TMI Blog2019 (4) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... watches formed part of assessee s brought forward stock worth ₹ 3,55,72,579/-. It therefore emerges that the assessee had very well manufactured the said wrist watches in the eligible undertaking only in earlier assessment years and derived profits from sale in the impugned assessment year. Revenue s grievance regarding the assessee s deduction claim relating to this latter issue of wrist watches. Direct the Assessing Officer to finalise consequential computation of assessee s claim u/s 80IC deduction disallowance only to the tune of the amount relating to the former issue of pan masala manufacturing as per law. - ITA No. 48/Kol/2016 - - - Dated:- 25-1-2019 - Sri S.S. Godara, Judicial Member Sri M. Balaganesh, Accountant Member For the Assessee : Shri Gautam Banerjee, FCA, appeared For the Revenue : Shri A.K. Nayak, CIT D/R. appearing ORDER PER S.S. GODARA, JM :- 1. This Revenue s appeal for Assessment Year 2010-11arises against Commissioner of Income Tax (Appeals)-3, Ahmedabad s order dated 10/11/2015 passed in case No. CIT(A)-3/Wd.3(3)(5)/468/14-15, involving proceedings u/s 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹436,98,601/-, ₹32,43,234/-, ₹80,97,963/- ,₹57,051,53,98, ₹19,38,38,674/-;(assessment year-wise) respectively, as deleted during the lower appellate proceedings. The Revenue states very fairly that at the outset that all the relevant fact qua the above sole issue are identical in these five assessment year(s). We therefore treat ITA 1962/Kol/2016 for assessment year 2007-08 as the lead case. 3. We now come to relevant facts. The assessee stated to be engaged in manufacturing and trading activities. The relevant manufactured items is pan masala . The Assessing Officer issued section 148 notice dated 03.03.2014 after forming reasons to believe that the instant taxpayer's business activity neither amounted to manufacture nor production of any article or thing u/s 80IC(2) and therefore its corresponding deduction claimed of ₹436,98,608/- resulted in escapement of taxable income from being assessed. 4. Case file suggests that assessee filed its objection petition dated 16.03.2015 challenging validity of reopening. The Assessing Officer declined the same in his separate order dated 30.03.2015 as reproduced in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcise Department's notification dated 25.04.2007 prohibiting pan masala manufacturing in Sikkim vide its notification dated 25.04.2007 with effect from 01.04.2007. The Assessing Officer further held that pan masala could not be treated as a food item in view of National Food Processing policy specifying various projects namely fruits and vegetables, fisheries, meat and poultry products milk, diary, Brewesy items, consumer industry's major products plantation major products. He took note of the legislative developments incorporating section 80IE of the Act with effect from 01.04.2007 specifically excluding the above corresponding manufactured items in the relevant list. 7. The Assessing Officer further went for a very comprehensive and detailed discussion on manufacturing aspect of the issue. He observed that the same had to involve inter alia production of article from use of raw material by giving such material of new form, quality, properties by applying process upon the said raw material, material concerned to have undergone transformation into a new and different article commercially different from the initial raw material and that the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... records and in some cases twice and thrice and also in Originals not only to the AO but also to the Appellate Authority. Based on the records I find that the Appellant firm is having valid registrations with A. Central Excise Department B. Sales Tax and VAT Department of the Govt of Sikkim. C. Registration under the relevant provisions of the Industries Act (DIC) of the Govt of Sikkim D. Service Tax Registration All the above registrations are valid and are effective form the date / year of manufacture viz 2006. C. I find that Gazetted Officers of the Ministry of Finance, Central Board of Excise and Customs have made sworn affidavits before the Hon'ble High Court of Sikkim certifying and confirming that the Appellant firm was engaged in the Manufacture of Pan Masala and Wrist Watches from the inception of the firm and also in the AY in question. D. Be that as it may be, the Apex Court in Arihant Tiles Marbles Pvt. Ltd. case ([2010] 186 TAXMAN 439 SC) by a Three Member Bench has settled this issue once and for all. The Apex Court held as follows in its concluding paragraph. 'Before conclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al's co-ordinate bench decision in DCIT vs. M/s Khushbu Industries ITA 371/Lkw/2016 decided on 19.10.2016 has declined Revenue's similar argument in identical fact as follows:- 4. The second ground taken by the Revenue relates to the claim of the assessee u/s 80IC, which was disallowed by the Assessing Officer but allowed by the CIT(A). The facts relating to this ground are that the Assessing Officer found that there had been search in the case of the assessee and during the course of search conducted at the residential and business premises, the statement of the employee of the assessee was recorded. The Assessing Officer, on the basis of the statement, took the view that the assessee was not doing any manufacturing or processing activity. It was only mixing and repacking various ingredients and selling these in the market. The Assessing Officer was not convinced with the reply of the assessee therefore, he took the view that the assessee has not complied with primary condition as given u/s 80IC of being engaged in manufacturing or processing. The Assessing Officer therefore, disallowed the claim u/s 80IC of the Act. The assessee went in appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product. There is a proper reaction amongst the products to produce a distinct flavor or fragrance. It may be submitted that a perfume or a flavor may involve from as less as 10 to as much as 50 raw materials to manufacture the product. Furthermore, a raw material may have 0.1% to even 50% of the constitution of finished goods. The raw materials have to be added in a proper chronological manner and a proper formulation without which the finished goods cannot be produced. 6(6)(ii) Some of the features explained by the appellant outline the following significant characteristics - Mixing has to be done at controlled temperatures to get the desired chemical reaction. The finished goods are themselves a result of Chemical reactions only. Several raw materials used by the appellant are hazardous chemicals, which are not per se fit for human consumption or application. However scientifically derived formulations, whereby other chemicals and substances are mixed with such material, such that the hazardous properties are removed are used by the appellant. Several natural oils and flavours, which may otherwise rot/decay with passage o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 79 (SC) has observed that when the activity undertaken by the assessee involves levy of excise duty then to say that the said activity does not amount to manufacture or production under section 80IA of the Act will have disastrous consequences. The appellant has demonstrated that it is engaged in the manufacturing of article and things. It fulfills all the essential conditions for availing deduction under section 80IC of the Act. I therefore direct the AO to allow deduction of ₹ 31,31,98,995/- to the appellant. The appellant gets consequent relief. 5. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below as well as the documents placed before us. The only question before us is whether the assessee is engaged in manufacturing activities to be eligible for deduction u/s 80IC of the Act. The provision of section 80IC although lays down various conditions to be complied with by an undertaking to be eligible for deduction u/s 80IC(3) of the Act but the Revenue did not raise any objection in this regard except that the assessee is not engaged in manufacturing or production of an article. Learned D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urthermore, a raw material may have 0.1% to even 50% of the constitution of finished goods. The raw materials have to be added in a proper chronological manner and a proper formulation without which the finished goods cannot be produced. The mixing has to be done at controlled temperatures to get the desired chemical reaction. The finished goods are themselves a result of chemical reactions only. Several raw materials used by the assessee are hazardous chemicals, which are not per se fit for human consumption or application. However, scientifically derived formulations, whereby other chemicals and substances are mixed with the material, such that the hazardous properties are removed, are used by the assessee. Several natural oils and flavors, which may otherwise rot/decay with passage of time, and are in concentrated form are required to be treated and blended with other chemicals etc. so as to render them usable in various type of industries and applications. Mixing cannot be done without proper lab testing techniques and without studying the behavioral pattern of various blends over a period of time, which may range from one hour to 15 days. The blended mixtures' properties c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Tribunal wants to verify whether the product or the article produced by the assessee is different from the raw material having the different market value and which cannot be reconverted into the raw material, this Tribunal can verify the same by visiting the industrial unit of the assessee. After having the discussion with D.R, we decided to call for the demonstration of the manufacturing process of the assessee in respect of one of the item and therefore, the case when it was initially fixed for 14/09/2016 when the detailed argument has taken place, adjourned the case for 15/09/2016 to see the demonstration of two of the products of the assessee i.e. sweet gulab and compound bela. 5.4 On 15/09/2016 the representative of the assessee appeared along with three chemical engineers of the assessee company having different chemicals in small bottles along with the induction and glass jars. The assessee first demonstrated how the sweet gulab is manufactured. The chemical engineer showed us 15 items out of which two were in solid form while 13 were in liquid form. He pointed out that the items brought by him for manufacturing 100 gms of sweet gulab were as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the object or the article which is entirely new and distinct having a different name, character and use. We noted that the provision of section 80IC was inserted in the statute by the Finance Act, 2003 with effect from 2004. Section 80IC nowhere defines the word 'manufacture' or 'production' of an article. We noted that the word 'manufacture' or 'production' of an article or thing has also been used u/s 80IA as well as u/s 10B of the Act. Section 10B defined the word 'manufacture' for the purpose of the said section to include any - (a) process or (b) assembling or (c) recording of programme on disc, tape, perforated media or other information storage device. Thus, 'process' was included within the word manufacture for the purpose of sec. 10B. Explanation (iv) of the said sec. 10B further provided that the word 'produce' for the purpose of said section, in relation to any article or thing shall include production of computer programme. CBDT vide its circular no. 528 dated 16/12/1988 176 ITR ST. 154 explained the [provisions enacted by the Finance Act, 1988 under para 8.2 of the circular. In this circular, CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act which reads as under:- (iii) 'Manufacture' shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zone Act, 2005. 5.10 As per the said definition 'process' is included in manufacture. Subsequently, by the Finance Act, 2009 w.e.f 1.4.2009, clause (29BA) was inserted in section 2 of the Income Tax Act, 1961defining the expression manufacture as under: manufacture , with its grammatical variations, means a change in a non-living physical object or article or thing,- (a)Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use or (b)Bringing into existence of a new and distinct object or article or thing with a different chemical composition spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking. Where therefore any commodity is subjected to a process or treatment with a view to its development or preparation for the market , as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and physical compositions. 5.12 Thus, the Hon'ble Supreme Court accepted that there is change in chemical compositions after processing of the iron ore. From the said decision of the Apex Court, it is apparent that Hon'ble Apex Court held even blending of iron ore for the purpose of export involves change in the chemical and physical composition of iron ore. If we look to the facts of the impugned case of the assessee, we find that the assessee is mixing various chemicals either in liquid or solid form by applying a predetermined process and mixing them in a predetermined manner so that out of the mixing, entirely a new product come and its finished product technically after having the process of mixing has different names. There are different chemicals and the items which are being used for different product in a different proportion in a predetermined order of the mixing, as shown to us during the course of hearing and during the course of demonstration of two items, as given by us in the preceding paragraph, both the products manufactured are entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning ascribed to the word production in the Oxford English Dictionary, as meaning amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort . For the wide definition of the word 'production', it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word 'production' since ore is 'a thing', which is the result of human activity or effort. 5.15 According to Webster International English Dictionary, the verb produce means to bring forward, beget, etc. The juxtaposition of the word manufacture with 'agriculture' and 'horticulture' is significant and cannot be lost sight of. The intention in employing the word produced obviously was to introduce an element of volition and effort involving the employment of some process for bringing into existence some goods. 5.16 In paragraph 7 of its in the case of Chowgule C0 (P) Ltd. Vs. UOI (supra), Hon'ble Apex Court also considered the question whether the different brands of tea purchased and blended by the assesses for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, but we do not think we can accept the decision of the Bombay High Court in the Nilgiri Tea Company case [10 STC 500 (Bom HC)] as laying down the correct law. When different brands of tea were mixed by the assessee in Nilgiri Tea Company case [10 STC 500 (Bom HC)] for the purpose of producing a tea mixture of a different kind and quality according to a formula evolved by them, there was plainly and indubitably processing of the different brands of tea, because these brands of tea experienced, as a result of mixing, qualitative change, in that the tea mixture which came into existence was of different quality and flavor than the different brands of tea which went into the mixture. There are, it is true, some observations in the judgment of the Bombay High Court which seem to suggest that if instead of manual application of energy in mixing the different brands of tea, there had been application of mechanical force in producing the tea mixture, the court might have come to a different conclusion and these observations were relied upon by the Assessee, since in the present case the blending was done by application of mechanical force, but we do not think that is the correct test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes processing . 5.18 Therefore, Hon'ble Supreme Court, in construing the expression processing allowed the appeal of the assessee, in Chowgule Co. Pvt. Ltd. (supra), holding, inter alia, that where any commodity is subjected to a process or treatment with a view to its development or preparation for the market it would amount to processing of the commodity within the meaning of Central Sales Tax Act, 1956. Hon'ble Supreme Court, in the said judgment, did not consider the expression manufacture since the question was decided only on the expression processing . However, considering the judgment of the Bombay High Court in the case of Nilgiri Tea Co. [1959] 10 STC 500, Hon'ble Supreme Court observed that, for the purpose of producing a tea mixture of a different kind and quality according to a formula evolved by them, there was plainly and indubitably processing of the different brands of tea, because these brands of tea experienced, as a result of a qualitative change, in that the tea mixture which came ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10A of the Act and section 10AA of the Act respectively. The assessee was allowed exemption on the profit derived by its 100% EOU engaged in blending, packing and export of tea bags and tea packets. Hon'ble High Court held as under: The finding of this court is that the purpose of incorporation of section 2(r) of the Special Economic Zones Act, 2005, into section 10AA of the Income-tax Act is to provide a liberal meaning to the word manufacture which takes in even blending, refrigeration, etc. It was noticed by this court that the definitions of manufacture contained in the above definition clauses are very liberal which takes in even processing like blending. The contention of the counsel for the assessee is that the purpose of removal of the definition of manufacture from section 10B was not to provide a restricted meaning for that term contained in the main section because if that was so, then the Legislature would have only modified the definition clause. Further, the definition of 100 per cent export oriented unit even after the amendment is retained in the said section, which defines it as an undertaking which has been approved as a 100 per cent export orie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007 were that the assessee was engaged in the business of manufacturing, processing, exporting and dealing in various commodities, more particularly tea, coffee, jute, pepper, chillies, cardamom, turmeric and similar other spices, etc. The assessee, as per the claim is a 100% EOU within the meaning of section 10B of the I.T. Act, 1961 and claimed exemption under that section. The assessee buys tea from auctions held in Tea Board recognized Auction centres at Kolkata, Guwahati, Siliguri, Cochin, Coimbatore and Coonoor. The assessee conceded the factual position that it imports small quantity of tea of the type and quality not produced in India. It further conceded the factual position that it does not grow or manufacture any tea. According to the assessee, tea so bought in different auctions is processed with a view to remove all dust and foreign substances and thereafter it blends different varieties of tea to make it of 'uniform and consistent' quality throughout the year. Thereafter, it is packed in consumer packets of 50, 100, 250, 500 or 1000 gms. Etc. or packed in the form of tea bags of 1.94 gms. Or 2 gms. etc., as the case may be. The assessee claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l include processes such as refrigeration, repacking, polishing and labeling. Manufacture, for the purpose of this Policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining. But the only difference between the Exim Policy of 2002-07 and of 2000 is that words and segregation which were appearing in the definition of the expression 'manufacture in the Exim policy of 2000 was deleted in the Exim Policy of 2002-07. Further, even in Prevention of Food Alternation Rules, 1955, it has been inter alia stated that Tea used in the manufacture of flavoured tea shall conform to the standards of tea. The flavoured tea : manufacturers shall register themselves with the Tea Board before making flavour tea In The Tea (Distribution Export) Control Order, 1957 issued by the Government of India, Ministry of Commerce Industry (Department of Commerce) the expressions flavour tea , green tea instant tea , packet tea quick brewing black tea , tea and test bag have been separately defined as distinct product. In Tea (Marketing) Control Order, 2003 issued by the ' Central Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for manufacture of Packet Tea, Tea Bags/Bulk Tea with annual capacity of 3110 Mt. in terms of Registration Certificate dated 26th December, 1995, inter alia, with the condition that its 100% production (excluding rejects not exceeding 5%) would have to be exported and that its registered EOU Unit shall make value addition to a minimum extent of 79%. Undisputedly, the exported consumer products, blended by Assessee in its said factory premises is a case of substantial value addition, as compared to the unblended black tea in granule and dust form normally available for sale in the open retail market throughout India. The subject for consideration under sections 10A and/or 10B of the said Act is manufacture / production of tea ; the object being grant of benefits of tax exemption to exporters carrying out their operations in FTZ, EOU, EPZ SEZ areas in accordance with the Exim Policy declared by the Government of India in Parliament and in the light of allied and governing laws; in the light of allied laws e.g. The Tea Act, 1953, The Prevention of Food Adulteration Act, 1953 read with Prevention of Food Adulteration Rules, 1955. The Tea (Marketing) Control Order, 2003, The Tea (Dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the industrial unit of the assessee's 100% EOU, it would defeat the very object of sections 10B of the Act. We, in view of the above, hold that when the products for which the assessee's unit is recognized as a 100% EOU are tea bags, tea in packets and tea in bulk packs and the assessee is exclusively engaged in blending and packing of tea for export may not be manufacturer or producer of any other article or thing in common parlance. However, for the purpose of Section 10A, 10AA and 10B, we have to consider the definition of the word manufacture as defined in Section 2(r) of SEZ Act, Exim Policy, Food Adulteration Rules, 1955, Tea (Marketing) Control Order, 2003, etc. We also find that the definition of 'manufacture' as per Section 2(r) of the SEZ Act, 2005 is incorporated in Section 10AA of the Income-tax act with effect from 10.02.2006. Hon'ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in Section 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term `ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne through the decision of Hon'ble Supreme Court in Indian Cine Agencies Vs CIT 308 ITR 98. In this case the question before the Hon'ble Supreme Court was: When the assessee was engaged in the activity of cutting jumbo roll films into flat and small rolls in desired sizes, whether such activity undertaken by the assessee was manufacture or production? In this case, the Hon'ble Supreme Court after discussing various cases, the provisions of different Acts and the dictionary meaning took the view that the assessee was engaged in manufacture / production. While holding so under para 12 of its order, Hon'ble Supreme Court has given the same analogy for the purpose of eligibility of deduction under section 80HH and 80-I as has been given by the Kerala High Court in the case of Tata Tea discussed herein above for the purpose of section 10B, that if there was no manufacturing activity, then the question of referring to item 10 of Eleventh Schedule for the purpose of exclusion does not arise. From this judgment, thus, it is apparent that the Hon'ble Apex Court accepted that manufacture/production includes processing also. 5.26 We have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Section 80IA of the Income Tax Act, 1961. 5.27 In this case also, Hon'ble Supreme Court took the view that cutting and polishing of the marble blocks is the activity which constitutes 'manufacture or production' as after processing marble block no more remains as marble block. This decision has also duly considered, in our opinion, whether the activity of processing is manufacture / production. 6. In view of our aforesaid discussion, we hold that the assessee is engaged in manufacturing and production of an article and therefore, the assessee shall be entitled for the deduction available u/s 80IC of the Act. We accordingly confirm the order of CIT(A) as in our opinion, no illegality or infirmity is found in the order of CIT(A). We adopt the above detailed discussion mutatis mutandis to decline Revenue's first and foremost plea qua manufacturing aspect to conclude that the assessee can be safely held to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hips further invoked Golden Rule of interpretation that the words of a statute must prima facie to be given their ordinary meaning. We find it very much relevant at this stage that their lordships yet another judgment in Smt. Tarulata Shyam vs. CIT (1977) 108 ITR 345 (SC) also made it clear that it is the fundamental rule of taxation that where there is no scope for importing into the statute words which are not there, such an important word would be not to construe but to amend the statute. And also that even if there is any casus omisus, the defect can be remedied by the legislation alone and not by judicial interpretation. 12. We keep in mind all these settled legal principles to avert to the taxpayer's impugned section 80IC deduction claim. There is hardly any dispute by now that it has manufactured pan masala in its specified unit situated in Sikkim state. Its claim throughout was that pan masala is covered in 7th item Part-B in the Fourteenth Schedule (applicable for the state of Sikkim) to be Food processing including agro-based industries, processing, preservation food packaging of fruits and vegetables (excluding conventional grinding / extrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culiar facts and circumstances that the assessee's impugned claim fails to clear the rigor of the above negative list in Thirteenth Schedule Part-1 Item No. 1 applicable for Sikkim. We further are of the view that an item covered in the negative list cannot be held to have been simultaneously included in the positive list as such an interpretation would lead to absurdity in interpretation of the two limbs of section 80IC deduction provision. We accordingly restore Assessing Officer's action making assessee's deduction claim of ₹436,98,608/- in lead assessment year 2007-08. 4. Mr. Banerjee vehemently contends during the course of hearing that the Revenue has not filed its appeal after annexing form no. 35 and statement of facts. His further case is that section 80IC deduction issue does not emanate from the Revenue s grounds. We find no merit in this technical objection as both form no. 35 as well as statement of facts form part of record before us in the instant case file. It further transpires that the above stated grounds sufficiently seek to revive the Assessing Officer s action disallowing assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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