an EOU as evidenced by approval letter dt. 3rd June, 2005. 2.3 The DDIT (Inv) conducted a survey at the factory premises on 17th September, 2009 and on examination of the information submitted by the appellant firm he noticed certain discrepancies with regard to bills for fabrication charges issued by three contractors for the A.y. 2006 -07. When the Inspector of Income Tax was sent for enquiry, the fabricators were not found at the addresses mentioned in the bills issued by them. 2.4 Further, DDIT analysed the information submitted to him and found the following from the information for the A.y. 2006 -07: a) That out of the manufacturing expenses of Rs. 4,65,34,414 a sum of Rs. 4,35,04,675 was incurred by Laila Impex and this works out to 96.56% of the total manufacturing expenses and that 90.4% of the total manufacturing expenses is paid to Laila Impex towards job work charges.
b) Out of manufacturing & establishment expenses of Rs. 16,10,643 a sum of Rs. 1,57,715 was towards monthly salaries of the assessee firm and the balance was borne by Laila Impex.
c) Out of power & fuel of Rs. 65,28,127 a sum of Rs. 54,95,037 was towards diesel for generators and only the balance of Rs. 10,38,090 was towards power bills.
d) Out of the six stages, only the first two stages can be considered as manufacturing and out of this stage 1 is carried out by Laila Impex.
2.5 Thus, the DDIT (Inv) was of the view that the appellant firm is not entitled to claim exemption u/s. 10B of the Act and the same thing was informed to the assessing officer in his report addressed to the assessing officer. 2.6 The Assessing Officer followed this report of the DDIT(lnv.) in his order. The finding of the DDIT(lnv.) became the finding of the AO in the assessment order.
(3.) ON appeal, the learned CIT(A) held as follows: 2. ON the issue as to whether the assessee is in possession of the machinery to carry on manufacturing activities during the FY 2005 -06 relevant to AY 2006 -07, he relied on the certificates issued by Asst. Commissioner of Customs and Central Excise as well as registration/permissions from the various Governmental authorities and held that the assessee was in possession of machinery and carried out manufacturing activity in FY 2005 -06. On the issue of sub -contracting part of work, the learned CIT(A) held that not only manufacturing expenses have to be considered by the AO to arrive at the percentage of outsourcing, but, all other manufacturing expenditures like raw -material, chemicals, fuel, manufacturing establishment, etc., have also to be considered. Thus, on facts he held that outsourcing of job is only about 21.27% and not 90% as held by the AO. He referred to certain judicial decisions and granted relief to the assessee. 3. THEREAFTER , the learned CIT(A) on the ground that the assessee has not completely proved that its employees have, in fact, supervised the job work, which was off loaded, held that, profit on the turnover attributable to job work i.e. 21.27% of the total turnover should be ascertained and that such profits should be excluded from claim of deduction u/s. 10B of the Act.
Aggrieved , the revenue is in appeal on the decision of the learned CIT(A) that the assessee is eligible for deduction u/s. 10B. The assessee is in appeal against the direction of the learned CIT(A) that profits on 21.27% of the total turnover being job work should be computed and excluded from the computation of eligible profit for deduction u/s. 10B. Grounds of appeal of the revenue, which are common, in all its appeals, are extracted below for ready reference: a. The CIT(A) erred both in law and in facts of the case.
b. The Id. CIT(A) has erred in accepting the contention of the assesses based on the machinery verification certificate issue by the Superintendent of Customs & Central Excise which lacks clarity as to the nature of machinery used whether old or new and as to its specification.
c. The Id. CIT(A) has erred in allowing exemption u/s. 10B even though the assessee has failed to fulfil the conditions laid down u/s. 10B(2) of the Act.
d. The Id. CIT(A) has erred in presuming that the machinery purchased was new even though it was not known whether the machinery purchased was new or old.
e. The Id. CIT(A) has erred in accepting the contention of the assessee that the labour contractors are available and accepting the confirmations submitted by the labour contractors through the assessee, who are not available to the Department for serving the notices.
f. The Id. CIT(A) has erred in allowing exemption u/s. 10B by concluding that machinery was installed even though the assessee has not installed machinery fully during the first year of the manufacturing i.e. AY 2006 -07 and purchased further machinery in the subsequent years.
g. The Id. CIT(A) has erred in accepting the contention of the assessee that Superintendent of Customs & Central Excise has submitted a report to VSEZ that machinery was installed even though VSEZ has denied that no such report was received from Department of Customs & Central Excise.
h. The Id. CIT(A) failed to note that out of manufacturing establishment expenses of Rs. 18,77,6897 -, only Rs. 1,57,715/ - was incurred by the assessee and the balance of Rs. 16,10,643/ - is borne by M/s. Laila Impex which is evident from the debit notes raised by them. (Para 2 of page 3 of assessment order).
i. The Id. CIT(A) failed to observe that out of Rs. 10,38,090/ - towards power, the assessee has actually expended only Rs. 30/ - while that incurred by M/s. Laila Impex as per the debit notes raised by them was Rs. 6,65,873/ - and an amount of Rs. 3,67,187/ - is pad by the assessee on behalf of others and not for itself, (para 3 of page 3 of assessment order)
j. The Id, CIT(A) ought to have considered the manufacturing establishment expenses, diesel and electricity expenses as job work charges while arriving at the % of job work charges in total mfg. expenses at 21.27%.
k. The Id. CIT(A) erred in calculating the % of job work charge in total manufacturing expenses at 21,27% as against 96.56% worked out by the A.O.
l. Any other ground that may be urged at the time of hearing.";