TMI Blog2018 (8) TMI 1797X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion on the issue of basic tenets of literal or strict interpretation to be adopted with regard to a taxing statute, their interplay, purposive construction as well as application of equitable principles to inter alia conclude that there is no room for intendment in such a fiscal statute and regard must be had to clear meaning of the words and the matter should be governed wholly by the language incorporated therein. Their lordships make it clear that one has to strictly look to the language used without any scope for searching intendment or for drawing any presumption Exemption provision in a taxing statute is to be interpreted strictly. Assessee s burden to how that his case comes within the specified parameters envisaged in the exemption clause or notification and any ambiguity in such a provision has to be interpreted in Revenue s favour. Also earlier decision in Raghunath Rai Bareza vs. PNB [ 2006 (12) TMI 479 - SUPREME COURT OF INDIA] holds that it is a cardinal principle of interpretation of a statute that the words used therein by the legislative are to be understood in their natural, ordinary or popular sense and construed as per their grammatical meaning unle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -A (for the state of Sikkim) comprising of a negative list at serial No.1 reading tobacco products (including cigarettes, sigma and gutka etc.) rather. The question as to whether pan masala is included in tobacco products or not stands answered by the legislature itself in part-B in the same schedule very much containing the crucial expression tobacco and tobacco products including cigarettes and pan masala. Legislature s clinching expression etc used in former part-A is inclusive in nature which is sufficiently answered in part-B of the very schedule wherein the tobacco products category includes pan masala since etc has been omitted to be used. The legislative intention is explicitly clear that it had sought to exclude tobacco products as segment including cigarettes and pan masala from the ambit of section 80IC of the Act. We apply necessary implication principle in these facts and circumstances to hold that pan masala definition used in para-B of the Thirteenth Schedule is included in tobacco products would also cover part- A thereto describing very categories of tobacco products to be not eligible for section 80IC deduction. We conclude in these peculiar fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 extempore in impugned re-assessment framed on 31.03.2011. He was of the view that the assessee inter alia not filed its return within the stipulated time of thirty days , section 142(1) notice stood issued on 07.05.2014 calling for relevant details followed by various hearings as well as the fact that the reopening reasons sufficiently quoted the corresponding proceedings in assessment year 2010-11 including the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antation 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 process must be connected with the ultimate production of goods only. The assessing authority further was of the view that assessee s Form 3CD containing capital assets nowhere indicated any factory building as well and therefore, it was not clear as to how it could be held to have been manufacturing its specified products. Its plant and machinery details also revealed mixer equipment of ₹35,000/- purchased from M/s Bhargaua Enterprise followed by batch coading elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 concluding we would like to make one observation. If the contention of the Department is to be accepted, namely that thee activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondent is paying excise duty, some of the respondents are job works and the activity undertaken by them has been recognised by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement 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 CIT(A) who examined the manufacturing process and the relevant evidence and came to conclusion that the assessee is engaged in manufacturing process whereas finished product is distinct from raw material and allowed the deduction to the assessee u/s 80IC by holding as under: 6(5) The appellant's case can therefore be examined in light of the above judicial pronouncements to see whether the activity carried out by the appellant comes under the expression manufacture so as to be eligible for ITA No. 1962-1966/Kol/2016 AYs 07-08 to 09-10, 11-12 to 12-13 DCIT/ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eatures 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 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 types 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 change as some chemicals react over a period of time, while in some cases reactions are instant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequent 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. R. even though vehemently relied on the order of the Assessing Officer but did not deny that the assessee has not failed to comply with other conditions as stipulated u/s 80IC of the Act for the purpose of being eligible for deduction 80IC of the Act. His main thrust of the argument was that the assessee was not engaged in manufacturing or production of an article. He was simply mixing the various chemicals and on that basis he was claiming as if he is engaged in manufacturing or production of an article. 5.1 On the other hand, the Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 change as some chemicals react over a period of time, while in some cases reactions are instant. It was further submitted that the testing is done at each stage by again reacting the finished products with other chemicals and substances, at various temperatures depending on the intended use of the finished product. Thus, it was expressed that the industry requires high expertise, specialization and knowledge of organic as well as inorganic chemistry. It was submitted that all the finished goods are totally distinct, as is evident from the price list and all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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: 1. Aldehyde C 11 Undecylic 0.1 2. Aldehyde C 8 0.02 3. Aldehyde C 9 0.05 4. Benzophenone 10 5. Cis-3-Hexanol 0.05 6. Cis-3-Hexanyl Acetate 0.08 7. Citral 0.5 8. Citronellol 15 9. Damascone Beta 0.04 10. Geraniol 12 11. Geranium Chinese 4 12. Linalool 0.8 13. Phenyl Ethyl Alcohol 47 14. Rose Crystals 10 15. Rose Oxide Indian 0. 16 5.5 He told us about each and every item and also pointed out that each of the items has to be put up in the jar in the same seriatim as it appeared in the list. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided 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 had clearly explained that the said new sec. 10B had been inserted in the statute book with a view to provide further incentive for earning foreign exchange so as to secure that the income of a 100% EOU shall be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years. The exemption provided under this new section was similar to the one provided under sec. 10A of the Act to industrial undertaking operating under the freetrade zone. It was also clarified therein that the expression manufacture for the purpose of both sections 10A and 10B of the said Act would include any processing or assembling or recording of programme on disc, tape, perforated media or other information storage device. 5.7 This definition of manufacture was removed when sec. 10A and 10B of the Act were amended by the Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Om Prakash Gupta Vs Commissioner of Commercial Taxes [16 STC 935 (Cal)]. What is necessary in order to characterize an operation as processing is that the commodity must as a result of the operation, experience some change. Here, in the present case, diverse quantit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entirely different from the various chemicals and the items used by the assessee. These items so produced have a different name, different utility and they are being used for different purposes in soaps, detergents, edible items, juices etc. according to the fragrances and taste to be given to these items. These items so produced are different in physical appearance and chemical composition. We do not agree with Learned D. R. that there is not any change in physical and chemical composition of the output than the input as is being processed in the case of the assessee. If we go to section 2 subITA section (29BC) inserted with effect from 01/04/2009, we find that clause (b) of this section clearly states that bringing into existence of new and distinct object or article or thing with different chemical composition or integral structure, tantamount to manufacture. Even though they remain in liquid form but it is not a case that all the ingredients which are being mixed are in liquid forms. The taste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on whether the different brands of tea purchased and blended by the assesses for the purpose producing the tea mixture could be said to have been processed , after the purchase, within the meaning of the proviso to section 8(a), so as to preclude the assesses from being entitled to deduct their turnover under section 8(a), so as to preclude the value of the tea purchased by them. The relevant observations made by the Hon ble Supreme Court in this respective are quoted and set out herein below for ready reference: 7. The Revenue however relied on the decision of the Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay [10 STC 500 (Bom HC)]. The assessees in this case were registered dealers in tea under the Bombay Sales Tax Act, 1953 and they purchased in bulk diverse brands of tea and without the application of any mechanical or chemical process blended these brands of different qualities according to a certain formula evolved by them and sold the tea mixture in the market. The question arose before the Sales Tax Authorities whether the different brands of tea purchased and blended by the assessee for the purpose of producing the tea mixture could b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hink that is the correct test to be applied for the purpose of determining whether there is processing . The question is not whether there is manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out 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 we are clearly of view that the blending of ore in the course of loading through the mechanical ore handling plant amounted to processing of ore within the meaning of Section 8(3)(b) and Rule 13 and the mechanical ore handling plant fell within the description of machinery, plant, equipment used in the processing of ore for sale 5.17 In deciding the said question, the Hon ble Supreme Court after considering the judgment of the Hon ble Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay [1959] 10 STC 500 (Bom), inter alia, observed as follows: (i) When different brands of tea were mixed by the assessee as in Nilgiri Ceylon Tea Supplying Co. s case (1959) 10 STC 500 (Bom) for the purpose of purchasing a tea mixt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the different brands of tea which went into the mixture. 5.19 Hon ble Kerala High Court had the occasion to consider whether assessee is engaged in the manufacture or production of an article or thing when assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285. Hon ble High court noted in that case that the Revenue s stand is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending and packaging of tea for export was treated as manufacture or production of an article qualifying for exemption. Hon ble Kerala High Court considered the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s 10A of the Act and units in the free trade zone provided u/s 10AA of the Act and the exemption available to 100% EOU u/s 10B of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature. Hon ble Kerala High Court also considered the judgment in the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Industries (Development Regulation) Act, 1951, and the Rules made under that Act. It is pertinent to note the products for which the assessee s unit is recognized as a 100 per cent export oriented unit are tea bags, tea in packets and tea in bulk packs. In fact, the assessee is exclusively engaged in blending and packing of tea for export and is not manufacturing or producing any other article or thing. Still it is recognized as a 100 per cent export oriented unit by the concerned authority within the meaning of that term contained in the definition clause of section 10B of the Income tax Act and the Department has no case that the assessee s unit engaged in export of tea bags and tea packets is not a 100 per cent export oriented unit. So much so, in our view, if exemption is denied on the ground that products exported are not produced or manufactured in the industrial unit of the assessee s 100 per cent export oriented unit, the same would defeat the very object of section 10B. Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, will continue to enjoy tax exemption under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption u/s 10B in respect of export of blending of tea. The rejection of exemption u/s 10B was confirmed by the CIT(A). When the matter went before the special Bench, Special Bench after discussion the relevant provisions as well as the various decisions of High Court and the Supreme Court held as under:- The provisions of section 10AA of the Act was inserted on the statute book by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006. Even prior to the enactment of the said SEZ Act, Special Economic Zones (including units therein) were all along treated like EQU / FTZ / EPZ for all purposes whatsoever and were dealt within the Exim Policy accordingly. Section 2(k) of the Special Economic Zone Act, 2005 defines the expression Existing Special Economic Zone to mean every Special Economic Zone which is in existence on or before the commencement of the said Act. Section 2(e) defines the expression existing unit to mean every unit which has been set up on or before the commencement of the said Act in an existing Special Economic Zone. In other words, admittedly all Special Economic Zones were also being governed by the Exim Policy prior to the enactment of SEZ Act, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Tea , Instant Tea and Made Tea have also been distinctly and separately defined. Clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 w.e.f. 01.04.2009 to define 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 or integral structure; The aforesaid definition of the expression manufacture , although brought into the statute book w.e.f. 01.04.2009, was applied by the Hon'ble Supreme Court even for the assessment year 2001-02 in ITO v. Arihant Tiles and Marbles Pvt. Ltd. (2010) 320 ITR 79, 82 (SC) on the ground that Parliament had taken note of ground reality in inserting section 2(29BA) in the Income Tax Law. The said definition was again applied by the Hon'ble Supreme Court in CIT V. Emptee Poly-Yarn Pvt. Ltd. (2010) Green Tea means the var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances and case laws relied on by both the sides that the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee's division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for AYs 2000-01 onwards, which was granted upto the AY 2003-04. However, for the AY 2004-05, exemption was declined for the reasons that by the Finance Act, 2000, the definition of `manufacture which included 'processing' contained in section 1OB of the Act was deleted w.e.f. 01.04.2001. The argument of the department is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending and packaging of tea for export was treated as 'manufacture' or 'production' of an article qualifying for exemption. We are of the considered view that the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. TOA of the Act an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) and Tata Tea Limited (supra), we hold that the assessee is entitled for exemption under Section 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under Section 10A of the Act. Accordingly, we answer the question referred in favour of the assessee by holding that the assessees who are in the business of blending and processing of tea and export thereof, in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemption u/s.10B of the Act. Further, assessees who are in the business of blending and processing of tea hi respect of undertakings in free trade zones are manufacturer/producer of tea for the purpose of claiming exemption u/s. 10A of the Act. We have examined and discussed the facts in the case of Madhu Jayanti International Ltd. and found that there is blending of tea and consequently the assessee is eligible for exemption u/s. 10B of the Act as prayed for. Their appeal for the AY 2004-05 is allowed. As regards other appeals and that of the interveners, the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee would fall within the meaning of the words manufacture or production in section 80-IA of the Income-tax Act, 1961? In this case, Hon ble Supreme Court, after discussing the definition of manufacture given in section 2(29BA) of the Income-tax Act, 1961 and also discussing the provisions of section 80- IA(2)(iii) and after going through various decisions, held as under: 22. Applying the above tests laid down by this Court in CIT Vs. N.C. Budharaja and Co. 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only there is manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (s) or thing(s) in issue. We find first of all that hon'ble apex court s latest constitutional bench s decision in Commissioner of Cusoms vs. Dilip Kumar Roy Civil Appeal No.3327 of 2017 decided on 30.07.2018 has gone into a very elucidate discussion on the issue of basic tenets of literal or strict interpretation to be adopted with regard to a taxing statute, their interplay, purposive construction (para 25) as well as application of equitable principles to inter alia conclude that there is no room for intendment in such a fiscal statute and regard must be had to clear meaning of the words and the matter should be governed wholly by the language incorporated therein. Their lordships make it clear that one has to strictly look to the language used without any scope for searching intendment or for drawing any presumption Hon'ble highest court of the land thereafter came to the core issue i.e. in the event of ambiguity in an exemption notification, should the benefits flowing therefrom be construed in Revenue s or to the subject / assessee favour. Their lordships sum up answer of the reference made in para 51 that an exemption provision in a taxing statute is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w sufficient light as per suitable references; sector-wise, that pan masala does not find place in National Food Processing policy as well. The assessee s section 80IC deduction claim therefore fails to satisfy the requisite test of its inclusion in positive list of specified articles or things prescribed in Item No.7, Part-B, Fourteenth Schedule to section 80IC(2) of the Act. It therefore fails to discharge its burden to be covered under the impugned deduction provision as per hon'ble apex court s constitutional bench s ratio hereinabove. 13. It further transpires that the assessee s manufactured item pan masala forms part of Thirteenth Schedule Part-A (for the state of Sikkim) comprising of a negative list at serial No.1 reading tobacco products (including cigarettes, sigma and gutka etc.) rather. The question as to whether pan masala is included in tobacco products or not stands answered by the legislature itself in part-B in the same schedule very much containing the crucial expression tobacco and tobacco products including cigarettes and pan masala. It is thus clear that legislature s clinching expression etc used in former part-A is inclusive in nature ..... X X X X Extracts X X X X X X X X Extracts X X X X
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