Facts of the Case

The Petitioner, Swarovski India Pvt. Ltd., was engaged in manufacturing imitation pearls and trading crystal-related products in India. It operated two units—one at Pune and one at Delhi.

The Pune unit was a 100% Export Oriented Unit engaged in coating raw beads and producing commercially marketable goods, while the Delhi unit was engaged in importing and trading crystal products.

For Assessment Year 2007–08, the Petitioner filed its return declaring losses after claiming deduction under Section 10B for its Pune unit. The case was scrutinized, referred to the Transfer Pricing Officer, and a final assessment under Section 143(3) was completed, granting the deduction.

Subsequently, the Assessing Officer first initiated rectification proceedings under Section 154 and thereafter issued reassessment notice under Section 148 on the ground that income had escaped assessment, alleging wrongful deduction under Section 10B. The Assessee challenged the reopening before the Delhi High Court.

Issues Involved

  1. Whether reassessment under Sections 147/148 can be initiated after four years without any failure by the assessee to disclose material facts?
  2. Whether deduction under Section 10B is to be allowed undertaking-wise or after adjusting losses of non-eligible units?
  3. Whether the Pune unit’s activities constituted “manufacture” for the purpose of Section 10B?
  4. Whether findings in subsequent assessment years can be used as the sole basis to reopen earlier concluded assessments?

Petitioner’s Arguments

  • The reassessment was based on the same facts already examined in original assessment proceedings.
  • There was no fresh material available to justify reopening.
  • All facts relating to the Pune and Delhi units were fully disclosed during original scrutiny.
  • Deduction under Section 10B must be granted unit-wise and not after clubbing losses of non-eligible units.
  • Reliance was placed on CIT v. Yokogawa India Ltd., where the Supreme Court clarified that deduction under Section 10B is undertaking-specific.
  • The Assessing Officer wrongly treated manufacturing activity as mere service activity on a cost-plus basis.
  • The basis for reopening, i.e., disallowance in subsequent assessment year, no longer survived as appellate authority had reversed that disallowance.

Respondent’s Arguments

  • At the stage of Section 148 notice, only prima facie belief of escaped income is required.
  • Assessment in subsequent years can provide a basis for reopening earlier years.
  • The Petitioner was allegedly only rendering manufacturing services to Associated Enterprises and not exporting goods independently.
  • Since the overall gross total income was negative, Section 10B benefit was allegedly not available.
  • Sufficiency of material cannot be examined at the notice stage.

Court Findings / Court Order

The Delhi High Court allowed the writ petition and quashed the reassessment notice.

Findings:

1. No Failure of Disclosure

The Court held that all material facts had been fully and truly disclosed during the original assessment proceedings.

2. No Fresh Tangible Material

The reassessment was based only on subsequent assessment orders and not on any fresh material.

3. Section 10B Deduction is Unit-Specific

Relying upon CIT v. Yokogawa India Ltd., the Court held that deduction under Section 10B is to be computed undertaking-wise.

4. Manufacturing Activity Established

The Court held that cutting, polishing, and processing beads/crystals amounted to manufacture under Explanation 4 to Section 10B.

5. Subsequent Year Findings Cannot Automatically Reopen Earlier Years

A later year’s assessment cannot become an automatic basis for reopening a concluded earlier assessment.

Final Order

  • Notice under Section 148 dated 25.03.2014 quashed
  • Order rejecting objections dated 11.06.2014 set aside
  • Writ Petition allowed

Important Clarification

Section 10B deduction is undertaking-specific

The Court clarified that profits of an eligible undertaking cannot be denied deduction merely because another non-eligible unit incurred losses.

Meaning of Manufacture under Section 10B

Even processing, coating, polishing, and converting raw material into commercially usable export products constitutes manufacture.

Reopening after four years requires strict compliance

Where original assessment is completed under Section 143(3), reopening after four years requires failure by assessee to disclose material facts, which was absent here.

Sections Involved

  • Section 10B – Deduction for 100% Export Oriented Undertakings
  • Section 143(2) – Scrutiny Assessment
  • Section 143(3) – Regular Assessment
  • Section 144C – Draft Assessment Order
  • Section 147 – Income Escaping Assessment
  • Section 148 – Notice for Reassessment
  • Section 154/155 – Rectification of Mistake
  • Section 92CA – Reference to Transfer Pricing Officer
  • Explanation 4 to Section 10B – Meaning of Manufacture 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:4935-DB/PMS30082017CW58072014.pdf

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