By TIOL News Service

MUMBAI, DEC 21, 2015: THE issue is - Whether merely because assessee partly outsourced its gold jewellery activities, it would fall outside ambit of 'manufacturing' for purpose of Sec 10B. NO is the answer.

Facts of the case

The assessee is a partnership firm formed with the objective of manufacture of Diamond studded gold jewellery. The assessee is approved as 100% EOU by the Development Commissioner, SEEPZ, SEZ, for manufacture and export of Plain/or studded handmade jewellery studded with diamonds, precious, semi precious and non-precious stones manufactured out of gold, silver, platinum metal. During the year under consideration, the assessee claimed deduction u/s 10B to the tune of Rs.14.31 crores. The AO examined the said claim of the assessee and took the view that the assessee has not carried out any manufacturing activity and accordingly held that the assessee is not eligible for deduction u/s 10B. On appeal, the CIT(A) upheld the order of AO.

Having heard the parties, the Tribunal held that,

++ it is pertinent to note that the deduction u/s 10B is allowed to a hundred percent export oriented undertaking deriving profit from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software. Hence the one of the conditions to be satisfied in order to avail deduction u/s 10B is that the undertaking should manufacture or produce articles or things. In the instant case, the tax authorities have taken the view that the assessee has not manufactured the jewellery. The tax authorities have not expressed any adverse view on the import of diamonds, purchase of gold and export of jewellery. The assessee has further submitted that the import of diamonds and export of jewellery are monitored by Central Excise and Customs Authorities. It has also submitted that the import of diamonds, purchase of jewellery have duly been established by the assessee with the help of Bond Register and DPCC Register maintained as per the provisions of the Central Excise and Customs Act.The assessee also furnished copies of bond register, DPCC register; Finished goods register to substantiate the claim of purchase of diamonds and gold and manufacture of jewellery;

++ a perusal of the said documents would show that the assessee has duly recorded the details relating to the same and they have also been inspected by the Central Excise and customs authorities. Further, it is noticed that the Superintendent of Central Excise have conducted audit relating to collection of MOT charges and the copy of audit report has also been furnished in the paper book. We understand that the Merchant Overtime Fee (MOT Charges) are the charges which are required to be paid by an exporter for availing the services of Central Excise officers beyond officer hours or on Sunday, Saturday or public holidays, i.e., after the official hours. The assessee during the course of arguments, submitted that the assessee has availed the services of Central excise officers in connection with the movement of goods at the time of import, issue and export of jewellery. The involvement of Central excise department in the activities carried on by the assessee, in our view, supports the case of the assessee. In fact, the records maintained by the assessee with regard to import of diamonds, purchase of gold and export of jewellery are not disputed by the tax authorities and they also support the case of the assessee that it is manufacturing jewellery. The absence of huge plant and machinery in the premises of the assessee cannot be a ground to suspect the claim of manufacturing, since the assessee has explained that the gold melting and mounting work have been outsourced. Only the shaping work and fitting of diamonds is carried out at its place. At the time of hearing , one of the workers was produced and he showed us the gold portion produced out of die process. The revenue also cross examined him and asked a specific question as to whether the assessee gives the details relating to the size of the diamonds, he gave negative reply. However, the contentions of the assessee that it has purchased gold bars locally and converted the same into gold mountings through outsourcing activities have not been disproved by the tax authorities;

++ since the labour charges and wages were found to be lower vis-a-vis the export value of jewelleries, the tax authorities have doubted about the claim of manufacture. However, we notice that the tax authorities have not brought any material on record to disprove the records maintained by the assessee. They have also not taken any steps to ascertain the fair market value of labour charges and wages. If the labour charges and wages booked by the assessee are considered to be low, then an addition towards suppression of expenditure, having regard to the fair market value of such services, may be called for and the same would not give rise to the presumption that the assessee did not carry on any manufacturing activity. Similarly the non-accounting of consumables in the books of account may also warrant an addition. However, it is pertinent to note that the assessing officer has not rejeted the books of accounts nor did he point out any defects in the books of account, meaning thereby, even though the assessing officer had commented upon the expenditure incurred by the assessee, he did think it necessary to examine about the adequacy of expenditure booked by the assessee. The tax authorities have also pointed out that the assessee could not furnish copies of standard designs of jewellery and hence they have taken adverse view. However, the fact that the assessee has exported jewellery has not been disputed and hence the non-furnishing of designs may not, militate against the assessee. The revenue also referred to the report given by the Tax auditor, wherein the activities of the assessee was stated to have been stated as trading. However, the activities carried on by the assessee, i.e., purchase of gold/diamonds and export of jewellery contradicts the said observation of the tax auditor. The assessee has also furnished copy of audit report given by the tax auditor for AY 2011-12, wherein the tax auditor has stated the nature of business as "Manufacturing Industry";

++ in the instant case also, the assessee has imported diamonds, purchased gold locally and exported the jewellery. Thus, the articles purchased and the articles exported are two different articles. The export of jewellery cannot be carried out without manufacturing the same. The assessee has also explained about its manufacturing process. Even though the conversion of gold into mountings is carried out through outsourcing, final shaping of jewellery and fitting of diamonds were carried out at the place of the assessee. Hence, the activities carried on by the assessee should be considered as manufacturing activity only and hence it is eligible to claim deduction u/s 10B. In view of the foregoing discussions, the order of CIT(A) is set aside and the assessing directed to allow deduction u/s 10B.

(See 2015-TIOL-2104-ITAT-MUM)