TMI Blog2005 (5) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... s of those cases, the industrial process as undertaken as not amounting to manufacture, and all in the context of some beneficial provision, and all of which would be of no avail, if the contention of the appellant company were to be accepted. The Hon'ble Supreme Court in a recent and popular case of IPCA Laboratory Ltd. v. Dy. CIT [ 2004 (3) TMI 9 - SUPREME COURT] expressed its unequivocal view in the matter The water being produced by the assessee-company, though popularly referred to as 'mineral water', is in fact, 'demineralized water', in that the excess minerals are removed from the raw tap water. It may be that further purification/treatment may lead to 'specialized water', as the 'Therapeutic Water' (not presently available in India) as referred to by the food technologist in his report, for specific application(s), as for selective patients who are forbidden intake of certain salts and which may be considered, on factual considerations, to be resulting from 'manufacture'. It would also be pertinent to state that the assessee's claim of having 'manufactured' its end product is being not accepted only on the basis of te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... io of the Supreme Court decision in CIT v. Chandulal Keshavlal Co.[ 1960 (2) TMI 1 - SUPREME COURT] , wherein the Apex Court has held that the expenditure incurred for fostering the business of another or by way of distribution of profits, or gratuitously, or for some improper or oblique purpose outside the course of business is not deductible, as also of Associated Mining Industries Ltd.'s case, to be fully applicable to the facts of the case, i.e., the finding as to its dominant purpose of promoting its brand position/value and which it successfully attained. Its contention of being a revenue expenditure is, therefore, dismissed on the ground of absence of commercial expediency and the action of the lower authorities in disallowing its claim as such, upheld. In the result, we find no basis or interfering with the orders of the authorities below, which are upheld, dismissing the assessee's appeals. Unaccounted purchase of bottles - CIT(A) has not done so as gathered from his findings as listed in his order. Even more so, as the alleged lapse, i.e., the error in construing a credit for quantity discount as being against damaged/defective stock, by the Assessing Officer is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al activity involved therein does not amount to 'manufacture' as contemplated under the Act, and as such, is not eligible for deduction under section 80-I of the Act. The CIT(A), before whom the matter travelled at the instance of the assessee, concurred with the findings of the Assessing Officer, again, after a detailed discussion vide his consolidated impugned order, citing case law, both to meet the arguments of the assessee, as well as to advance the Revenue's case, in the process. 3. The issue thus, as deciphered, is whether the industrial activity involved in the 'production' of demineralised water by the assessee-company amounts to manufacture within the meaning of the term as contemplated under section 80-I of the Act; there being no dispute as to the assessee's satisfaction of the other qualifying criteria as laid out in that section. 3.1 The 'manufacturing' process, as explained by the assessee, is as under:- "Potable water received from Municipal Corporation is purified by Chlorine treatment and then it is filtered out and dechlorinated. This water is passed through demineralised unit with a view to take out all minerals. After going through the above process, controlled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the franchisees (Bottlers of the Bisleri packaged water), held the process as one of excisable manufacture leading to 'manufacture' of excisable goods. And which ratio, therefore, it was pleaded, would apply squarely to the assessee's case. The matter, he added, even if considered to be doubtful, should weigh in the favour of the assessee in view of the liberal construction that the provisions of beneficial deduction should merit, keeping in view the larger purpose and the object they subserve, as also the settled position in law that in case of two equally reasonable views, the one in favour of the assessee ought to be adopted. 3.3 The learned D.R., on the other hand, was equally vehement and emphatic in supporting the orders of the Assessing Officer and the learned CIT(A), which he pleaded had dealt with the subject in a very comprehensive manner, further arguing that if not so considered, every household or commercial establishment that installs a water purifier by the name 'Acqua Guard' (in which chlorinification, filtration, purification and sterilization take place), or of the more recent variety, i.e., reverse osmosis units (where minerals are also totally or partially r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess, the term 'manufacture', though not mathematically precise, is also not a term of art, so that we are obliged to consider the case law as well as the other arguments cited before us by the learned A.R. before deciding the matter. Further, it would be pertinent to state, as also argued before us by the learned D.R., that the case law in respect of cognate legislation cannot have an automatic application and is to be used/relied upon with circumspection, i.e., with due regard to the object and the intent of that legislation. The Excise Law, indeed, deals with products that arise out of manufacturing or production activity. However, the whole focus there is the coming into existence of a product, which is listed under a tariff schedule, so that it becomes irrelevant whether the same arises out of manufacturing or processing or production activity, and which alone is of significance in the present case. There have been instances in the recent past, as in the case of dyeing of fabrics, or stuntering, i.e., which are decidedly only processing activities, of having been subject to excise. Also, the word 'production' has been explained by the Courts to be of much wider import than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point whether commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity." It is difficult to see how this decision, and more importantly, the observations of the Hon'ble Supreme Court on which it is based, helps to advance the assessee's case, and rather, does so of the Revenue, placing the parameters involved in sharp focus. 4.2 In the case of Kores India Ltd. v. CCE 2004-TIOL-92-SC-CX, a decision under Excise Law, the Hon'ble Supreme Court observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinct in its name, character and use comes into being, would not, to our mind, advance the assessee's claim. 4.4 In the case of Hynoup Food Oil Industries (P.) Ltd., wherein the process of refining of raw cotton seed oil into refined cotton seed oil was held to be a manufacturing activity, the decision was based on the factual understanding that the raw (unrefined) cotton seed oil is not at all eatable, and used, as well as sold, as washoil (being used primarily for the manufacture of soap), while the refined cotton seed oil is an edible product and used, among others, as a cooking medium, thus leading to a manufacture of a different commercial article with a different class of consumers, and which in the instant case purchased it for manufacturing of biscuits. It was these considerations that the ITAT departed from its earlier view of the refining of oil as not amounting to manufacture, which was taken in respect of groundnut oil and rice bran oil which were edible even in the unrefined state. 5.1 Coming to the assessee's stand of one of its franchisees viz., Silver Springs Pvt. Ltd., Bangalore, being held under the Excise Law to be engaged in manufacturing and thus liable to exci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial mineral water and aerated waters, not containing added sugar or other sweetening matters, not flavoured ice") nor is it covered under Chapter 22.02 which include 'sweetened or flavoured mineral water'; and (c) That if such products are to be considered as excisable, tap water for domestic use supplied by the Municipal Corporation could also get covered since 'waters' are specifically mentioned under Heading 22.01 of HSN though charging of duty is not intended. It would be profitable to reproduce the process of manufacture (of treated water) as described in the said Circular, and which we find is in agreement with the process as declared by the assessee, at para 2 thereof: "... water is treated with bleaching powder to eliminate injurious microorganisms. Thereafter, it is purified by filtration. Subsequently it is softened. Finally, it is sterilized to keep such drinking water free from bacteria, and to avoid contamination during treatment." 5.3 However, subsequently, it come to the Board's notice that apart from the processes listed above, some manufacturers were also adding minerals to water and by which process the treated water came into category of mineral water and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich forms Annexure-1 of the said report, we find that there is a reduction in the content of all such minerals from that found in raw water so that there is a removal of the minerals to that extent through the process of demineralization, rather than their addition. As such, reference to the case of M/s. Silver Springs Pvt. Ltd. does not in any manner help the assessee's case and, rather highlights the depreciable tendency on its part to conceal material facts as it would but be aware of the same, being the sole basis on which it has been able to, and for so long, successfully convince the Excise Authorities, and thus, avail exemption from the levy of excise. In fact, the Excise Authorities had, in view of a telex message found at the said franchisee's premises, sought to levy penalty for evasion of duty, which read as under:- "Please immediately change the SSI Registration of Mineral water to 'Purified Treated Water' or 'Bottled Water' or any other suggestion given but definitely not mineral water. Otherwise you will be in excise trouble sometime." And which clearly exhibits the knowledge, in the trade circles, of the difference in the excisable status of the two products. This ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st Appellate authority in this matter. In fact, the argument of the assessee, if given effect to, by, as prayed, construing the word 'manufacture' so as to include within its purview activity which would not otherwise qualify for the same, would be to negate the entire case law on the subject and the meaning of the term "manufacture' as judicially interpreted and elucidated by the Courts. In fact, the learned D.R. has cited not less than five cases, wherein the Hon'ble Supreme Court has held, in the facts of those cases, the industrial process as undertaken as not amounting to manufacture, and all in the context of some beneficial provision (as also some High Court decisions), and all of which would be of no avail, if the contention of the appellant company were to be accepted. The Hon'ble Supreme Court in a recent and popular case of IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521, at page 529 expressed its unequivocal view in the matter in the following words:- "We are unable to accept the submission of Mr. Dastur. Undoubtedly section 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognized as a distinct and new article that has emerged as a result of the process, there might be borderline case where either conclusion with equal justification can be reached. Insistence on any sharp or intrinsic distinction between 'processing and manufacture' results in an oversimplification of both and tends to blur their interdependence." "14. To put differently, the test to determine whether a particular activity amounts to 'manufacture' or not is: Does new and different goods emerge having distinctive name, use, and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes 'manufacture' takes place and liability to duty is attracted. Etymologically the word 'manufacture' properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore-stated; we have, for that matter, a range of qualities for each product being sold in the market. But this would not make them, for that reason, to be recognized as separate (generic) products, so that the market strives to attract customers by building a brand name/image around it on the strength of any of its distinctive or superior attributes. 9.4 As long as the tap water, from which the treated water is churned out, is not declassified as drinking water, as being 'unsafe' for human consumption, we do not think that it shall be possible to consider the proposition, i.e., of the production of treated water as one arising out of manufacture. A scan of the sample test report in respect of the physical, chemical and micro-biological characteristics of the raw and treated, i.e., packaged drinking water reveals that for most part, i.e., 24 out of 28, the physical and chemical parameters fall within the norms prescribed by BIS for the packaged drinking water (also mentioned therein), as also the micro-biological (8 out of 10). Whether the prescribed norms, to the extent not met, would make the tap (untreated) water unfit for human consumption is not known. No empirical evidence has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year or in the past. Upon inquiry, it was explained that the assessee had given possessing rights in respect of its Trade Mark 'MAAZA' for exploitation to its 100 per cent, subsidiary, namely, M/s. Golden Agro Products Limited and which manufactured and marketed the same by itself and through a network of bottlers. Further, in view of the sagging sales as well as to restore confidence among its franchisees, specially in view of the entry of a similar soft drink by the name 'MANGOLA', it had incurred this special expenditure through advertisement on the National circuit in the form of a 'campaign'; the routine expenditure on advertisement being incurred in the normal course by its subsidiary company or the franchisees, i.e., the bottlers. The said expenditure was, therefore, it was contended, incurred on grounds of commercial expediency, and being revenue in nature would merit allowance. On its ground of commercial expediency being questioned as it had not charged any license fee from its subsidiary, which constitutes a distinct legal and taxable entity, nor any royalty from the franchisees, even as it did so and earned a sum of Rs. 35,08,507 as royalty from the bottlers of the Bisl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elaborating the arguments of the lower authorities placed full reliance on them, as also that the case law as cited is not fully applicable, while on other hand the Revenue's case stands fortified by the decision of the Hon'ble Calcutta High Court in Associated Mining Industries Ltd. v. CIT [1955] 27 ITR 429, as also of Gujarat High Court in the case of Sarabhai Sons (P.) Ltd. v. CIT [1993] 201 ITR 464. 11.4-1 We have heard the rival parties as well as perused the orders of the authorities below and the case law cited. It would be relevant to mention the other allied facts in the matter. The assessee-company belongs to renowned Parle group of companies, which has built a name for itself in the soft drink trade, marketing its products all over India for the past several years. It, consequent to the entry of the MNCs 'PEPSI' and 'COKE' in the Indian market, perceiving a threat to its leadership status or the strong-hold therein, sought to leverage its advantage and was able to secure a good price for the sale of its soft drink brands to 'COKE', its deal for which was reportedly struck in the middle of 1993 and the formal agreement entered into in November, 1993. We observe that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and fetch a fabulous price both in its hands as well as that of its subsidiary. 11.5 It has been contended by the assessee that the bottlers are its franchisees, and not of its subsidiary, and produced letters of arrangements entered into by it with them in substantiation of its claim. In our opinion, this is not relevant. For, as far as the franchisees are concerned, it would not be a matter of concern as to whom grants them the franchise, i.e., the assessee or its subsidiary, and rather, are in the facts of the case, placed on a sounder legal footing; the assessee being the owner of the trade mark/brand, which consideration would have perhaps guided this action. And, as regards the assessee-company, again, this becomes irrelevant, if not outright mischievous, in view of the fact that no franchise fee is charged by it, as from the bottlers of Bisleri packaged water, but is paid directly by the bottlers to its subsidiary. 11.6 Under the circumstances we, therefore, are of the opinion that this expenditure by way of a special advertisement campaign of the 'MAAZA' line of product(s) by the assessee-company is not a business expenditure in its hands being not incurred in its capacity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37,240 from its account, the same was stated to be on account of quantity discount allowed by the supplier and which fact was specifically mentioned in the credit note issued by the supplier so that this amount had no nexus or relevance with the breakages. The learned CIT(A) held in the assessee's favour on the basis of the foregoing, assailing also the other grounds, viz. the absence of records as well as absence of transport receipt with the assessee, taken by the Assessing Officer, as being not relevant in the facts and circumstances of the case. The addition, he further observed, would in any case stand to be set off by the additional deduction on account of purchases, which would have to be allowed to the assessee-company. 13.2 It may be that what the assessee contends before the CIT(A) is true and that there has been a lapse on the part of the Assessing Officer in failing to mention about the factum of the confirmation from the supplier having been filed before him, as also in his inference of the nature of receipt of Rs. 1,37,240 by the assessee, which are to be, nevertheless, and if at all, considered as honest mistakes committed bona fidely being in discharge of his duty a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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