WHAT is ‘manufacture’ ? The Income Tax Act does not define it all. Nor does it say that the scope and meaning of this word may be borrowed from the sister taxing statute of Central Excise Act. As a result, it continues to be a major loosely defined concept, provoking the Income Tax AOs to disallow benefits claimed by the industry. This is what happened even in this case.
The issue before the HC was : Do blending and bottling of IMFL amount to ‘manufacture’ for the purpose of claiming deduction under Section 80-IB? And the HC emphatically held that it does. The assessee does not just add water and sells the final product. It is an admitted fact that quite apart from water, the assessee has to add several items to make it fit for human consumption. The Tribunal, in its order, has stated that the blending was subject to filtration for required time and thereafter only, the final product was sold. It is also stated that the alcoholic strength of the ENA was reduced considerably to more than 50% to result in a final marketable commodity. In this background, it is not possible for the Bench not to accept that the blending should not be treated as a manufacturing activity under Section 80-IB of the Act.Brief facts of the case :

The assessee is an SSI unit, recognised so by the Director of Industries, Pondicherry. It set up a second unit to manufacture and bottle Indian manufactured foreign liquor (IMFL) at Pondicherry. In its return for the assessment year 2003-04 and 2004-05, it claimed deduction under Section 80-IB of the Act in respect of the profits and gains derived from the second unit. The assessing officer however rejected the plea on the issue that the process carried on by the assessee for its product does not constitute ‘manufacture’ within the meaning of Section 80-IB of the Act.

The issue went to the CIT(A) where the assessee explained the process of blending as follows:

The assessee purchased rectified spirit or extra neutral alcohol (ENA) made of grain or grapes or malt to which it added demineralised water in required proportion to reduce the strength of the ENA to make various products like whiskey, brandy, rum, etc. Apart from that, other ingredients like caramel, sugar etc., were also added as per blending formulations. This blend was subject to filtration for required time, blend inspection and then bottling in empty bottles. The finished products were packed and sold.

The CIT(A) considered the fact that the alcoholic strength of ENA which was around 95% v/v was reduced to a maximum of 42.8% v/v. Consequently, he held that there was no manufacture or production of any new article or thing as the alcohol which was the input remained as alcohol.

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On further appeal before the Tribunal, the assessee reiterated the contentions as regards the process undertaken to result in a totally different marketable commodity. Considering the entirety of the issue the Tribunal held that the rectified spirit is not mentioned in the 1st Item of 11th Schedule “beer, wine and other alcoholic spirits” and consequently, the assessee as a Small Scale Industrial Unit was entitled to deduction under Section 80-IB of the Act.

Then the issue travelled to the precincts of the High Court which heard the arguments of both the parties and observed that a deduction u/s 80IB is available only where the assessee engages in the manufacture or production of an article or thing, not being an article or thing as specified in the list in the 11th schedule or operates one or more cold storage plant or plants in any part of India. The proviso to sub-clause (iii) of sub section (2) of Section 80-IB of the Act shows that the condition with reference to the list in the 11th Schedule does not apply at all to the case of an industry being a small scale undertaking or an undertaking referred to in sub-section (4).

As regards to the issue as to whether the assessee had engaged itself in the manufacturing or producing of an article of thing by the act of blending, it is seen that the assessee does not just add water and sells the final product. It is an admitted fact that quite apart from water, the assessee had to add several items to make it fit for human consumption. This is elaborately discussed in the order of the Commissioner of Income Tax (Appeals). His order also states that the assessee was not a manufacturer of ENA which was the basic raw material required for making various IMFL products. Instead it was only mixing water and other ingredients with ENA formulations. In the process, the alcoholic strength of the ENA which was around 95% v/v was reduced to a maximum of 42/8% v/v as in respect of whiskey, brandy, rum, vodka and gin.

As against the CIT(A) order the Tribunal referred to the Apex Court decision in the case of Aspinwall & Co. Ltd. v. CIT (2002-TIOL-592-SC-IT-LB), with regard to the concept of what would amount to manufacture. The SC pointed out to the various processes and held that conversion of the raw berry into coffee seeds was a manufacturing activity; that coffee bean had an independent identity from the raw material i.e., berry from which they were produced. Considering the various process involved, the Supreme Court held that the assessee was entitled to investment allowance under Section 32-A. The Apex Court held that “if a commercially different article or commodity results after processing, then it would be a manufacturing activity. ”

The Bench further stated that in the case of State of Karnataka Vs. Shaw Wallace & Co. Ltd, the High Court of Karnataka considered a case of the dealer engaged in Indian Made Foreign Liquor. The High Court held that without blending there cannot be any manufacture of IMFL. It is also to be pointed out that blending is also an essential part of the manufacturing process of IMFL. Even if the part of the process is done by the assessee and the other part under the control and the supervision of other parties, yet, the concept of manufacturing process cannot be taken out.

15. We are in entire agreement with the decision of the Tribunal, which is in accordance with the law laid down by the Supreme Court on the interpretation of the concept ‘manufacture’ . In our view, the appeals do not deserve admission, as no interference is called for by this Court. The appeals are dismissed.

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