IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : `C' : NEW DELHI
BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
ITA No.5421/Del /2011
Assessment Year : 2008-2009
ITO, Ward-22(2), Vs. M/s Indo Swedish Instrument
New Delhi C/o Arjun Mehta & Co.,
Chartered Accountants, 401,
White House, 382, Sant
Nagar, East of Kailash,
New Delhi.
(PAN AABFI 9730 J)
(Appellant) (Respondent)
Shri Vivek Nangia, Sr. D.R.
Assessee by :
Shri P.K. Gaur, And
Respondent by:
Shri Arjun Mehta, C.As.
PER: GEORGE GEORGE K., J.M.
1. This appeal, at the instance of the Revenue, is directed against the
order of the CIT (A)-XXIII, New Delhi, dated 20-09-2011. The relevant assessment
year is 2008-09.
2. The Department, has, in its grounds of appeal, raised a solitary issue,
namely: Whether the CIT (A) was justified in allowing 50% of the claim of
deduction u/s 80IC of the Act which was denied by the AO?
3. Briefly stated, the facts of the case are as follows:
The assessee, a partnership firm, is a manufacturer of multi-function transducer,
current transducer and other related products. During the assessment year under
dispute, the assessee had started its manufacturing operation and, accordingly,
claimed exemption u/s 80-IC of the Act on the premise that the location of its Unit
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Assessment year 2008-09
falls in the notified area in Himachal Pradesh. However, the AO took a stand that as
there was no manufacturing activity, the traded items purchased from M/s. SML
which were directly sold to M/s ABB Limited, the assessee was disentitled to
deduction u/s 80IC of the Act. However, the AO had restricted the deduction u/s
80IC of the Act to 50%, on ad-hoc estimation, for the following reasoning:
"4.7. As seen in the earlier paras that the assessee has purchased his machinery only
in the second half of the year and it is presumed that in the first 6 months of the year,
he hasdone trading only. More than 50% sales were done in the first 6 months. The
head of the income is being changed from manufacturing to trading in the case of
purchases made from SML. Since, assessee has not furnished the complete details of
sale and purchases bills so the comparison could not be made in rest of the
purchases., An ad-hoc estimated 50% of such purchases have been treated as
trading purchases accordingly the head of such purchases which is also can be said
50% of the sales made to M/s ABB Ltd. Hence, exempt profit has been restricted up-
to 50% only...."
4. Aggrieved, the assessee took up the issue with the CIT (A) who allowed
the appeal of the assessee and granted relief for the entire deduction as claimed by
the assessee. The relevant finding of the CIT (A) read as follows:
"4...............It is seen that the appellant has taken the manufacturing premises on
rent vide rent agreement dt. 24.4.2006. The appellant has entered into an agreement
with Cewe Instruments AB, a Swedish corporation on 2.5.2006 for obtaining
technical know-how, support and assistance for manufacture of products based on
technology supplied by Cewe. The appellant has been allowed certificate of
registration under VAT as on 27.9.2006. The appellant has been granted NOC from
the environment Protection and Pollution Control Board, Baddi, on 4.9.2006. Power
connection from the State electricity Board has been provided on 27.12.2006. An
inspection report of the Director of Fire Services is on record, showing inspection on
24.1.2007. The Dy. Director, Industries, Dept. of Industries, Baddi, Himachal
Pradesh has issued a certificate of allocation of registration number for Small Scale
Enterprise for manufacturing of transducers, meters etc., showing date of
commencement of commercial production on 11.4.2007. The appellant has also
furnished copies of certification under ISO 9001:2000 for design, manufacturing
and supply of transducers and meters and copy of approval letter dated 24.3.2008
from the Power Grid Corporation of India Ltd for supply of Voltage and Current
transducers which shows inspection of the premises at Barotiwala by Power Grid
representative on 2.3.2008. All these documents are seen to have been furnished
before the assessing officer during assessment proceedings. The sequence of events
does not support the assessing officer's opinion that the business was set up
hurriedly. Nor can the appellant be faulted for setting up the business with relatively
less capital compared to the loans or for establishing the Unit in as rented premise.
(5) The Assessing Officer has also found it doubtful that the appellant's turnover has
increased from Rs.6.28 lakhs in the earlier year to Rs.7.57 crores in the current year
and that the bulk of sales have been made to one party, M/s ABB Ltd. The assessing
officer has suspected that the unit was set up by M/s. SML in the name of the
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Assessment year 2008-09
appellant only to claim deduction under section 80IC. However, the assessing officer
has not found any evidence to show that the partners' capital or the unsecured loans
have originated from M/s SML. The assessing officer's contention that the products
have been purchased from M/S SML and sold to M/s ABB Ltd without any value
addition is also not borne out by the record. Out of the total raw material
consumption of Rs.505.5 lakhs, Rs.218.56 lakhs was the value of imported
components and accessories used in the manufacturing. The raw material was
sourced from more than twenty five indigenous suppliers, apart from M/s. SML. The
appellant was required to file copies of the bills of import of raw materials showing
the particulars of bills of lading, date of clearance etc., which have been examined by
me. I find the raw materials have been received in India from 7.6.2007 onwards.
Examination of the details of power and fuel expenses shows proportionate
consumption through the year. It is also verified that the manufacture and process is
one of assembly and testing which does not require large input of power or labour.
6. The assessing officer has pointed out that there is a very short span of time
between the purchase of material from M/s SML and sale to M/s ABB Ltd which has
led him to conclude that the items were directly sold to M/s ABB Ltd without any
further process. This was confronted to the appellant by the assessing officer on
28.12.2010 to which the appellant has filed a reply on 31.12.2010. From the said
reply, it is seen that the appellant explained that the time recorded on the invoice
issued by M/s SML was subsequent to the despatch of the material on the basis of
challan. The appellant has correlated the entry of goods as per delivery challan and
the despatch of the finished material from its gate register. It is submitted that the
time required for assembly and testing of the product varies between two to six hours.
It is also submitted that the items purchased from M/s SML are Circuit Card
Assembly which are the basic raw material for mounting of variable components
based on customer requirements. The appellant's products however consist of
transducers and meters which are not manufactured by M/s SML.
7. Regarding the purchase of machinery for manufacturing of the electronic
products, the appellant has submitted that machinery amounting to Rs.24,39,190/-
was purchased during the financial year 2006-07. Hence, the assessing officer's
finding that manufacture could not have commenced as machinery of only
Rs.10,46,287/- was purchased in the first half of the financial year 2007-08 asnd
machinery of Rs.83,30,016/- during the second half, is misplaced. In respect of the
bills of purchase from M/s Laxmi Designers, Bangalore and M/s Premanui Tools,
Thane, it is seen that the invoices are in the name of the appellant. It was explained
by the appellant in the submission before the assessing officer dated 31.12.2010 that
the manufacturers of the machinery were introduced to the appellant my M/s. Secure
Meters Ltd whose employee Mr E.V.R Murthy was authorised to issue the order of
purchase. As the appellant had no previous commercial relation with the supplier
and as Barotiwala was a distant location, the manufacturers chose to deliver the
equipments to M/s Secure Meters Ltd. At Udaipur from where the machineries were
carried by an employee to the premises of the appellant. I also find that the invoice
of M/s Laxmi Designers of Rs.25,92,757/- is dated 4.3.2008 and not 3.7.2008 as stated
by the assessing officer. In respect of purchase from M/s. Premauni Tools, the
machinery is seen to be received at the premises of the appellant on 27.3.2008.
Merely because the machinery was first received at Udaipur and then transported to
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Assessment year 2008-09
Barotiwala does not establish that the machinery was used by M/s. Secure Meters Ltd
or that it was not put to use by the appellant before the end of the financial year.
8. For the various reasons stated above, I am unable to subscribe to the view of the
assessing officer that no manufacturing has taken place and that the appellant is not
entitled to the full deduction under section 80IC. The assessing officer has made an
ad-hoc disallowance of 50% of the deduction claimed by holding that 50% of the
sales made to M/s. ABB Ltd are from trading. Needless to say, there is no credible
basis for this estimation of proportion of trading to manufacturing sales. After
careful consideration, it is held that the appellant is entitled to the deduction under
section 80 IC for profits from a manufacturing unit established in a special category
State......."
5. The Revenue, being aggrieved, is in appeal before us. During the course
of hearing, the learned DR took us through the assessment order and highlighted the
reasoning of the AO for having denied 50% of deduction u/s 80 IC of the Act. On the
other hand, the learned A.R. reiterated the submissions made before the authorities
below and relied on the findings of the CIT (A) on the issue.
6. We have carefully considered the rival submissions, perused the relevant
material on record and also the findings of the CIT (A) in reversing the stand of the
AO. The AO had denied 50% of the deduction u/s 80 IC of the Act as claimed by the
assessee solely on the premise that `(a) assessee has not furnished any proof of the
installation of machinery; (b) the items purchased from SML was sold to M/s.ABB Ltd
without doing any manufacturing activity and without value addition in physical terms;
and (c) there are very few manufacturing expenses [Source: Para 4.5. of the asst.
order].However, the reasoning of assessing officer that the assessee had not
furnished any proof of installation of machinery [Para 4.5(a)] has since been
controverted, inter alia, by the CIT (A) in her findings that `The Dy. Director,
Industries, Dept. of Industries, Baddi, Himachal Pradesh has issued a certificate of
allocation of registration number for Small Scale Enterprise for manufacturing of
transducers, meters etc., showing date of commencement of commercial production
on 11.4.2007'.[Para 4 of CIT (A)'s order]. Ostensibly, the finding of the CIT (A) has
not been dispelled by the Revenue by placing any document or material on record.
Similarly, the reasoning of the AO as mentioned at para 4.5.(b) and (c) of the
assessment order has also been effectively controverted by the CIT (A). For ready
reference, the relevant portions of the findings of the CIT (A) are illustrated as under:
(b) The items purchased from SML was sold to M/s. ABB Ltd without doing any
manufacturing activity and without value addition in physical terms and (c) There are
very few manufacturing expenses:
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Assessment year 2008-09
"5.................The assessing officer's contention that the products have been
purchased from M/S SML and sold to M/s ABB Ltd without any value addition is
also not borne out by the record. Out of the total raw material consumption of
Rs.505.5 lakhs, Rs. 218.56 lakhs was the value of imported components and
accessories used in the manufacturing. The raw material was sourced from more
than twenty five indigenous suppliers, apart from M/s. SML. The appellant was
required to file copies of the bills of import of raw materials showing the particulars
of bills of lading, date of clearance etc., which have been examined by me. I find the
raw materials have been received in India from 7.6.2007 onwards. Examination of
the details of power and fuel expenses shows proportionate consumption through the
year. It is also verified that the manufacture and process is one of assembly and
testing which does not require large input of power or labour.
"6........................ From the said reply, it is seen that the appellant explained that
the time recorded on the invoice issued by M/s SML was subsequent to the despatch
of the material on the basis of challan. The appellant has correlated the entry of
goods as per delivery challan and the despatch of the finished material from its gate
register. It is submitted that the time required for assembly and testing of the product
varies between two to six hours. It is also submitted that the items purchased from
M/s SML are Circuit Card Assembly which are the basic raw material for mounting
of variable components based on customer requirements.
6.1. Moreover, the finding of the CIT (A) has also not been challenged as
incorrect by placing any material/document on record by the revenue. On the
contrary, the assessee had produced positive proof that it was
manufacturing/assembling Unit. Therefore, we uphold the order of the CIT (A) which
is in accordance with law and that no interference is called for. It is ordered
accordingly.
7. In the result, the Revenue's appeal is dismissed.
Sd/- Sd/-
(T.S. KAPOOR) (GEORGE GEORGE K.)
Accountant Member Judicial Member
Dated: 10th October, 2014.
Copy forwarded to
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Dy. Registrar, ITAT, New Delhi
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