Case Note & Summary
The appellant, Daman Computers Pvt. Ltd., filed an appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal dated 11.7.2007 for Assessment Year 2004-05. The appellant claimed a deduction of Rs.90,14,908 under Section 80IB of the Act for manufacturing electronic computers at Daman. However, the manufacturing was carried out by M/s. Kobian ECS India Pvt. Ltd. under a contract manufacturing agreement dated 26.8.2003, with the factory located at Silvassa. The appellant argued that the manufacturing was under its supervision and control based on various clauses of the agreement. The Assessing Officer, after examining the evidence, found that the appellant had only one lady accountant on its rolls for most of the year and that the manufacturing activity was not under its direct supervision and control. The claim was rejected by the Assessing Officer, the Commissioner of Income Tax (Appeals), and the Tribunal. The High Court admitted the appeal on three substantial questions of law: whether the Tribunal erred in holding that the appellant is not entitled to deduction under Section 80IB; whether the appellant carries on manufacturing activity of electronic computer products within the meaning of Section 80IB; and whether the term 'manufacturer' under Section 80IB includes manufacturing activity outsourced to another party. The court, after considering the facts and the agreement, held that the appellant did not carry on manufacturing activity itself and that the outsourced manufacturing without direct supervision and control did not qualify as manufacture under Section 80IB. The appeal was dismissed.
Headnote
A) Income Tax - Deduction under Section 80IB - Manufacturing Activity - The appellant claimed deduction under Section 80IB for manufacturing of electronic computers, but the manufacturing was outsourced to M/s. Kobian ECS India Pvt. Ltd. without direct supervision and control. The court held that the appellant did not carry on manufacturing activity itself and thus was not entitled to the deduction. (Paras 2-6)
B) Income Tax - Section 80IB - Meaning of 'Manufacture' - The term 'manufacture' under Section 80IB requires the assessee to be directly involved in the manufacturing process. Outsourcing the entire manufacturing to another party without retaining control and supervision does not constitute manufacture by the assessee. (Paras 4-6)
Issue of Consideration
Whether the appellant is entitled to deduction under Section 80IB of the Income Tax Act, 1961 for manufacturing activity outsourced to another party without direct supervision and control.
Final Decision
The appeal is dismissed. The appellant is not entitled to deduction under Section 80IB of the Income Tax Act, 1961.
Law Points
- Section 80IB deduction requires the assessee to carry on manufacturing activity itself
- outsourcing without direct supervision and control does not qualify as manufacture
- manufacturing activity must be under the assessee's own supervision and control
Case Details
2018 LawText (BOM) (08) 95
Income Tax Appeal No.1 of 2008
M.S. Sanklecha, Sandeep K. Shinde
Ms. Sneha Phene with Ms. Priyanka Pol and Mr. Pratik Divkar I/by Little & Co. for Appellants; Mr. Abhay Ahuja with Ms. Sangeeta Yadav for Respondents
Daman Computers Pvt. Ltd.
Income Tax Assessing Officer, City V, Ward 5(1)(3), Ayakar Bhavan, Maharshi Karve Road, Mumbai 400 020 and The Commissioner of Income Tax, City V, Ward 5(1)(3), Ayakar Bhavan, Maharshi Karve Road, Mumbai 400020
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Nature of Litigation
Income Tax Appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal.
Remedy Sought
The appellant sought deduction under Section 80IB of the Income Tax Act, 1961 for manufacturing of electronic computers.
Filing Reason
The appellant's claim for deduction under Section 80IB was rejected by the Assessing Officer, Commissioner of Income Tax (Appeals), and the Tribunal on the ground that the manufacturing activity was outsourced and not under the appellant's direct supervision and control.
Previous Decisions
The Assessing Officer rejected the claim; the Commissioner of Income Tax (Appeals) upheld the rejection; the Income Tax Appellate Tribunal dismissed the appeal.
Issues
Whether the appellant is entitled to deduction under Section 80IB of the Income Tax Act, 1961 for manufacturing activity outsourced to another party?
Whether the appellant carries on manufacturing activity of electronic computer products within the meaning of Section 80IB?
Whether the term 'manufacturer' under Section 80IB includes manufacturing activity being carried out outsourced to another party?
Submissions/Arguments
The appellant argued that the manufacturing activity was carried out under its supervision and direct control as per the agreement with M/s. Kobian ECS India Pvt. Ltd.
The respondents argued that the manufacturing was not under the appellant's direct supervision and control, and thus the appellant was not entitled to deduction under Section 80IB.
Ratio Decidendi
For the purpose of deduction under Section 80IB of the Income Tax Act, 1961, the assessee must itself carry on the manufacturing activity. Outsourcing the manufacturing to another party without retaining direct supervision and control does not constitute manufacture by the assessee.
Judgment Excerpts
The Appellants' claim for deduction under Section 80 IB of the Act was rejected throughout having found that the manufacturing activity undertaken by M/s. Kobian ECS India Pvt. Ltd. for and on behalf of the Appellants was not under its direct supervision and control.
The Assessing Officer upon appreciating the evidence, recorded the finding which are as under: 'The salary register of the appellant shows that during the entire year till December, 2003 there was only one lady accountant on the roles.'
Procedural History
The Assessing Officer rejected the appellant's claim for deduction under Section 80IB. The Commissioner of Income Tax (Appeals) upheld the rejection. The Income Tax Appellate Tribunal dismissed the appeal. The appellant then filed this appeal under Section 260A of the Income Tax Act, 1961, which was admitted on 15.7.2008 on the substantial questions of law.
Acts & Sections
- Income Tax Act, 1961: Section 80IB, Section 260A
