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Making of food products is manufacture & export by a 100% EOU can enjoy tax holiday holds ITAT Ahmedabad

If you thought that your favourite dhoklas and samosas were mere gastronomic delights you were mistaken. Infact, if a taxpayer has a 100% export oriented unit (EOU), which is actively engaged in making and exporting the same, he can even enjoy income-tax exemption for the profits earned therefrom under Section 10B of the Income-tax Act.

Upholding the above contention of the taxpayer in the case of Deepkiran Foods Pvt. Ltd. vs. ACIT (30 99), the Income-tax Appellate Tribunal (ITAT), Ahmedabad has rendered a very interesting decision. In this case, the taxpayer company was a 100% EOU engaged in the business of manufacturing and export of various food products like paratha, samosa, dhokla, idli, dahi vada, fried bhindi, pani puri, mint chutney etc. It claimed total exemption in respect of the profits earned under Section 10B. The Assessing Officer was of the view that preparation of eatable items by the taxpayer in its mechanized kitchen did not amount to manufacture or production within the meaning of the said section and, therefore, it was not eligible for exemption. The Commissioner (Appeals) upheld the view of the Assessing Officer and hence the matter was taken in second appeal before the ITAT.

Analyzing the facts of the case, the ITAT noted that the taxpayer held factory license for its 100% EOU unit for manufacture and export of food. Its factory premises were also licensed under Section 58 of the Customs Act, 1953 as a Private Bonded Warehouse for storing and manufacturing of food items. The value of plant and machinery and electrical installations as per the audited balance sheet was in excess of Rs. 20 crores, and the number of workers employed in its factory were in excess of 2000. The Tribunal observed that these facts had not been controverted by the revenue by bringing any contrary material on record and therefore the undisputed factual position was that the taxpayer unit was an industrial undertaking.


           The Tribunal also noted that the taxpayer used various materials like flour, ghee, oil, etc. for the production of various items. The production was done by following a particular set process. The various raw materials when consumed lost their individual and independent identity and a different and new product came into existence. The new product manufactured had a different name and characteristic and was commercially distinct.

         What impressed the Tribunal to accept the contention of the taxpayer was that even for the purposes of Excise Duty, the final product was considered as a different product than the individual items of raw materials. The produced goods were not sold to the customers as flour, ghee, etc., but with the change in the form. It had attained a different identity and was recognized as a new and distinct article and was sold as such a different and distinct commodity. Accordingly, the ITAT held that manufacturing of chapati, paratha, samosa, dhokla etc. constituted manufacturing activity and since the taxpayer had earned profits from the export of the same, they were very much entitled to 100% income-tax exemption in accordance with the provisions of Section 10B of the I.T. Act.

        While rendering its above decision in favour of the taxpayer, the ITAT also usefully quoted the observations of the Hon’ble Supreme Court in the case of Arihant Tiles & Marbles (P.) Ltd (320 ITR 79), wherein it was observed that if the contention of the Department was to be accepted, namely, that the activity undertaken by the taxpayer was not a manufacture, then, it would have serious revenue consequences. The Apex Court noted that the concerned taxpayer was paying excise duty and the activity undertaken had been recognized by various Government authorities as manufacture. To say that the activity will not amount to manufacture or production under the Income-tax Act will have disastrous consequences, particularly in view of the fact that the taxpayers in all such cases would plead that they were not liable to pay excise duty, sales tax etc., because the said activity did not constitute manufacture for purposes of income-tax. 


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