2010 (1) TMI 18 - SC - Income Tax

Manufacture Meaning of what to consider dictionary meaning or process - whether twisting and texturising of POY amounts to manufacture held that - Repeatedly this Court has recommended to the Department be it under Excise Act Customs Act or the Income Tax Act to examine the process applicable to the product in question and not to go only by dictionary meanings. This recommendation is not being followed over the years - The term manufacture implies a change but every change is not a manufacture - However this test of manufacture needs to be seen in the context of the above process. If an operation/process renders a commodity or article fit for use for which it is otherwise not fit the operation/process fall6 s within the meaning of the word manufacture - POY is a semi-finished product. It is a raw material/input. That raw material or input gets converted into a texturised yarn by reason of the thermo mechanical process. POY is unfit for manufacture of fabric held as amount to manufacture

Summary

Issues Involved:
- Interpretation of 'manufacture' in terms of Section 80IA of the Income Tax Act, 1961 regarding twisting and texturising of partially oriented yarn (POY).

Detailed Analysis:
- The primary issue in this judgment revolves around determining whether twisting and texturising of partially oriented yarn (POY) constitutes 'manufacture' as per Section 80IA of the Income Tax Act, 1961. The Court emphasizes the importance of examining the specific process involved in each case rather than relying solely on dictionary meanings. The expert opinion plays a crucial role in assessing whether the process of twisting and texturising transforms POY into a manufactured product. The Court highlights that POY, in its original state, is a semi-finished yarn not suitable for direct use in fabric manufacturing, and it requires a thermo mechanical process to convert it into texturized yarn, which is then used in fabric production.

- The judgment delves into the concept of 'manufacture,' stating that not every change in an article amounts to manufacture unless it renders the article fit for a purpose for which it was previously unsuitable. The Court applies this test to the case at hand, concluding that the thermo mechanical process applied to POY brings about a structural change in the yarn, making it suitable for fabric manufacturing. The Court also references the Finance Act No.2/2009, which explicitly defines 'manufacture' as the creation of a new object with a different composition or structure, aligning with the transformation undergone by POY during texturising.

- The Court distinguishes a previous judgment regarding twisting of cellulosic filament yarn from the current case involving POY. It clarifies that while the former may not constitute manufacture, the latter's transformation through the thermo mechanical process qualifies as manufacturing due to the structural changes and enhanced usability for fabric production. The judgment underscores that the decision is specific to the facts of this case and does not establish a blanket rule that all texturising or twisting activities amount to manufacturing, emphasizing the unique circumstances surrounding the conversion of POY into texturized yarn.

- Ultimately, the Court upholds the lower court's decision, dismissing the Civil Appeals filed by the Department. The judgment affirms that the thermo mechanical process applied to POY for texturising and twisting meets the criteria of 'manufacture' under Section 80IA of the Income Tax Act, 1961. The ruling underscores the importance of analyzing the structural changes, usability, and transformation of the product in determining whether a process qualifies as manufacturing, highlighting the specific context of each case in making such determinations.