Thursday, 13 February 2014

Whether when assessee, engaged in exports, outsources preparation of food items and does not supply any controlled raw materials to its jobworkers, it can even then claim Sec 10B benefits - NO: HC

THE issue before the Bench is - Whether when the assessee, engaged in exports, outsources the preparation of food items and does not supply any controlled raw materials to its jobworkers, it can even then claim Sec 10B benefits. And the verdict goes against the assessee.
Facts of the case
The assessee company is engaged in the business of manufacturing and exporting of food items
such as mathia, chorafali, paratha and other tandoor items. It had claimed benefit u/s 10B. The Revenue contested the claim on various grounds including that the assessee cannot be stated to be manufacturing or producing an article or thing. On appeal, Tribunal split the issue in two parts. Insofar as the majority of the claims of the assessee for deduction was concerned, the plea was accepted holding that the assessee had a manufacturing unit in Kandla Special Economic Zone which was a 100% EOU. The food items manufactured by the assessee thus would qualify for such deduction. The Tribunal held that the assessee was an industrial undertaking and was engaged in manufacturing or producing article or thing when it produced different food preparations. To a limited extent when the assessee did not itself undertake such manufacturing activity, but claimed to had outsourced it, the Tribunal had not accepted the assessee's claim for deduction. The assessee contended that after receiving such items like mathia and chorafali from the outsourced agencies in bulk packaging, assessee undertook the process of sorting out and then packing the same in consumer packets and thereafter freezing it to minus 180C in deep storage freezer for increasing its shelf life. This according to the assessee amounted to manufacturing activity. The Tribunal, however, was unmoved. On the premise that the breakup of the profit earned from outsourced items was not available, the Tribunal placed the matter back before the AO for the limited purpose to determine the profits of the items manufactured by the assessee and to exclude that from the outsourced items.
Before the HC, the assesee's counsel vehemently contended that Tribunal committed a serious error. The assessee, in addition to manufacturing food items itself, in order to expand its business, outsourced part of its manufacturing activity. Even after receiving prepared items, the assessee undertook detailed exercise of sorting, packing and storing the items in below frozen temperature. Reliance was placed by the counsel for the appellant on a decision of the HC in the case of CIT v. Prabhudas Kishordas Tobacco Products (P) Ltd., (2006-TIOL-181-HC-AHM-IT). On the other hand, the Revenue's counsel opposed the appeal contending that the Tribunal had come to a factual finding that the assessee did not undertake any manufacturing activity on the outsourced items. Section 10B deduction was available to an exporter who manufactures or produces articles or things.
Held that,
++ part of the exports of the assessee comprised of snack items such as, cholafali, mathia, etc. which was not manufactured by the assessee but the manufacturing activity was outsourced. The question therefore is whether for export of such items, deduction under section 10B of the Act would be available. Section 10B of the Act applies to any industrial undertaking which manufactures or produces articles or things and exports it. Admittedly, in the present case, the snacks were manufactured by the suppliers of the assessee and no manufacturing activity was done by the assessee till the stage of preparation of such items. If some follow up action is taken for packing and storing the same would not partake the character of activity amounting to manufacturing or producing an article or thing;
++ in the present case, the facts are very different. The assessee was not involved at any stage of manufacture of an article or thing. Even the raw material for preparation of the items was not procured and supplied by the assessee. For any food preparation, raw material itself is of great importance. In snack items under consideration, dough, oil, etc. would play a major role in deciding its quality and taste. The assessee did not involve itself even in procuring such basic material and the assessee's stand that it was only the preparation work which was outsourced and the assessee was all along involved in the manufacturing activity through supervision cannot be accepted. Counsel for the assessee relied on the report of the officer of the Company who had reported that the manufacturing activity was undertaken by one of the contractors in a satisfactory manner. In our opinion, this in isolation would not be sufficient to establish that the assessee was engaged in the manufacturing activity directly. The Tribunal having come to a factual finding, we do not see any scope of interference. In the result, the Tax Appeal is dismissed.

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