Export oriented undertaking (Manufacture) – Exemption u/s. 10B – Assessee firm was engaged in mining and export of iron ore – It outsourced work of processing of iron ore to another company which operated plant and machinery outside custom bonded area – Assessee’s claim for exemption u/s. 10B was rejected by AO – Tribunal took a view that mere processing of iron ore in a plant and machinery located outside customs bonded area would not disentitle assessee from claiming exemption u/s. 10B where iron ore was excavated from mining area belonging to an export oriented unit – Accordingly, Tribunal allowed assessee’s claim – No substantial question of law arose

23.  Pr. CIT vs.
Lakshminarayana Mining Co.;
[2018] 93 taxmann.com 142 (Karn):

Date of Order: 6^th
April, 2018

A. Ys.: 2009-10 to 2011-12

Section 10B of I. T. Act, 1961

Export oriented undertaking
(Manufacture) – Exemption u/s. 10B – Assessee firm was engaged in mining and
export of iron ore – It outsourced work of processing of iron ore to another
company which operated plant and machinery outside custom bonded area –
Assessee’s claim for exemption u/s. 10B was rejected by AO – Tribunal took a
view that mere processing of iron ore in a plant and machinery located outside
customs bonded area would not disentitle assessee from claiming exemption u/s.
10B where iron ore was excavated from mining area belonging to an export
oriented unit – Accordingly, Tribunal allowed assessee’s claim – No substantial
question of law arose

The assessee was a firm in the
business of mining and export of iron ore. It had entered into an operation and
maintenance agreement with NAPC Ltd., which operated the plants and machineries
installed in the Export Oriented Unit (hereinafter referred to as ‘EOU’) and
non-EOU both belonging to the assessee-firm. The EOU had started production on
23/09/2006 and accordingly deduction u/s. 10B of the Income-tax Act, 1961 on
the profits derived from the production of iron ore from the EOU was claimed.
The Assessing Officer disallowed the claim for deduction u/s. 10B with respect
to production of iron ore said to have been outsourced by the EOU to the
non-EOU and restricted the claim to the profits derived by the EOU from its
production.

The Commissioner (Appeals)
confirmed the order of the Assessing Authority holding that the claim for
deduction u/s.10B was not allowable in respect of production of non-EOU. The
Tribunal held that customs bonding was not a condition precedent for granting
exemption u/s. 10B. It was thus concluded that mere processing of the iron ore
in a plant and machinery located outside customs bonded area  would 
not  disentitle  the 
assessee  from  deduction u/s.10B where the iron ore was
excavated from the mining area belonging to an export oriented unit. The
Tribunal allowed the assesee’s claim.

On appeal by the Revenue, the
Karnataka High Court upheld the decision of the Tribunal and held as under:

“i)  In the instant appeal, primary contention advanced by the revenue
is to the effect that profits that have been derived by the assessee must be
pursuant to excavation and processing activity of the assessee in a customs
bonded area. It is further contended that as the ‘production’ has not been
carried out in the EOU and, contribution to the finished product by the
assessee being almost absent, deduction u/s. 10B cannot be permitted.

ii)   Insofar as factual aspects are concerned, the authorities have
clearly held that there has been outsourcing of processing of iron ore to
evidence which the profit and loss account and the ledger account for the
relevant year have been relied upon. The assertions to the contrary by the
revenue warrants no acceptance.

iii)  As regards the contention that the processing by ‘SESA plant’ which
is a plant situated outside the customs bonded area and disentitles the
assessee from claiming deduction u/s. 10B is concerned, the same can be
answered as follows:

(a) The processing of the iron ore in a plant belonging to the assessee
being in the nature of job work is not prohibited and forms an integral part of
the activity of the EOU;

(b) The mere fact that the ‘SESA Plant’ is situated outside the bonded
area is of no legal significance as the benefit of customs bonding is only for
the limited purpose of granting benefit as regards customs and excise duty. The
entitlement of deduction under the Act is to be looked into independently and
said benefit would stand or fall on the applicability of section 10B.

iv)  The judgement in the case of CIT vs. Caritor (India) (P.) Ltd.
[2015] 55 taxmann.com 473/230 Taxman 411/[2014] 369 ITR 463 though arises in
the context of deduction u/s. 10A which is different from deduction u/s. 10B
insofar as section 10A provides for the location of the unit in the ‘Special
Economic Zone’ such locational restriction is absent in case of section 10B,
however, the principle that benefit of customs and excise duty is independent
of the entitlement of deduction under the Act is applicable in the instant case
also. From the discussion above, it is held that no substantial question of law
arises for consideration.”