INCOME TAX APPELALTE TRIBUNAL : JODHPUR BENCH : JODHPUR

ITA NO.333 /Jodh/2013 (A.Y. 2009-10)

HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI N.K. SAINI, ACCOUNTANT MEMBER.

Dinesh Boob for the Assessee
N.A. Joshi for the revenue.

This appeal has been filed by the department against the order dated 11/03/2013 of ld. CIT(A), Johdpur. The following grounds have been raised in this appeal:

1. The CIT(A) has erred in not appreciated all the facts of the case properly and in giving finding that a new marketable item with substantial value addition came in to existence as a result of various process of manufacture/production carried out by the assessee on the items purchased in its raw form amounting to Rs. 2,64,20,904/ -.

2. The CIT(A) has erred in deleting disallowance of claim made u/s 10AA to the extent of Rs. 2,64,20,904/- for goods traded and not manufactured by it as eligible articles.

3. The CIT(A) has erred in relying upon facts and scrutiny assessment order for A.Y. 2007-08 and 2008-09 in allowing exemption u/s 10AA in the assessment year 2009-10 as the AO had examined the books of accounts in the year under consideration and therefore, had given finding that there was no manufacturing activity on the goods purchased and disclosed under heading "VAT free goods" amounting to Rs. 2,64,20,904/-. Hence, the assessee has not fulfilled conditions given in section 10AA(1).

4. The CIT(A) has erred at Para 6.9 on page 28 of the order in relying upon various certificates and registrations obtained under different statute for different purpose, whereas the provisions of section 10AA of the IT Act specially provides conditions which are to be satisfied to become eligible for exemption.

5. The CIT(A) has erred in allowing exemption u/s 10AA for total profit of the unit on the basis of labour expenses, consumable items expenses, PF, ESI etc. and plant and machinery by ignoring specific finding of the AO that in respect of goods purchased under head " VAT free goods ", there was no manufacturing activity and it had simply traded/ exported only. Therefore, the assessee has not fulfilled condition provided in section 10AA(1).

6. The CIT(A) has erred in not bringing on record any documentary evidences which could prove that the manufacturing activities as defined in clause (r) of section 2 of special Economic Zone Act, 2005 or other relevant law were carried out on the VAT free handicrafts goods purchased and exported by the assessee.

7. The CIT(A) has erred in relying upon some photographs for the finding that assessee had purchased un-finished handicraft items as VAT free items/goods without correlating with nature of specific process of work and corresponding purchases and sale bills of export.

8. The CIT(A) has erred in relying upon the decision of Hon'ble ITAT, Jaipur Bench and Jodhpur Bench at para 6.5.2 and 6.5.3 on page 25 of the CIT(A)'s order without appreciating that the facts of cited decisions are different compared to assessee's case. In this case, the AO had examined books of Accounts and purchase bills of VAT free items purchased from handicraft dealers and come to a conclusion that the assessee had not manufactured/produced eligible articles or things but it simply traded with the goods purchased and had not carried out any artistic work thereon.

9. The CIT(A) has erred in allowing deduction u/s 10AA in respect of income received/accrued from DDB of Rs. 51,19 ,027 / - .

10. The CIT(A) has erred in not following decision of Hon'ble SC in case of M/s Liberty India, reported in 317 ITR 218 M/s Sterling foods,237lTR 579 (SC) and M/s Hindustan Lever Ltd. 239 ITR 297(SC).

11. The CIT(A) has erred in ignoring the similar expression used in the provisions of section 10AA as used in section 80lA of the lT Act. In the section 10AA(1), the Expression is as " hundred percent of profit or gains derived from the export of such articles or things or from services " and in section 80lA(1), includes any profits and gains derived by an undertaking ". Hence, the CIT (A) ought to have followed decision of the Hon'ble SC in case of M/s Liberty lndia.

12. The CIT(A) has erred in giving finding that the provision of section l0BA are similar to the provisions of section 80HHC. The CIT(A) has not noticed that in clause "bba" of explanation to section 8OHHC, the expression "profits of the business " is defined and it includes income accrued/received from DEPB/DDB, where as there is no such definition in section 10AA. The Sub- Section 7 of section 10AA gives a formula for determination of eligible deduction only."

2 Vide grounds No. 1 to 8, the grievance of the department relates to the deletion of disallowance of claim made by the Assessing Officer under section 10AA of the I.T. Act, 1961 (hereinafter referred to as "Act", for short).

3. The facts related to this issue in brief are that the assessee has filed e-return of income on 29/09/2009, showing total income of Rs. 81,440/-. The assessee revised the return on 26/08/2010 and shown same income of Rs. 81,440/-. Later on, the case was selected for scrutiny. During the course of assessment proceedings, Assessing Officer noticed that the assessee had claimed deduction of Rs. 3,18,08,031/- under section 10AA of the Act. He was of the view that the deduction under section 10AA of the Act was allowable to the unit set up in Special Economic Zone (SEZ) in respect of profit derived from export of articles or things manufactured by the unit. The Assessing Officer discussed the provisions of Section 10AA of the Act at pages 2 & 3 of the assessment order dated 26/12/2012 and pointed out that the assessee purchased raw-material as per the following details:-

From the above figures, the Assessing Officer observed that major amount of Rs. 3,43,48,670/- was of the VAT exempted goods and the assessee had given heading in Annexure-L as purchases of raw-material, but in fact, the entire purchases were not raw-material. He further observed that VAT exempted purchases of the above said amount were in fact of finished handicrafts items and since handicraft items are VAT free under Schedule I of Rajasthan Value Added Tax, 2003. No item of raw material is exempted from VAT. All such purchases were from handicraft dealers, who themselves manufactured. The details of purchases as mentioned at page 4 of the assessment order were as under:-

4. The Assessing Officer further observed that what the assessee has purchased were handicraft items and what the assessee had exported were also handicraft items, hence, there was no change in the name, character or use. Therefore, it was established that the assessee has exported the articles and things not manufactured by it, but had exported trading items. Therefore, assessee was not entitled for exemption under Section 10AA of the Act in respect of goods not manufactured by it. Accordingly, exemption of Rs.3,18,08,031/- under section 10AA of the Act claimed by the assessee was disallowed to the extent of profit from export of trading goods, which was worked out as under:-

The Assessing Officer allowed exemption under section 10AA of the Act to the extent of Rs. 53,87,127/-.

5. Being aggrieved, assessee carried the matter to the learned CIT(A) and submitted that the assessment for the A.Ys. 2007-08 & 2008-09 had been completed, after scrutiny under Section 143(3) of the Act, Assessing Officer elaborately checked and verified the SEZ activities and after careful consideration of the relevant facts, evidence and report of the Income-Tax Inspector, had granted the exemption under section 10AA of the Act in the past assessments. It was emphasized that there was no change in the business activities of the assessee as compared to the earlier years, where such claim had been accepted after deep scrutiny. The assessee explained in his letter dated 16/11/2011 that it fulfills all the conditions for grant of exemption under section 10AA of the Act and the same was claimed on the basis of Auditor's report in the prescribed Form No. 56. It was further stated that Assessing Officer wrongly presumed that VAT exempted handicraft items purchased by the assessee aggregating to Rs. 3,43,48,670/- were finished handicraft items and those had been exported by the assessee without any change in the name, character or use. It was stated that the finding of the Assessing Officer was wrong and contrary to the voluminous record relating to purchase of raw material, processing of raw material, wage, exports invoices and various other relevant documents required to be maintained under the law relating to SEZ, produced by the assessee from time to time before the Assessing Officer. Therefore, the findings of the Assessing Officer were clearly contrary to contemporary physical verification and deep scrutiny of entire inputs and dispatches required to be made by the Customs Authorities in manufacturing units in SEZ according to the provisions contained in the customs and exercise rules and regulation and rules relating to the SEZ. It was explained that the assessee was engaged in the business of manufacturing of artistic wooden/iron/marble/glass handicrafts items and the unit is situated in Special Economic Zone at RICCO Boranada, Jodhpur. It was stated that exemption under section 10AA of the Act is given to such units established under SEZ Act, 2005. It  as further stated that for setting up of any unit in any SEZ zone, first permission from Development Commissioner of the SEZ is required. The proposal is scrutinized by the approval committee, which consists of various members. The said committee includes officer in rank of Additional Secretary to the Government of India in the Ministry of Department of Central Government dealing with commerce, two officers from the Ministry of the Finance dealing with revenue, economic affairs, officers from Ministry of Commerce, Industrial Policy and Promotion, science and technology, representative of State government and even representative from the Central Board of the Direct Tax under the Ministry of the Finance represent the Board granting such approval. It was pointed out that the assessee had been granted letter of approval by the office of Development Commissioner, Noida SEZ, Ministry of commerce and Industry, Department of the Commerce Government of India, in accordance with the scheme of Government and bond-cum-legal undertaking was executed on 13/04/2006 in accordance with the terms and condition of letter of permission, which had been duly accepted by the Development Commissioner, Noida, SEZ in accordance with their letter dated 27/04/2006. It was further stated that the agreement executed on 13/04/2006 with the concerning government authorities clearly reveals that the unit of the assessee established in the SEZ is a manufacturing unit. It was further stated that every purchase of sale unit was duly recorded by the customs authorities and certified by the authorities when the goods were taken in and out from such zone. It was contended that each and every bill of the assessee unit was being verified by the custom authority before the goods moved from the unit of the assessee. It was further contended that the entire purchase of the raw material purchased by the assessee came within the permissible ambit of the provision of SEZ Act and the rules made there under and that the manufacturing unit located in notified special zone is eligible for all kinds of exemption under the provisions of direct tax law and indirect tax law. It was stated that the assessee furnished the details of exemption given in chapter VI - Sections 26 to 30 of SEZ Act, 2005 and copies of notification dated 01/03/2003 in respect of sale tax exemption to the unit established in SEZ and notification issued under Section 8(4) of the Rajasthan Value Added Tax Act, 2003 providing for exemption under indirect taxes and exempting from tax, the sale or purchase by registered dealer to industrial unit established in SEZ. It was further stated that the activities carried out by the assessee had been accepted as manufacturing and accordingly, approval for setting up of manufacturing unit was granted in accordance with the provision of the SEZ Act. Once the same has been accepted as a manufacturing unit by the SEZ in accordance with the rules and regulations governing SEZ units, it should be treated implicit and implied that the unit has been approved as a manufacturing SEZ unit by the board. It was stated that the Assessing Officer examined the issue in A.Y. 2007-08 & 2008-09 under Section 143(3) of the Act and the entire relevant evidence i.e. purchase vouchers, export invoice, manufacturing expense, labour records to show the details about process of manufacturing/production carried out by the assessee and after such scrutiny and investigation, the Assessing Officer had accepted that the entire activity carried out by the assessee amounted to manufacture/production in SEZ, which was eligible for deduction under Section 10AA of the Act. It was further stated that the unit of the assessee was duly registered as a manufacturing unit with District Industrial Centre as an SSI unit and registered as a manufacturing unit with various other authorities of the Government i.e. the Chief Inspector of the Factory, Government of Rajasthan, Export Promotion Council for Handicraft, Ministry of Textile Government of India, under Rajasthan Sales Tax law. Therefore, assessee has been accepted as a manufacturing unit by all concerning Government authorities which support the assessee's claim that assessee was wholly engaged in the business of manufacturing/production of handicraft articles exported by it. It was explained that the assessee carries out series of the manufacturing / production process on the raw structures to transform or to convert into finished handicraft items, which becomes totally different, distinct and new commercial commodity which is exported by the assessee. Assessee submitted to the learned CIT(A) that after purchase of handicraft items in its raw form or sketch form, the assessee carries out various activities of manufacture/production on such raw items to make it fit for export. The various activities carried out by the assessee were as follows:-

i. Thorough checking of unfinished goods procured (Filing/grinding/welding/sanding/filing etc.)
ii. Initial polishing/sanding/buffing/coating. iii. Final buffing/polishing/prime coating.
iv. Plating/lacquering/colour coating.
v. Engraving
vi. Antique polish
vii. Fitting/Assembling
viii. Barcoding/packing/marking.

The assessee also furnished detailed flow chart showing production process, flow chart for iron/wooden/iron wooden/combination item after purchase of unfinished and unassembled items in its raw form. Photocopies of purchase invoices relating to purchase of the raw material shown as VAT exempted items had been furnished and also furnished the chart of illustrative purchase of raw material and corresponding exports made after carried out several process of manufacture/production as under:-

6. It was stated that the assessee was fully engaged in business of manufacturing/production of handicraft items exported by it, which was further corroborated by the fact that assessee purchased various items, which were used in converting the raw material purchased into finished products. The details of such items are as under:-
Polishing item Rs. 9,84,776/-
Nicle Plating & other plating material Rs. 45,11,844/-
Component (glass, clocks etc.) Rs. 21,59,358/-
 Raw material (weight matter etc.) Rs. 15,35,253/-
Hardware Rs. 1,30,344/-
Packing materials Rs. 51,75,039/-
Misc. expenses Rs. 1,82,756/- -----------------------
Total Rs.1,46,79,370/- ------------------------

It was also stated that the assessee incurred expenses of Rs. 56,47,777/- on account of labour charge. The authorities like Dy. Chief Inspector, Factory and Boiler Department had also inspected and found that the large number of labour employed and ESI & PF had been deducted. It was also contended that the assessee's unit was established in sizable infrastructure facilities spreading over 4200 sq.mt and also having sufficient plant and machinery to carryout manufacturing activities. The assessee had power connection of 50kwh in the year under consideration and incurred electric expenses of Rs. 6,56,987/-. Thus, the assessee fulfills all the requirements under the law in relation to claim of deduction made under section 10AA of the Act. The assessee submitted copies of the following certificates issued by the various government authorities:-

a. Copy of registration certificate issued by District Industries Centre, Jodhpur registering No. 080151100653.
b. Registration certificate granted under the provision of Factories Act 1948 NO. 28531 dated 22/11/2010.
c. Copy of the registration certificate issued by Export Promotion Council for Handicraft.
The reliance was placed on the following case laws:-
1. Madhu Jayanti International Ltd. in ITA No. 1463/Kol/2007 A.Y. 2004-06 order dated 20/07/2012.
2. CIT Vs. Emptee Poly-Yarn (P) Ltd. reported in 320 ITR 665.
3. ITO Vs. Arihant Tiles & Marbles P. Ltd. reported in 320 ITR 79 (SC)
4. Pondichary State Cooperative Consumer Federation Ltd. Vs. Union Territory of Pondichary reported in 20 Tax upto Date (SC) 203.
5. Vadilal Chemicals Ltd. Vs. The State of Andhra Pradesh reported in 4 VAT Reporter 123(SC)
6. ITO Vs. Ektara Exports (P) Ltd. reported in 152 Taxman 18 (Kol)
7. Goverdhan Prasad Singhal Vs. ITO reported in 27 DTR (jp) (Trib.) 1
8. DCIT Vs. Manglam Arts reported in 17 DTR (JP) (Trib.) 97
9. Arts and Crafts Exports Vs. ITO reported in 66 DTR (Mum) (Trib.) 69
10. DCIT Vs. M/s. Basant, Jodhpur in ITA NO. 614/JU/2008 for A.Y. 2005-06.
11. Kwal Pro Exports Vs. ITO reported in 25 DTR (Jd) 113.
12. Devarsa Gas Chem P. Ltd. Vs. Rajasthan Taxation Tribunal reported in 25 Tax Wrold 234 (Raj)
13. Gujarat Nermada Valley Fert. Co. Ltd. Vs. Collector of Ex. And Cus. 2005 (184) E.L.T. 128 (SC)
14. Bhor Industries Ltd. Vs. Collector of Central Excise Bombay reported in (1989) 1 (SC) 602.

7. It was stated that a new distinct and different marketable item namely finish item of handicraft with substantial value of the addition, came into existence as a result of various process of manufacture/ production carried out by the assessee on the item purchased on its raw form/in the form of Skelton and the name, character and user of the raw material/semi finished/unassembled items purchased by the assessee become totally different marketable and exportable products having different name, description, character and user as is evident from respective purchase invoice duly certified by the custom authorities. It was also stated that the meaning of the word "production" is very wide. Section 10AA of the Act uses the expression "manufacture" or "produce" and the expression "produce", production have a much wide meaning as compared to the meaning of the word "manufacture". The reliance was placed on the judgment of the Hon'ble Supreme court in the case of CIT Vs. Sesa Goa Ltd. reported in 271 ITR 331 (SC).

8. Learned CIT(A) after considering the submissions of assessee observed that the assessee was engaged in the business of handicraft items and purchased raw material of Rs. 3,79,53,527/- which included VAT exempted purchases of Rs. 3,43,48,670/-. He further observed that the contention of the Assessing Officer that the assessee had purchased VAT free goods, which were finished goods from manufacturer themselves and selling of those amounted to trading not manufacturing. He further observed that the Assessing Officer had presumed that the assessee had exported the purchase items in the same form. On the contrary, the assessee had furnished illustration with photographs which showed that all the VAT exempted items purchased by the assessee were pieces of unfinished handicraft items, so those purchases of VAT exempted items and other consumable materials required to be physically checked and verified by the customs authorities. The learned CIT(A) pointed out that purchase invoices certified by the customs authorities had a remark as "unfinished items" and the assessee had submitted a chart with photographs where purchase cost, process expenses and sale price were given, which clearly established that the activity carried out by the assessee was a manufacturing as provided under section 10AA of the Act. He further pointed out that the assessee furnished the copies of VAT assessment before the Assessing Officer which clearly revealed that supplier had supplied only unfinished and semi-finished items on which finishing work and artistic work was carried out in the assessee's own factory and even otherwise, the products of one industry can be a raw material for other industries. The reliance was placed on the judgment of Hon'ble Supreme Court in the case of Ujagar Paints reported in 179 ITR 317 (SC). Learned CIT(A) observed that the assessee's unit was situated in SEZ area, which was 100% EOU and eligible to purchase VAT exempted goods and after manufacturing, the goods were exported out of India. Learned CIT(A) referred to notification No. F12/63FD/Tax 2005-06 dated 09/06/2006 of the State Government, in accordance with the said notification, the assessee required to furnish a declaration regarding purchase of goods which are to be used for export out of India. The learned CIT(A) observed that contention of the Assessing Officer that the assessee had purchased VAT exempted goods, which were finished goods and the same were exported as trading was not based on facts and evidences. Learned CIT(A) held that the observation of the Assessing Officer that the assessee purchased handicraft items and also exported them, hence, there was no change in the name, character and use was not correct, since, the raw materials purchased were Skelton, which were utilized in manufacturing, activity to prepare finished products with distinct name, character or use. Learned CIT(A) pointed out that the Assessing Officer allowed the deduction of Rs. 53,87,127/- only, which basically included consumable items utilized for manufacturing, on the contrary as per the assessee by doing a manufacturing process with the help of consumable item the VAT free raw material i.e. the skelton were given a distinct name, character or use which was quite different from the raw material. Therefore, the Assessing Officer was not justified to restrict the disallowance to the tune of Rs. 53,87,127/-. Learned CIT(A) also referred to the definition of "manufacturing" given in Export & Import Policy applicable for 100% EOU and discussed the same in para 6.5 of the impugned order, for the cost of repetition, the same is not reproduced herein. Learned CIT(A) was of the view that the definitions given in different relevant provisions relating to factories and exports, clearly shows that the various processes of manufacture/production were applied on the eligible articles or things namely handicraft articles or things having artistic value. Reliance was placed on the case of Goverdhan Prasad Singhal VS. ITO reported in (2009) 27 DTR (Jp.) 1 and the decision in the case of DCIT Vs. Manglam Arts reported in 17 DTR (JP) (Trib.) 97 and Arts & Crafts Exports Vs. ITO reported in 66 DTR (Mum) (Trib.) 69. Learned CIT(A) categorically stated that the assessee was engaged in the business of manufacture/production and exports of wooden handicraft items. In addition to the handicraft items of iron, metal, glass etc. and such handicraft items manufactured and exported by the assessee contained artistic value. He further stated that the assessee purchased raw material in the form of word, iron and semifinished skelton thereafter carries out the following process:-

i. Thorough checking of unfinished goods procured. (Filing/grinding/welding/sanding/filling etc.)
ii. Initial polishing/sanding/buffing/coating iii. Final buffing/polishing/prime coating
iv Plating/lacquering/colour coating
v Engraving
vi Antique polish
vii Fitting/Assembling
viii Barcoding/packing/marking.

9. The learned CIT(A) further observed that if the aforesaid activities carried out by the assessee are examined in the light of wider definition of manufacture given in Export Import Policy, which governs 100% EOU, it would be crystal clear that the activities carried out by the assessee amount to 'manufacture' for the purpose of grant of deduction u/s 10AA of the Act and the definition of manufacture given in the Export Import Policy applicable for 100% EOU will be applicable, which inter alia includes any process, assembly, polishing, labelling and packing etc. as part of manufacturing activities and that the circular No. 314 dated 06/05/1997 issued by the Ministry of Finance inter alia clarifies that the term 'manufacture' for the purposes of 100% EOU is wider in meaning then that used in section 2(f) of Central Excise Act and the said clarification amply clarifies the intention of the Government that the wider definition of "manufacture" given in the Export Import Policy should be applied for grant of all incentives, concessions and exemptions to 100% EOU.

On the basis of the above discussion and the detailed flow chart of the process, learned CIT(A) was of the view that a new marketable item with substantial value addition came into existence as a result of various processes of manufacture/production carried out by the assessee on the items purchased in its raw form i.e. VAT free goods. Learned CIT(A) also observed that the deduction under section 10AA of the Act had been allowed after deep examination in the scrutiny assessment. He referred to the A.Y. 2007-08 & 2008-09, wherein the Assessing Officer allowed the claim and verified the SEZ activities and relevant facts, evidence and report of the income tax Inspector about physical verification of the manufacturing activity and had granted the exemption under section 10AA of the Act. He also pointed out that the Assessing Officer had held that w.e.f. 03/01/2007 i.e first year's business of the assessee, the taking of goods commenced form SEZ, the assessee was eligible for 100% deduction under section 10AA of the Act, which was also allowed in subsequent orders by the Assessing Officer and there is no change in the business activities of the assessee as compared to the earlier years. Learned CIT(A) categorically stated that the Assessing Officer did not point out any instance or facts which suggested that there was any change in activity of the assessee, therefore, the deduction allowed cannot be withdrawn unless and until there is contrary distinguishable facts. Reliance was placed in the case of Grace Exports Vs. ITO reported in 79 ITR 361. Learned CIT(A) also observed that the assessee-firm was duly registered as manufacturing concern/100%-EOU with various government authorities, the said registration was granted after necessary enquiries and satisfaction about the fulfillment of various preconditions. Learned CIT(A) pointed out that the various government and concerned authorities after verification and scrutinizing the activity of the assessee issued the following certificates:-

i. Copy of registration certificate issued by district Industries Centre, Jodhpur registering No. 080151100653.
ii. Registration Certificate granted under the provision of Factories Act, 1948 NO. 28531 dated 22/11/2010.
iii. Copy of the registration certificate issued by Export Promotion Council for Handicraft.
iv. Copy of approval issued as per SEZ Act, 2005 by office of the development Commissioner, Noida Special Economic Zone, Ministry of Commerce and Industry, Department of Commerce Government of India.
v. Copy of letter dated 27/04/2006 of Development Commissioner, Noida, Special Economic Zone.
vi. Copy of registration granted under the provisions of Rajasthan Sales Tax Act showing the appellant as "manufacturer of all types of handicrafts".
vii. Copy of registration certificate issued under the provisions of CST Act showing the assessee as manufacture of handicrafts.

On the basis of above certificates, learned CIT(A) held that the assessee carried out manufacturing process with the number of labours and made the labour payment of Rs. 56,47,777/-, the details of which was furnished and the authorities like Dy. Chief Inspector, Factory and Boiler Department had also inspected and found that the large number of labour employed were covered under the ESI/PF. He also pointed out that the assessee had incurred Rs. 6,56,987/- on account of electric expenses and the unit was established in sizable infrastructure facilities spreading over 4200 sq.mt. having sufficient plant and machinery to carry out various manufacturing activities and the Assessing Officer had not doubted the above said expenses, which proved that the assessee was engaged in the manufacturing activity and even the Assessing Officer had not doubted the eligibility under section 10AA of the Act but restricted the claim of deduction. Learned CIT(A) held that the assessee was eligible for deduction under section 10AA of the Act and the Assessing 24 Officer was not justified in restricting the deduction of claim under section 10AA of the Act to the extent of Rs. 53,87,127/- only. He accordingly, allowed the claim of the assessee. Now, the department is in appeal.

10. Learned D.R. strongly supported the order of the Assessing Officer and submitted that the handicraft goods were purchased by the assessee for export as handicraft goods, so it was a trading activity. Therefore, the Assessing Officer was fully justified in disallowing the claim of the assessee for exemption under section 10AA of the Act and the learned CIT(A) wrongly allowed the claim in respect of those goods purchased and traded by the assessee.

In his rival submissions, learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that in the preceding A.Y.s 2007-08 & 2008-09, the Assessing Officer after making the deep scrutiny allowed the claim under section 10AA of the Act while passing the assessment order under section 143(3) of the Act and there is no change in the nature of business and manufacturing process of the assessee during the year under consideration vis-a-vis earlier years, therefore, learned CIT(A) was fully justified in allowing the claim of the assessee. It was further submitted that this issue is squarely covered by the decision dated 31/01/2013 of this bench of the tribunal in ITA NO. 336/Jodh/2011 and others in the case of M/s. Suraj Exports India Sardar Shahar, Churu Vs. ITO, Churu, copy of the said order was furnished is placed on record. The relevant portion is reproduced as under:-

"We have cogitated rival arguments vis-a-vis evidence on record. We have examined the decisions on which parties have placed their respective reliance. We have found that the ratio of the decision of Hon'ble Apex Court rendered in the case of Liberty India Vs. CIT reported 225 CTR 233 (Hon'ble Supreme Court) is not applicable to the facts of this case. The section under interpretation before Hon'ble Supreme Court was 80IA. In sec. 80IA, no formulate for computation of profit derived by the undertaking is laid down, whereas in section 10BA and section 80HHC formula is prescribed for the purpose. Therefore, in our considered opinion, sec. 10BA and 80HHC are more nearer to each other, and whatever interpretation of 'derived from' is given in any decision in which section 80HHC is involved, would also mutatis-mutandis to the interpretation of sec. 10BA. The Hon'ble Apex Court in the cases of Topman Exports Vs. CIT reported in 67 DTR 185 (S.C.) and ACG Associated Capsules Pvt. Ltd. Vs. CIT reported in 67 DTR 205 has recently held that DEPB is chargeable as income and Cl.(iiib) of section 28 in the year in which the assessee applies for DEPB credit against the exports whereas the profit on transfer of DEPB by the assessee is chargeable as income under Cl.(iiid) of section 28 in his hands in the year in which he makes the transfer. The Mumbai Bench of Hon'ble Income Tax Appellate Tribunal in the case Arts and Crafts Exports vs. Income-Tax Officer reported in 66 DTR 69 (Mumbai), after considering the decision of Liberty India (supra) has taken a clear cut decision in favour of the assessee.

11. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, it appears that Assessing Officer disallowed the claim of the assessee mainly on the ground that assessee purchased VAT exempted goods amounting to Rs. 3,43,48,670/-, which were in fact, finished handicraft items, because only handicraft items are VAT free under Schedule I of Rajasthan Value Added Tax, 2003. On the contrary, the claim of the assessee is that the goods purchased by it were unfinished handicraft items, which were also verified by the custom authorities, who clearly remarked on the purchase invoices as "unfinished items". In our opinion, the view taken by the Assessing Officer was not correct because the assessee purchased unfinished handicraft goods and applied various processes like cutting, polishing, repairing, remaking etc. and for that purpose, incurred expenses amounting to Rs. 56,47,777/- for labour, which has not been doubted by the Assessing Officer. The assessee also incurred electric expenses of Rs. 6,56,987/- which was also accepted by the Assessing Officer. The assessee was engaged in manufacturing activities, this fact is established from various certificates issued by the government and concerned authorities, who after verification and scrutiny, issued the certificates which are to be issued only to the concerns engaged in manufacturing activities. Those certificates were as under:-

i. Copy of registration certificate issued by district Industries Centre, Jodhpur registering No. 080151100653.
ii. Registration Certificate granted under the provision of Factories Act, 1948 NO. 28531 dated 22/11/2010.
iii. Copy of the registration certificate issued by Export Promotion Council for Handicraft.
iv. Copy of approval issued as per SEZ Act, 2005 by office of the development Commissioner, Noida Special Economic Zone, Ministry of Commerce and Industry, Department of Commerce Government of India.
v. Copy of letter dated 27/04/2006 of Development Commissioner, Noida, Special Economic Zone.
vi. Copy of registration granted under the provisions of Rajasthan Sales Tax Act showing the appellant as "manufacturer of all types of handicrafts".
vii. Copy of registration certificate issued under the provisions of CST Act showing the assessee as manufacture of handicrafts.

12. In the present case, it is also admitted fact that in the preceding assessment years 2007-08 and 2008-09, the deduction claimed by the assessee under section 10AA of the Act was allowed while passing the assessment orders under section 143(3) of the Act. Copies of the said assessment orders are placed at page Nos. 232 to 249 of the assessee's paper book. In the instant case, nothing is brought on record to substantiate that there is any change in the facts of the present year vis-à-vis to the earlier years. It is relevant to point out that in the assessment order dated 20/04/2010 for the A.Y. 2008-09 passed under section 143(3) of the Act, copy of which is placed at page Nos. 232 to 236 of the assessee's paper book, the Assessing Officer while allowing the deduction under section 10AA of the act observed as under:-

"Meanwhile, vide order sheet entry dated 19/03/2010, Inspector of this ward was directed to verify whether the unit is located in Special Economic Zone or not and whether the firm is manufacturing the articles of its own or not. The Inspector of this ward, vide his report dated 29/03/2010 has reported that the assessee's factory and production house is situated at G-185 & 186, F-204 & 205 which is in SEZ, Boranda. He further reported that the assessee manufactures the articles of its own. The submission of the assessee was examined with reference to books of account, purchase bills/vouchers etc. produced/filed. Considering all the facts and circumstance of the case and after discussion with the ld. A/R of the assessee and partners of the firm, it is found that the assessee is eligible for 100% exemption, being second year of the business.

13. Similarly, for the A.Y. 2007-08 copy of which is placed at page Nos. 240 to 246 of the assessee's paper book. The Assessing Officer in the order dated 03/04/2009 in para 4.1, 4.2 observed as under:-

"4.1 The assessee was asked vide order sheet noting dated 12/03/2009 to establish its case to cover by clause (iii) of explanation 1 to section 10AA (8) of the Act i.e. manufacture shall have the same meaning as assigned to it in clause (r) of section 2 of the SEZ Act, 2005. The assessee vide letter dated 23/03/2009 has explained as under:-

"THAT assessee is manufacturer of all types of handicrafts. It is labour oriented unit and no heavy machinery is used for production. There is no fixed system of manufacturing; it depends upon the order of export. As and when assessee received the order, he decided the manufacturing process and style of working. Assessee is having good setup for manufacturing different types of handicrafts items. Assessee generally deals with Iron handicrafts. A detailed process chart with photos of items showing the steps involved in manufacturing one after another process is enclosed. The Steps involved in production and export is as under:-

1) Receipt of purchase order from the foreign buyer.
2) Production planning for in house and at outsides.
3) Issue of Pos and JOs to suppliers and in house in charges with the specified 'models' each for production of 'semi-finished' goods, which too in different steps. Iron sheets or angles were cut down in the shape of items, which is done by different persons which are specialized in different items as per size and frama and some time these skeletons was purchased directly from supplier to save time and headache of scrape.
4) These cut size items are assembled and engraving and shaping as per requirement of items under supervision of supervisors. Welding, moundling and giving shapes and attaching small attachments which are needed as accessories & requirement of items.
5) These items were now given for finishing for removing the welding signs and balancing the same.
6) Now these items are polished as per requirement of buyer i.e. nickel platting Powder coating, stand stone blasting or colouring as per requirement.
7) Now final polishing is done and by checking the accuracy of item as per requirement and as per order and specification of size and finishing and glass accessories were fitted or final accessories were fitted as per specifications.
8) Special packaging is done as per item and individual item is packed in separate box and than each is packed in big boxes with use of different kind of packing material after labelling and tagging the items.
9) Labelling of boxes and putting it in container for export of the same.

THAT manufacturing of items involved many steps and due to variety of items and style, each and every work of the item cann't be done in house, hence some part of the work/job is given outside to specialist for adding in the items and which returns the same and next process were done in inhouse. As in export secrecy of the model of item is must and if we loose the same we will lose the order or we will not receive the order second time hence assessee's try to do the work in parts and final finishing and shaping of the item is done in inhouse. Assessee is having good and efficient staff which is sufficient for it working and all the staff is on roll and also having some contractors which are also registered under assessee and working in assessee's premises and P.F. and E.S.I liability is taken by the assessee if it is not paid by the contractor. Hence, directly and indirectly assessee gives employment for the manufacturing of its item through contractor also. Contractorship is must in this trade due to large volume of labour turnover. As assessee if keeps the employee on his roll and after two three months he left and he has to give explanation for the same to the PF and ESI department, hence it create one more problem. Second in contractor ship assessee has to pay only for the work or items which he has completed and no payment without work if there is no work of said type with assessee. Assessee in handicraft industry due to variety of items each person or team of persons are specialized in the special work, which is also as needed from order to order. Hence, assessee prefer's contractor over the direct employee, as there is no difference in working both are doing work in assessee's premises."

4.2 The explanation of the assessee was examined with the books of account, purchase bills/vouchers and vouchers raised by the contractor. As much as profit & gains raised to the assessee on export sales, the taking of goods commenced from SEZ i.e. w.e.f. 03/01/2007, is eligible for 100% deduction, being first year of the business u/s 10AA of the I.T. Act, 1961."

14 From the above narrated facts, it is clear that the department has allowed claim of the assessee for deduction under section 10AA of the Act in the preceding years. Since, there is no change in the facts of the year under consideration therefore, on the principle of consistency also, the claim of the assessee was allowable. Furthermore, this issue is covered by the decision of this bench of the tribunal in the case of M/s. Suraj Exports India Sardar Shahar, Churu Vs. ITO, Churu (supra). We, therefore, considering the totality of facts as discussed hereinabove, are of the view that learned CIT(A) was fully justified in directing the Assessing Officer to allow the claim of the assessee under section 10AA Act. Accordingly, we do not see any merit on this issue in the appeal of department.
15. The next issue vide grounds No. 9 to 12 relates to deduction under section 10AA of the Act in respect of income received/accrued from DDB of Rs. 51,19,027/-.

16. Brief facts related to this issue are that Assessing Officer disallowed the claim of the assessee under section 10AA of the Act on amount accrued/received from DDB of Rs. 51,19,027/-. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of M/s Liberty India. Learned CIT(A) allowed the claim of the assessee by following the decision dated 31/03/2013 of this bench of the tribunal in the case of M/s. Suraj Exports India Sardar Shahar, Churu Vs. ITO, Churu in ITA No. 336/Jodh/2011 and others and he reproduced the relevant portion given in para 8 of the said decision which read as under:-

"8. We have cogitated rival arguments vis-à-vis evidence on record. We have examined the decisions on which parties have placed their respective reliance. We have found that the ratio of the decision of Hon'ble Apex Court rendered in the case of Liberty India Vs. CIT reported in 225 CTR 233 (Hon'ble Supreme Court) is not applicable to the facts of this case. The Section under interpretation before Hon'ble Supreme Court was 80IA. In Section 80IA, no formula for computation of profits derived by the undertaking is laid down, whereas in Section 10BA and Section 80HHC formula is prescribed for the purpose. Therefore, in our considered opinion, Section 10BA and 80HHC are more nearer to each other, and whatever interpretation of 'derived from' is given in any decision in which Section 80HHC is involved, would also mutatis mutandis to the interpretation of Section 10BA. The Hon'ble Apex Court in the cases of Topman Exports vs. CIT reported in 67 DTR 185 (SC) and ACG Associated Capsules Pvt. Ltd. Vs. CIT reported in 67 DTR 205 has recently held that DEPB is chargeable as income and Cl. (iiib) of Section 28 in the year in which the assessee applies for DEPB credit against the exports whereas the profit on transfer of DEPB by the assessee is chargeable as income under Cl. (iiid) of Section 28 in his hands in the year in which he makes the transfer. The Mumbai bench of Hon'ble Income Tax Appellate Tribunal in the case of Arts and Crafts Exports vs. Income-tax Officer reported in 66 DTR 69 (Mumbai), after considering the decision of Liberty India (supra) has taken a clear cut decision in favour of the assessee. The held portion of the Mumbai bench is as under:- "Para 11.14-As regards deduction u/s 10 BA in respect of DEPB, we find that sub-section (4) of section 10BA a defines profits derived from eligible articles. Section 28 (iiic), (iiid) and (iiie) provides that these income are profits and gains of business. The said sub-section(4) of Section 10B A is reproduced below:-

For the purposes of sub-section (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking.

The relevant part of Section 28 reads as under:

28. The following income shall be chargeable to Income-tax under the head "profits and gains of business or profession". (iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;

(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992); (iiie) Any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992); In the light of the above discussion, we find that the assessee is entitled to deduction u/s 10BA on DEPB as in accordance with Section 28 of the Act, these are business income."

17. During the course of hearing, learned D.R. supported the order of the Assessing Officer while learned counsel for the assessee-firm submitted that this issue is squarely covered by the decision of the jurisdictional bench of the ITAT, which has been followed by the ld. CIT(A), therefore, the appeal of the department on this issue deserves to be dismissed.

18. We have considered the submissions of both the parties and carefully gone through the material available on record. It is an admitted fact that similar issue has already been decided by this bench of the tribunal in the aforesaid referred to order dated 31/03/2013 in the case of M/s. Suraj Exports India Sardar Shahar, Churu Vs. ITO, Churu (supra), which has been followed by the ld. CIT(A). We therefore, do not see any valid ground to interfere with the findings of the ld. CIT(A). Accordingly, we do not see any merit on this issue also in the appeal of the department.

19. In the result, appeal of the department is dismissed.