THE issue before the Bench is - Whether when assessee had undertaken detailed engineering drawings as per the specifications, but actual manufacture and production work was outsourced, the assessee would still be eligible for Sec 10B benefits. YES is the answer.
Facts of the case
Assessee is engaged in the business of manufacture, trading and export of engineering goods etc. and also has a factory located in Noida Export Processing Zone. The unit is a 100% EOU and located in customs bounded area. Assessee claimed exemption u/s 10B on profit from the Noida Unit. AO rejected the claim of assessee on the ground that assessee had not manufactured any goods in the Noida Unit. He refered to the reply received from some concerns which stated that they had manufactured and exported various goods on behalf of assessee. Assessee itself had not undertaken manufacturing activities. AO further observed substantial decrease in electricity as compared to preceding year though the turnover and WIP is substantial.
In subsequent assessment year 2008-09, AO claimed that they had earned exempt income as they had carried out upgradation of cement plant in Zambia and also received consideration for design, fabrication and commissioning of a steel rolling mill in Kazakhastan. Assessee was a multifaceted project engineering company having highly qualified engineers, technocrats etc., who had extensive experience, and expertise in executing turnkey projects of diverse nature. AO held that assessee was not carrying on manufacturing and assembling activities as they had erected the steel rolling mill and the cement plant abroad. The assessee himself did not manufacture any goods but had removed various parts after testing and disassemble them for the purpose of export. Testing, painting or prepackaging for export cannot be construed as manufacture or assembling activity. The assessee himself did not possess adequate plant, machinery or infrastructure to carry out manufacturing activities. Plant and machinery was very less. On site inspection at Noida, it was noticed that the assessee had installed lathe machines, welding sets, cutting machine, weighing machine, cranes, electric hoists and chain pully. The said plant and machinery were for loading, unloading of materials received, upkeep, painting etc. for exports. The salaries paid to the workers were not proportionate to the export turnover. The inference drawn was that the assessee was not engaged in manufacturing activity. Thus, AO disallowed the exemption claimed.
CIT (A) allowed the claim of assessee applying the principle of consistency. Tribunal also allowed the claim of assessee observing that section 10B is beneficial provision and has been enacted to give tax concession or exemption to 100% export oriented units engaged in manufacture or production of articles, things or computer software. The exemption is only granted if the assessee has been declared as an 100% export oriented undertaking which means an undertaking approved by the Board appointed in this behalf under the Industries (Development and Regulation) Act, 1951. Assessee had an export oriented unit in Noida Export Processing Zone, which was duly approved. The Development Commissioner, Noida Export Process Zone, had extended all facilities and privileges admissible to the said unit under the Export-Import Policy. One of the conditions, for establishment of an undertaking in the said zone was that the undertaking should be manufacturing engineering products and the entire production should be exported, after excluding the rejects and permissible sales in the domestic tariff area. Assessee has entered into an agreement with the said authority for carrying on the said business.
Assessee had carried out detailed engineering analysis of system design, equipment specifications and development and preparation of engineering drawings. Thereafter approval was taken from the client. At the next stage, the assesseed issued technical specification and drawings for production, which activity was outsourced to vendors. During the course of production by the third parties vendors, process inspection and final inspection was undertaken. After approval, the goods were dispatched from the vendors' factory to the assesseed. The goods were then examined at the Noida Unit and approved. Assessee had also undertaken in-house fabrication in addition to inspection at the vendors factory to whom the production or manufacture had been outsourced. Once the goods were received at the Noida unit, they were examined and assembled and tested. Rust protection was undertaken. Big assemblies were disassembled and repacked. Small assemblies were packed as such. Thereupon, the goods were exported from India and erected at the site, tested and then commissioned.
As per AO, assessee had erected cement / steel rolling mills abroad and therefore assessee was not engaged in export, manufacture or production of goods and things, but again AO did not bifurcate the said figures into service element and export value of goods etc.
After hearing both the parties, the High Court held that,
++ under sub-section (1) and (2) there is direct reference to profits and gains derived from export of articles or things or computer software by 100% export oriented unit. The profits are to be computed with respect to export turnover under sub-section (4) in respect of such articles, things or computer software in proportion to the total turnover of the business carried on by the undertaking. Thus, while computing export turnover in terms of clause (iii) to Explanation 2, expenses incurred for providing technical services outside India in connection with articles or things so exported would be included and added, provided the said expenditure was not incurred in foreign exchange. The Legislature was conscious that an assessee engaged in export of articles or things may have to incur expenditure in nature of technical services in connection with the said exports and in a given case would be reimbursed or paid for the said expenditure. The payment received for the said expenditure would be included in the export turnover, provided the expenditure was not incurred in foreign exchange. The explanation only excludes expenses incurred in foreign exchange in providing technical services outside India. The services must be provided by the assessee, i.e. in respect of services provided by the assessee outside India. Explanation 3 which uses the expression 'for removal of doubts' in the case of computer software states that on site development including services for development of software outside India shall be deemed to be profits and gains derived from export of computer software outside India. The use of expression 'for removal of doubts' has to be contrasted from the term 'deemed' used in the same explanation but the said expression shows the underlying objective and purpose behind the provision i.e. Section 10B of the Act. Software developed outside India or even services for development of software outside India is to be and regarded as export;
++ assessee had assembled the entire plant outside India from the goods supplied and manufactured in India would include the expenditure incurred for commissioning and providing technical services outside India, after excluding expenses in form of payment made in foreign exchange for technical services provided outside India. It is not the case of the Revenue that the respondent assessee had made payment in foreign exchange for technical services provided outside India;
++ assessee did not self-manufacture or produce most of the articles or things which were exported and used for setting up the plant. The assessee had undertaken detailed engineering drawings and as per the specification and drawings, the actual manufacture and production work was outsourced. Throughout the said process, inspection was carried out and only after approval, the goods were dispatched. The goods were re-inspected, checked, assembled and disassembled, before they were exported out of India. Only upon satisfactory performance and ensuring that there was perfect matching, the goods were exported. These activities qualify and be treated as manufacture or production of goods by the assessee himself;
++ the term "manufacture" was defined in Explanation 3 to Section 10B prior to its substitution in 2001 by an inclusive definition to mean any process, assembling or recording of programme. Thereafter, by Finance (No. 2) Act of 2009, with effect from 1st April, 2009, the term "manufacture" has been defined in sub-section 29AB to Section 2 to mean a change in a non-living physical object or article or thing resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character or use; or bring into existence a new and a distinct object or article or thing with a different chemical composition or integral structure. These two definitions would not be applicable to these appeals, which relate to AYs 2007-08 and 2008-09. Pertinently, in Explanation 4 to Section 10AB of the Act inserted by Finance Act 2003 with effect from 1st April, 2004, the term "manufacture" or “produce” it stands elucidated would include cutting or polishing of precious or semi-precious stones. The aforesaid definition reflects and illustrates the legislative intent behind granting exemption/deduction under Section 10B and the wide scope the legislature wanted to bestow;
++ assessee, an 100% export oriented unit, who had refurbished a mini cement plant in Zambia and established a mini steel mill in Kazakhstan, were not engaged in "manufacture" or "production" of articles or things. In case the mini steel plant and refurbished cement mill had been completely assembled in the unit in Noida and exported as such, the assessee would qualify and would be a manufacturer or a person engaged in production of articles or things. However, benefit under Section 10B, it is asserted by the Revenue, should be denied for what was exported were separated or disassembled parts of the mini cement and steel plant/mill, as it was not possible to export after fabrication and assembly the entire plant/mill itself. The said reasoning and ratiocination is obdurate and deflates the object and purpose of Section 10B of the Act;
++ an expression used in taxing statute should be ordinarily understood in the sense it harmonises with the object of the statute to effectuate the legislative intention. If the language is plain and unambiguous, one can look fairly at the language used and interpret it to give effect to the legislative intent.
Assessee is engaged in the business of manufacture, trading and export of engineering goods etc. and also has a factory located in Noida Export Processing Zone. The unit is a 100% EOU and located in customs bounded area. Assessee claimed exemption u/s 10B on profit from the Noida Unit. AO rejected the claim of assessee on the ground that assessee had not manufactured any goods in the Noida Unit. He refered to the reply received from some concerns which stated that they had manufactured and exported various goods on behalf of assessee. Assessee itself had not undertaken manufacturing activities. AO further observed substantial decrease in electricity as compared to preceding year though the turnover and WIP is substantial.
In subsequent assessment year 2008-09, AO claimed that they had earned exempt income as they had carried out upgradation of cement plant in Zambia and also received consideration for design, fabrication and commissioning of a steel rolling mill in Kazakhastan. Assessee was a multifaceted project engineering company having highly qualified engineers, technocrats etc., who had extensive experience, and expertise in executing turnkey projects of diverse nature. AO held that assessee was not carrying on manufacturing and assembling activities as they had erected the steel rolling mill and the cement plant abroad. The assessee himself did not manufacture any goods but had removed various parts after testing and disassemble them for the purpose of export. Testing, painting or prepackaging for export cannot be construed as manufacture or assembling activity. The assessee himself did not possess adequate plant, machinery or infrastructure to carry out manufacturing activities. Plant and machinery was very less. On site inspection at Noida, it was noticed that the assessee had installed lathe machines, welding sets, cutting machine, weighing machine, cranes, electric hoists and chain pully. The said plant and machinery were for loading, unloading of materials received, upkeep, painting etc. for exports. The salaries paid to the workers were not proportionate to the export turnover. The inference drawn was that the assessee was not engaged in manufacturing activity. Thus, AO disallowed the exemption claimed.
CIT (A) allowed the claim of assessee applying the principle of consistency. Tribunal also allowed the claim of assessee observing that section 10B is beneficial provision and has been enacted to give tax concession or exemption to 100% export oriented units engaged in manufacture or production of articles, things or computer software. The exemption is only granted if the assessee has been declared as an 100% export oriented undertaking which means an undertaking approved by the Board appointed in this behalf under the Industries (Development and Regulation) Act, 1951. Assessee had an export oriented unit in Noida Export Processing Zone, which was duly approved. The Development Commissioner, Noida Export Process Zone, had extended all facilities and privileges admissible to the said unit under the Export-Import Policy. One of the conditions, for establishment of an undertaking in the said zone was that the undertaking should be manufacturing engineering products and the entire production should be exported, after excluding the rejects and permissible sales in the domestic tariff area. Assessee has entered into an agreement with the said authority for carrying on the said business.
Assessee had carried out detailed engineering analysis of system design, equipment specifications and development and preparation of engineering drawings. Thereafter approval was taken from the client. At the next stage, the assesseed issued technical specification and drawings for production, which activity was outsourced to vendors. During the course of production by the third parties vendors, process inspection and final inspection was undertaken. After approval, the goods were dispatched from the vendors' factory to the assesseed. The goods were then examined at the Noida Unit and approved. Assessee had also undertaken in-house fabrication in addition to inspection at the vendors factory to whom the production or manufacture had been outsourced. Once the goods were received at the Noida unit, they were examined and assembled and tested. Rust protection was undertaken. Big assemblies were disassembled and repacked. Small assemblies were packed as such. Thereupon, the goods were exported from India and erected at the site, tested and then commissioned.
As per AO, assessee had erected cement / steel rolling mills abroad and therefore assessee was not engaged in export, manufacture or production of goods and things, but again AO did not bifurcate the said figures into service element and export value of goods etc.
After hearing both the parties, the High Court held that,
++ under sub-section (1) and (2) there is direct reference to profits and gains derived from export of articles or things or computer software by 100% export oriented unit. The profits are to be computed with respect to export turnover under sub-section (4) in respect of such articles, things or computer software in proportion to the total turnover of the business carried on by the undertaking. Thus, while computing export turnover in terms of clause (iii) to Explanation 2, expenses incurred for providing technical services outside India in connection with articles or things so exported would be included and added, provided the said expenditure was not incurred in foreign exchange. The Legislature was conscious that an assessee engaged in export of articles or things may have to incur expenditure in nature of technical services in connection with the said exports and in a given case would be reimbursed or paid for the said expenditure. The payment received for the said expenditure would be included in the export turnover, provided the expenditure was not incurred in foreign exchange. The explanation only excludes expenses incurred in foreign exchange in providing technical services outside India. The services must be provided by the assessee, i.e. in respect of services provided by the assessee outside India. Explanation 3 which uses the expression 'for removal of doubts' in the case of computer software states that on site development including services for development of software outside India shall be deemed to be profits and gains derived from export of computer software outside India. The use of expression 'for removal of doubts' has to be contrasted from the term 'deemed' used in the same explanation but the said expression shows the underlying objective and purpose behind the provision i.e. Section 10B of the Act. Software developed outside India or even services for development of software outside India is to be and regarded as export;
++ assessee had assembled the entire plant outside India from the goods supplied and manufactured in India would include the expenditure incurred for commissioning and providing technical services outside India, after excluding expenses in form of payment made in foreign exchange for technical services provided outside India. It is not the case of the Revenue that the respondent assessee had made payment in foreign exchange for technical services provided outside India;
++ assessee did not self-manufacture or produce most of the articles or things which were exported and used for setting up the plant. The assessee had undertaken detailed engineering drawings and as per the specification and drawings, the actual manufacture and production work was outsourced. Throughout the said process, inspection was carried out and only after approval, the goods were dispatched. The goods were re-inspected, checked, assembled and disassembled, before they were exported out of India. Only upon satisfactory performance and ensuring that there was perfect matching, the goods were exported. These activities qualify and be treated as manufacture or production of goods by the assessee himself;
++ the term "manufacture" was defined in Explanation 3 to Section 10B prior to its substitution in 2001 by an inclusive definition to mean any process, assembling or recording of programme. Thereafter, by Finance (No. 2) Act of 2009, with effect from 1st April, 2009, the term "manufacture" has been defined in sub-section 29AB to Section 2 to mean a change in a non-living physical object or article or thing resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character or use; or bring into existence a new and a distinct object or article or thing with a different chemical composition or integral structure. These two definitions would not be applicable to these appeals, which relate to AYs 2007-08 and 2008-09. Pertinently, in Explanation 4 to Section 10AB of the Act inserted by Finance Act 2003 with effect from 1st April, 2004, the term "manufacture" or “produce” it stands elucidated would include cutting or polishing of precious or semi-precious stones. The aforesaid definition reflects and illustrates the legislative intent behind granting exemption/deduction under Section 10B and the wide scope the legislature wanted to bestow;
++ assessee, an 100% export oriented unit, who had refurbished a mini cement plant in Zambia and established a mini steel mill in Kazakhstan, were not engaged in "manufacture" or "production" of articles or things. In case the mini steel plant and refurbished cement mill had been completely assembled in the unit in Noida and exported as such, the assessee would qualify and would be a manufacturer or a person engaged in production of articles or things. However, benefit under Section 10B, it is asserted by the Revenue, should be denied for what was exported were separated or disassembled parts of the mini cement and steel plant/mill, as it was not possible to export after fabrication and assembly the entire plant/mill itself. The said reasoning and ratiocination is obdurate and deflates the object and purpose of Section 10B of the Act;
++ an expression used in taxing statute should be ordinarily understood in the sense it harmonises with the object of the statute to effectuate the legislative intention. If the language is plain and unambiguous, one can look fairly at the language used and interpret it to give effect to the legislative intent.
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