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Commissioner of Income Tax 1 Mumbai Versus M/s. Hindustan Petroleum Corporation Ltd.

Eligibility to benefit of Sections 80HH, 80-I and 80-IA - whether bottling of LPG is an activity which amounts to ‘production’ or ‘manufacturing’ for the purposes of the aforesaid provisions of the Act - Held that:- No distinction was drawn between manufacture and production and the matter was not looked into from the angle as to whether the aforesaid process would amount to production or not. - Other reason which prevailed with the AO and which was also the argument of for the Revenue was .....

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) of the Gujarat Sales Tax Act, 1969 defines ‘manufacture’ and, therefore, the entire case was examined keeping in view the said definition of ‘manufacture’ and the issue was as to whether the process amounted to manufacture or not. As pointed out above, the question as to whether it amounts to ‘production’ as well did not arise for consideration. The AO committed manifest error in relying upon the said decision inasmuch as the provisions with which we are concerned in the instant case use the w .....

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Decided in favour of assessee. - Civil Appeal No. 9295 of 2017, Civil Appeal No. 9296 of 2017, Civil Appeal No. 9297 of 2017, Civil Appeal No. 9298 of 2017, Civil Appeal No. 9299 of 2017, Civil Appeal No. 9300 of 2017, Civil Appeal No. 9301 of 2017, Civil Appeal No. 9302 of 2017, - Dated:- 3-8-2017 - Mr. A. K. Sikri And Mr. Ashok Bhushan JJ. Civil Appeal No. 9303 of 2017, Civil Appeal No. 9304 of 2017, Civil Appeal No. 9305 of 2017, Civil Appeal No. 9306 of 2017, Civil Appeal No. 9307 of 2017, C .....

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). Admissibility of benefit under the aforesaid provision depends upon the question as to whether bottling of LPG is an activity which amounts to production or manufacturing for the purposes of the aforesaid provisions of the Act. 2) The Assessing Officers (AOs) had disallowed the deduction claimed by the assessees holding that they did not engage in the production or manufacture activity because of the reason that LPG was produced and manufactured in refineries and thereafter there was no chang .....

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In this light, it was noted that the process involved LPG suction, vapour distribution, de-classification, compression of LPG vapour, external and internal cleaning, hydro pressure testing refilling, sealing, quality control etc. and hence the activity would be a manufacturing activity . In this hue, the Tribunal also referred to the Gas Cylinders Rules, 2004 and in particular Rule 2(xxxii) thereof which defines manufacture of gas to mean filling of a cylinder with any compressed gas and also i .....

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Before discussing the aforesaid central issue which has arisen for consideration, it may be noted that Section 80-I of the Act provides for certain amount of deductions in respect of profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the said section applies. Section 80-IA gives similar benefits to those industrial undertakings or enterprises which are engaged in infrastr .....

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s and for the applicability of the aforesaid provisions, it is essential to establish that the assessees are industrial undertakings. It is in this context the question mooted above has arisen for consideration. 5) Learned counsel appearing for the Revenue opened his arguments by referring to the order of the AO in Civil Appeal No. 9295 of 2017. He pointed out that before passing the Assessment Order, the AO had issued a questionnaire to the assessee to explain: (a) the process of LPG manufactur .....

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he refinery. It generally consists of butane, propane and butane and propane mixtures. In the refinery, the plant is fed with natural gas and crude oil. The feed gas and the gas undergoes a chilling up to a temperature of 22 degree centigrade and 37 degree centigrade. In the first stage, when it is chilled to 22 degree centigrade, the liquefied hydrocarbon formed is separated out and the vapour is further chilled to 37 degree centigrade. The liquefied hydrocarbons from both stages are then fract .....

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y from the refineries, the LPG for domestic applications has to be necessarily filled into the LPG Cylinders. Unless LPG is filled into the cylinders, the same cannot be used as a domestic fuel, since LPG which is a gaseous substance in ambient temperature has to be compressed into liquefied stage, the flow of which shall be controlled by the value fitted on to the cylinder. Accordingly, in order to facilitate the convenience of handling as well as to make it usable as domestic fuel, bulk LPG fr .....

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ration/running of the plants. Refilling/bottling of LPG in cylinders by compressing the same into liquid. Storage of LPG packed cylinders. Despatch of packed cylinders to LPG. Distributors for - illegible. Maintenance/upkeeping of plant equipment to ensure smooth operation of plant. Imparting necessary training to employees, contract workmen and transporters crew to ensure safe operation/handling of LPG/LPG cylinders in plant and enroot. 8) After taking note of reply to the aforesaid two questio .....

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r, dealt with the contention of the assessee predicated on Section 10A of the Act wherein explanation (iii) mentions that manufacture includes assembling as well and, therefore, assessee s case was covered by the definition of manufacture under Section 10A of the Act. This contention was, however, rejected by the AO by pointing out that the definition of manufacture as given in the explanation (iii) to Section 10A of the Act is for limited purposes in the context of newly established industrial .....

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identifiable and distinctive goods and the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. The AO also referred to the legal dicta laying down the principle that the test is not whether what is produced as a result of the process carried out in the plant becomes more saleable from an otherwise less saleable article. Simply because a process carried out on a particular ar .....

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s and it remained the same product, namely, LPG, the process of filling up of the gas into cylinder was not a manufacturing process. 9) Heavily relying upon the aforesaid reasoning of the AO, the learned counsel for the Revenue submitted that this view is consistently taken in catena of judicial pronouncements and, therefore, should be accepted. He also referred to the following judgments in support of his contention: Servo-Med Industries Private Limited v. Commissioner of Central Excise, Mumbai .....

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onsists of a mixture of propane, propylene, butane and butylene (containing 3 or 4 carbon atoms per molecule), these hydrocarbons are easily liquefied by moderate compression at ambient temperature. Unlike natural gas which can be piped to the consumer, LPG has to be transported in the liquid phase at ambient temperature and, therefore, required to be handled in specially designed pressure vessels. Once the LPG vapour is subjected to moderate pressure to achieve liquefaction, the resultant liqui .....

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enever industrial undertaking is either manufacturing or producing an article, it will be entitled to the benefit of the aforesaid provisions, subject to satisfying other conditions laid down in those Sections. His argument was that the activities undertaken by the assessees in their bottling plant results in the production of a new commercial product which is made suitable for domestic use, which would otherwise not be possible without undergoing such processes. Gas produced by refineries is no .....

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re and any activity which makes a product marketable and usable to the consumer would be covered by the word production . Learned counsel referred to the judgment of this Court in Income Tax Officer v. Arihant Tiles and Marbles P. Ltd. (2010) 320 ITR 79 (SC) wherein this Court has held that the word production is wider in ambit and has a wider connotation than the word manufacture . He also sought to draw sustenance from the judgment of this Court in Vadilal Chemicals Ltd. v. State of A.P. & .....

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004 which superseded the aforesaid Rules of 1981 contain identical definition of manufacture of gas in Rule 2 (xxxii). His submission was that this definition itself provides legislative intent as well as that of the Central Government treating the process as manufacture of gas. Mr. Gulati also argued that for the purposes of Section 80-IB of the Act, which provides a deduction for industrial undertaking established in the North Eastern region, the Central Government has notified vide Notificati .....

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x) Nitrite acid and ammonium nitrate; (xi) Carbon black; (xii) Polymer chips. (Emphasis Supplied) It was contended that from the above, it is clear that an undertaking engaged in bottling of gas is considered to be involved in manufacture or production for the purpose of deductions under the Act and this view has been taken by the Central Government itself. 12) Learned counsel argued that the findings of the Tribunal, as upheld by the High Court, were not assailed by the Department and, therefor .....

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se judgments have no applicability. He, thus, pleaded that the appeals of the appellant/Revenue deserve to be dismissed. 13) Mr. Parijat Sinha, who appeared for some other assessees, argued almost on the same lines. 14) We have given adequate consideration to the respective submissions of both the parties, which they deserve. As is clear from the facts and arguments noted above, the question of law which is involved (already mentioned) is: Whether bottling of LPG, as undertaken by the assessee, .....

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essee whose process amounts to either manufacture or production (i.e. one of these two and not both) would become entitled to the benefits enshrined therein. It is held by this Court in Arihant Tiles and Marbles P. Ltd. case that the word production is wider than the word manufacture . The two expressions, thus, have different connotation. Significantly, Arihant Tiles judgment decides that cutting of marble blocks into marble slabs does not amount to manufacture. At the same time, it clarifies t .....

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e goods. Taking note of the judgment in Commissioner of Income Tax, Goa v. Sesa Goa Ltd. (2004) 271 ITR 331 (SC) which was rendered in the context of Section 32A of the Act and which provision also applies in respect of production , the Court reiterated the ratio in Sesa Goa Ltd. to hold that the word production was wider than the word manufacture . On that basis, finding arrived at by the Court was that though cutting of marble blocks into marble slabs did not amount to manufacture , if there a .....

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ble blocks into slabs. In the present case we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated hereinabove is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of manufacture or pro .....

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t activity certainly constitutes manufacture or production in terms of Section 80-IA. 18. In this connection, our view is also fortified by the following judgments of this Court which have been fairly pointed out to us by learned counsel appearing for the Department. 19. In CIT v. Sesa Goa Ltd. [(2004) 13 SCC 548 : (2004) 271 ITR 331], the meaning of the word production came up for consideration. The question which came before this Court was whether ITAT was justified in holding that the assesse .....

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r, it came to the conclusion that extraction of iron ore and the various processes would involve production within the meaning of Section 32-A(2)(b)(iii) of the Income Tax Act, 1961 and consequently, the assessee was entitled to the benefit of investment allowance under Section 32-A of the Income Tax Act. In that matter, it was argued on behalf of the Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of the assessee that it did pro .....

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to manufacture. 22. In our view, applying the tests laid down by this Court in Sesa Goa case [(2004) 13 SCC 548 : (2004) 271 ITR 331] and applying it to the activities undertaken by the respondents herein, reproduced hereinabove, it is clear that the said activities would come within the meaning of the word production . 16) Keeping the aforesaid distinction in mind, let us take note of the process of LPG bottling that is undertaken by the assessees herein and about which there is no dispute. It .....

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re for suction, unloading and vapour recovery; (c) Refilling/bottling of LPG in cylinders by compressing the same into liquid form; and (d) Capping, fixing of seals and safety valves prior to storage and loading of filled cylinders. 17) Thus, after the bottling activities at the assessees plants, LPG is stored in cylinders in liquefied form under pressure. When the cylinder valve is opened and the gas is withdrawn from the cylinder, the pressure falls and the liquid boils to return to gaseous st .....

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ived at the specific findings in support of its decision, which are as under: (a) There is no dispute that the LPG produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety. (b) LPG bottling is a highly technical and complex activity which requires precise functions of machines operated by technically expert personnel. (c)Bottling of LPG is an essential process for rendering the product marketable and usable f .....

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he learned counsels for the assessees that the definition of manufacture of gas in Rule 2 (xxxii) of the Gas Cylinders Rules, 2004 also supports the case of the assessees inasmuch as gas distribution and bottling is treated as manufacturing or producing gas. We are also inclined to accept the submission of the learned counsel for the assesses that various High Courts have, from time to time, decided that bottling of gas into cylinder amounts to production and, therefore, claim of deduction under .....

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ncome Tax, Mangalore (2014) 361 ITR 290 and Central U.P. Gas Ltd. v. Deputy Commissioner of Income Tax, Kanpur (Income Tax Appeal No. 224 of 2014 decided by High Court of Allahabad and reported in MANU/UP/2895/2016). 19) From the submissions made by learned counsel for the Revenue, who banked on the reasoning given by the AO, it can be gathered that the entire thrust of the AO was that the process involved in filling up the gas into cylinders does not amount to manufacture inasmuch as the said p .....

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m M/s. HPCL into small cylinders would not amount to manufacture. That was a case which was decided in the context of the Gujarat Sales Tax Act, 1969. The Court held that transfer of LPG from bulk containers into cylinders did not amount to process of manufacture. It is pertinent to point out that Section 2(16) of the Gujarat Sales Tax Act, 1969 defines manufacture and, therefore, the entire case was examined keeping in view the said definition of manufacture and the issue was as to whether the .....

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