Whether Bottling Of Gas Into Cylinder Amounts To Production For Claiming Of Deduction Under Sections 80HH, 80-I And 80-IA Of The Income Tax Act, 1961
Whether an activity constitutes production or manufacture for the purposes of sections 80HH, 80-I and 80-IA of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) has remained point of dispute in many cases.
Recently, in CIT – 1, Mumbai vs. Hindustan Petroleum Corporation Ltd. [Civil Appeal No. 9295 to 9309 of 2017, decided on 03.08.2017], the question of law that arose for consideration in all the above-mentioned appeals, which were filed by the CIT, Mumbai, was identical. The respondents-assessees in these appeals were engaged in the process of bottling Liquefied Petroleum Gas (LPG) Cylinders meant for domestic use. They were claiming benefit of sections 80HH, 80-I and 80-IA of the Act.
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 change in the chemical composition or other properties of the Gas in the activity of filling the cylinder. This view was affirmed by CIT (Appeals).
The Income Tax Appellate Tribunal (ITAT), however, upset the aforesaid view of the AOs after finding that LPG produced in the refineries cannot be directly supplied to households without bottling of the LPG into the Cylinders and insofar as LPG bottling is concerned, it is a complex activity which can only be carried out by experts.
The High Court concurred with the view of the ITAT. The Income Tax Department before Supreme Court insisted that the process of bottling LPG cylinder in domestic use does not amount to manufacture.
The Supreme Court observed that the two expressions “production” and “manufacture” have different connotation. The word “production” is wider in ambit and it has a wider connotation than the word “manufacture”.
SC took note of the process of LPG bottling that was undertaken by the assessees and about which there was no dispute. It had come on record that specific activities at assessees’ plant included receiving bulk LPG vapour from the oil refinery, unloading the LPG vapour, compression of the LPG vapour, loading of the LPG in liquefied form into bullets, followed by cylinder filling operations. The stages of these activities were as under:
(a) Bulk LPG is received in the bottling plant through road tankers/rail wagons;
(b) The LPG is unloaded into spheres/bullets through LPG compressors which use variable levels of pressure 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.
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 state. This is how LPG is made suitable for domestic use by customers who will not be able to use LPG in its vapour form as produced in the oil refinery. It, therefore, becomes apparent that the LPG obtained from the refinery undergoes a complex technical process in the assessees’ plants and is clearly distinguishable from the LPG bottled in cylinders and cleared from these plants for domestic use by customers.
The ITAT had arrived at the specific findings in support of its decision, which were 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 for the end customer.
(d) The word ‘production’ has a wider connotation in comparison to ‘manufacture’, and any activity which brings a commercially new product into existence constitutes production. The process of bottling of LPG renders it capable of being marketed as a domestic kitchen fuel and, thereby, makes it a viable commercial product.
The learned judges of the Supreme Court held that, in the considered opinion of the Court, the aforesaid activity would definitely fall within the expression ‘production’. The view of the ITAT as affirmed by the High Court was correct.