TMI Blog1967 (2) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: The assessee is carrying on business in the manufacture of locomotives and other engineering products. On 28th November, 1953, the company applied for permission to manufacture bus/truck-chassis at their workshop at Jamshedpur in collaboration with the German firm of automobile manufacturers, Messrs. Daimler Benz A. G. of West Germany. In their application the assessee-company proposed that they would be undertaking "a realistic manufacturing scheme comprising a purely assembly stage followed by four progressive stages of manufacture, each of one year duration ......" With the proposal they set out in some detail the four gradual stages of the manufacturing process which they proposed to adopt during the period of four years. As part of the same proposal they also indicated that prior to the starting of the manufacturing process the company would assemble 500 chassis within an initial period of 9 months. The scheme was approved by the Government of India by their letter dated 1st May, 1954, D. O. No. Eng. Ind. 20(89)/53. During the accounting period ending on 31st March, 1955, the assessee had assembled 443 vehicles from out of C. K. D. (complete knocked down) packs i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned a profit but the overall result of their business was a loss and, therefore, section 15C would not be attracted in the year under assessment. Nevertheless he also proceeded to decide the merits of the other question. He held that since the assembly of automobiles from imported parts "was merely the first stage in the company's scheme for the manufacture of automobiles, the company should be held to have begun to manufacture or produce articles during the accounting period relevant to the assessment under consideration." A further appeal was taken to the Income-tax Tribunal and it was urged before the Tribunal that the mere assembly of chassis did not form a part of the manufacturing scheme submitted to the Government of India by the assessee but was simply in the nature of an exploratory venture for which permission was sought from the Government with a view to try the particular make of bus/truck-chassis, namely, those manufactured by Messrs. Daimler-Benz A. G. of West Germany and with a view to put them on the market and incidentally also to find out the scope of the future market in this country for that kind of vehicle. The Tribunal observed in their order that "there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 15C is required to be granted ?" If an industrial undertaking is started in order to assemble trucks/bus chassis (as distinct from manufacturing their component parts) and manufactures the trucks after an initial trial period, would the trial period be still covered by the words "manufacture" or "produce" ? The true question according to counsel is this : Having regard to the particular circumstances under which this activity was undertaken by the assessee-company, and having regard to the totality of the company's programme and the terms on which the Government granted them permission to undertake the manufacture of bus/truck-chassis, was the mere assembling of the 443 units from the imported parts in C. K. D. condition manufacture or production of those units ? An allied point raised is that having regard to the provisions of section 15C(1) read with sub-section (2)(ii) and sub-section (6) of section 15C, the exemption is on the profits or gains derived from any industrial undertaking and sub-section (6) indicates that the exemption applied to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is a Co-operative Society, this sub-section shall have effect as if for the words 'four assessments' the words 'six assessments' had been substituted." It is clear that the exemption granted by section 15C is only to new industrial undertakings in which new capital is employed, the purpose being to encourage industrial enterprise and the investment of capital in new industrial undertakings. The exemption is six per cent. of the capital employed and after computing the benefit the amount so computed is to be deducted from the profits derived from the undertaking. Secondly, the exemption applies only to profits or gains to be derived from an industrial undertaking and is not available when there is a loss. Sub-section (2) virtually defines or rather indicates to which industrial undertakings the provisions of the section apply. Thirdly, sub-section 2(ii) read with sub-section (6) indicates from when the exemption is to come into force. Sub-section 2(ii) shows that section 15C begins to apply as soon as the industrial undertaking "has begun or begins to manufacture or produce articles. . . ." and sub-section (6) lays down the commencement period for the purpose of assessment wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or an industrial undertaking, two shades of meaning are important. In the Oxford Dictionary, vol. 6, the two shades of meaning are given as follows : (1) The first is "the action or process of making articles or material (in modern use, on a large scale) by the application of physical labour or mechanical power". This is the most generic meaning in its application to industry or industrial undertakings or establishments. (2) There is also another more limited meaning which is found referred to in the authorities as meaning the transforming of raw materials into a commercial commodity or a finished product which has a separate identity (Commissioner of Income-tax v. Ajay Printery Pvt. Ltd.). This shade of meaning is more appropriately used in the past participle "manufactured". See Oxford Dictionary, Vol. 6, at page 143, sense No. 1, where the meaning is "fabricated from raw material". In Aswathanarayana v. Dy. Commercial Tax Officer, at page 801 one finds a useful compilation of meanings attached to the word "manufacture" from various dictionaries and other sources. Similarly, the word "produce" with reference to its meaning in industry or political economy has two different sens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed into a different matter. The mixture may become a chemical compound in which the drugs used may have been transformed into a totally different thing in their character and properties, or it may result in what is called a mechanical or physical mixture in which each drug retains its original properties. But in either case, the resulting mixture is a distinct product brought into being in a particular form suitable for the particular use for which it is intended and capable of being sold or supplied for a price." Thus looked at from any point of view and whether one takes into account the wider or narrower meaning of the word "manufacture", it is clear that assembling of automotive bus/truck chassis from imported parts in a knocked down condition would give rise to an article which is totally different from the parts. This so even though the component parts from which the automotive chassis is made, retain their individual identity in the whole article which is thus manufactured or produced. To take the simplest illustration, if a child takes strips of metal, bolts, nuts, bars and wheels from out of a "meccano" set and assembling them together makes a wheel-barrow or a chair, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Inspecting Assistant Commissioner of Income-tax dated 12th June, 1957. This was written in answer to an enquiry from the department as to the facts relating to the process that took place in the industrial undertaking of the assessee. The case on behalf of the assessee is thus put in the letter : "As the provisions of the section apply only to industrial undertakings which 'manufacture' or 'produce', we claim exemption from tax under the section for five years from April, 1955, when the first progressive stage of 'manufacture' commenced. In the accounting year 1954-55 about 500 chassis were only assembled from the imported complete CKD packs in order to gain necessary initial training and experience. The provisions of the section do not apply to this purely assembly stage in which no manufacture was involved." Appended to this letter was a note of the automobile division of the assessee-company and in the note the activity of the company is described---a description, on which Mr. Joshi on behalf of the department strongly relied---as follows : "After fully establishing the manufacture of locomotives and boilers, the company diverted its attention to the possibility of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he raw materials will be obtained from indigenous sources". To the letter was appended an elaborate note of the proposals of the company containing in paragraph 7 a tabular statement showing how the several phases of the programme were going to be worked out. Mr. Palkhivala strongly relied upon this tabular statement which was as follows : ------------------------------------------------------------------------------------------------------------------------------------------------- Extent of work at Telco No. of ------------------------------------------ productive and Stage Principal Extent of Based on Based on non-productive groups the period. Production materials men time. consumed. including ------------------- ---------------------- an allowance % Cumulative % Cumulative of 10% for Total Total absenteeism. -------------------------------------------------------------------------------------------------------------------------------------------------- CKD Assembly. 9 months 10.0 10.0 1.7 1.7 106 (500 chassis) Manufacturing : (3,000 units per year) 1 Yr. 26.5 36.5 47.4 49.1 278 <?xml:namespace prefix = st2 /> Stage I. Frames,front axles,sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 500 chassis will be assembled from C. K. D. packs imported from Daimler-Benz for the purpose of the necessary initial training and experience. "In paragraph 11 of the proposal also it is stated that the initial programme of assembly of C. K. D. packs can be started within a period of six months to nine months from the time the project is approved by Government and by the board of directors and that the first stage of manufacture would follow nine to twelve months after the commencement of the C. K. D. assembly. Counsel urged that it is clear from these categorical statements that the assembly stage was only a stage undertaken with a view to the actual manufacture or production of the truck chassis and that in the clearest language it was stated especially in paragraph 7 that the "manufacturing" consists of four stages and that excludes the initial assembly stage. Now though in the letters of the company the purpose is stated to be "necessary initial training and experience", that purpose has not been found established. It is nowhere found stated in any of the orders of the tax authorities or of the Tribunal, but on the other hand, there is an express finding in the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as one composite business and the assembly stage cannot be divorced from the rest of it. The overall purpose of the company in commencing this industrial undertaking was the production of trucks on an economic basis from indigenous materials in progressive stages. The programme was one whole integrated programme and it is so delineated in the letter of the chairman of the company as well as in the note of proposals appended to that letter. No doubt in paragraph 7 of that note it is stated that the programme envisages development of the manufacture of chassis for trucks and buses in four stages of one year each and that excludes the initial assembly stage of about 9 months during which about 500 chassis would be assembled. But even the assembly stage is referred to as the initial stage of the programme and cannot be divorced from the programme. If the purpose of that initial stage was, as the Tribunal has found it to be, to probe the market and find out whether the trucks and buses when manufactured would be acceptable to the automobile trade and the public, it was a part of the industrial undertaking itself. A consideration of the tabular statement which we have reproduced above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Germany, was forwarded to this Ministry and to say that the Government of India are pleased to extend their approval to your programme of manufacture subject to the following conditions : (a) that the scheme of manufacture of trucks does not interfere with the fulfilment of the targets set for the manufacture of locomotives and boilers in the Telco factory-there should be no slowing down of the agreed programme for the supply of locomotives and boilers to the Railways . . ." It is clear from the letter granting the sanction that whatever the company may have said, the Government of India regarded the whole, including the so-called assembly stage, as one scheme for the manufacture of diesel trucks. The approval communicated was "to your programme of manufacture". Having thus considered the position upon the facts we now turn to a further contention of Mr. Palkhivala. The contention as he urged it was as follows : "The exemption under section 15C is not in respect of business profits generally but profits derived from the industrial undertaking which has been established for a specific purpose. The object of the legislature was to give a limited exemption---limited in point o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted on the basis of the capital employed in the undertaking. Counsel emphasises the words "industrial undertaking to which this section applies" and urges that the "undertaking" of the assessee was the undertaking to manufacture the "Indian truck" and not the 500 units of the foreign truck in the sense that they were made out of parts imported from foreign country and were wholly foreign articles. He, therefore, urged that the exemption has been given up on an undertaking which was a completely separate undertaking from the undertaking which claimed the exemption. In this respect he also relied upon the two cases referred to earlier of the Ashok Motors Ltd. and the Standard Motor products of India Ltd. In both these cases the two motor companies had, in addition to importing parts of motor cars and motor trucks and assembling motor cars and trucks from those parts, also sold the surplus spare-parts in their possession and what was held in both the cases was that the sale of the surplus spare-parts was not the same industrial undertaking as the industrial undertaking whereby the cars and trucks were assembled. Counsel urged that these decisions emphasise that the exemption shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder remarked that the Income-tax Officer "seems to have been guided by the ordinary meaning of the words 'manufacture' or 'produce'." But we are unable to see what other meaning could be attributed to those words even assuming that they have to be read in the context of the other provisions of section 15C. The Tribunal, however, seems to have construed those words having regard to the supposed intention of the legislature in enacting section 15C as can be seen from the following remark : "Supported as it is by the intention of the legislature we cannot hold that merely assembling of parts and especially assembling of trucks/bus chassis from complete knocked down packs as the appellant-company had done can be called either manufacture or production of articles because evidently trucks/bus chassis had already been manufactured in all their component parts in West Germany and what the appellant-company had done was merely to fit up and join the components." The passage which we have just quoted does not indicate how the intention of the legislature affects the interpretation of those words and it may as well be that with the intention to foster new industries and to induce investme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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