Case Law Details
CASE LAWS DETAILS
DECIDED BY: ITAT, CHANDIGARH BENCH `B’
IN THE CASE OF: J. B. Conductors & Cables Vs ITO, APPEAL NO: ITA No. 215/Chandi/2009, DECIDED ON November 30, 2009
RELEVANT PARAGRAPH
. The controversy squarely involves interpretation and, construction of the words “manufacture” and, “production” . The word `manufacture’ was not defined under the Act, uptill the insertion of section 2(29BA) by the Finance (No. 2) Act, 2009, w.r.e.f. 1-4-2009, which reads as under:-
” 29BA – `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 above insertion has been made effective from 1-4-2009, while we are dealing with assessment years prior to 1-4-2009, while we are dealing with assessment years prior to 1-4-2009. hitherto, the expressions `manufacture’ and `production’ have been understood in terms of the judge made law. The various courts of the country have rendered numerous judgements elucidating various principles or tests to evaluate whether a particular process can be understood as `manufacture’ or `production’ . The expression “manufacture” in its ordinary acceptance has a wider connotation, it means making of articles, or material commercially different from the basic components, by physical labour or mechanical process, and a manufacturer is a person by whom, or under whose direction or control the articles or materials are made.
The word `manufacture’ used as verb is generally understood to mean as bringing into existence a new substance and does not mean merely to produce some change in a substance. As is generally understood and also stated in section 2(29BA) of the Act, `manufacture’ implies a change, and such change must entail a transformation; a new and different article must emerge having a distinctive name, character or use. Thus, `manufacture’ , ordinarily signifies emergence of new and different goods as understood in relevant commercial circles. The Corpus Juris Secundum defines it as the production of article for use from raw or prepared material by giving these materials new forms, qualities, properties, or combinations, whether by hand labour or machinery; also anything made for use from raw or prepared materials”. According to Webster’s Dictionary, manufacture means to work, raw or partly wrought materials, into suitable forms for use, as to manufacture wool, iron, etc. to make (wares or other products) by hand by machinery or other agency. Thus, literally speaking the process of manufacture involves some transformation or change in the material as a result of application of art or a mechanical manipulation. The material, which is thus fashioned into a new product, may be distinct in form or in use.
9.1 Now, we may refer to some of the judicial precedents on the issue. The Hon’ble J & K High Court in the matter of CIT v. Abdul Ahad Najar 248 ITR 744 (J&K) considered the question, whether the undertaking of an assessee from foresh and conversion of same into logs, planks, etc. constituted an industrial Undertaking within the meaning of section 80 J(4) of the Act or hot ? In this case, the assessee claimed that U was engaged in the manufacture! and production .of articles, the case of the assessee was that the planks sawn out of logs and, articles produced! therefrom were different in shape from the logs and the trees. However, the Assessing Officer did not accept the contention of the assessee as according to him the assessee did not manufacture or produce any article. According to the Assessing Officer, the process of converting trees into logs did not involve much sawing operations as after felling the trees, it had been cut into logs and sold as such. The Revenue also contended that the process of sawing of logs into planks also did not involve any manufacture of articles and that manufacturing process could not be carried out by bare hands without the aid of machinery. The claim of the assessee was, however accepted by the Appellate Commissioner, who held that the use of machinery was not indispensible to a manufacturing process and even for the conversion of the standing trees into logs, labour was required as something is converted into something else viz. logs. He was of the view that the logs could be said to be a new product emerging out of manufacturing process. He accordingly held that the assessee was entitled to deduction under section 80J of the Income-tax Act, which was confirmed by the Tribunal. The matter was considered by the Honourable High Court on the above facts. The Hon’ble High Court was of the view that in order to claim relief under section 80J, an industrial undertaking must manufacture or produce articles and it was a condition precedent. The Honourable High Court observed that the assessee cut trees in the forest, converted them not only into logs but also into planks and other articles for the purpose of sale. As a forest lessee, the assessee’s business was to cut standing trees and to extract timber and convent the same into form of logs, planks, etc. for the purpose of sale- It was observed that the logs and planks could never be known, as trees ; that the two are undoubtedly different from the standing trees. The Honourable High Court accordingly upheld the stand of the assessee. It is clear from the above that the activity of the forest lessees of extraction of timber from the forest and conversion of the same into logs, planks, etc. is understood to be a manufacturing process. The Honourable High Court on the question of manufacturing further held as under:-;
“Otherwise also, it is clear that the activity undertaken by the assessee clearly amounts to manufacture and production of articles. The expressions ‘manufacture’ and ‘produce’ have not been defined in the Income-tax Act. The dictionary meaning of ‘manufacture’ is transform or fashion new materials into a changed form for common parlance, manufacture means production of articles from raw or prepared materials by giving these materials new forms Qualities, properties of combinations, whether by ‘hand’ labour-or by mechanical process. .In other words, it means making of articles or materials commercially different from the basic components by physical labour or mechanical process, In its ordinary connotation, manufacture signifies emergence of new and different goods as understood in relevant commercial circles. So far as the meaning of the word ‘produce’ is concerned, though the word ‘produce’ has a wider cohnbtation than the word ‘manufacture’, when used} in juxtaposition with the word manufacture’, it takes ‘in bringing into existence new goods by a process] which may not amount to manufacture. The activity of extraction of wood by the assessee from the forest by felling the trees and converting the same into logs, planks, sleepers and other articles, undoubtedly, falls within the definition of `manufacture’ .
9.2 The Honourable Supreme Court in the matter of CIT Vs N. C. Budharaja & Co. [1993] 204 ITR 412 (SC) considering a similar point of law held, “The test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a .new and distinct commodity..”
9.3. The Honourable Supreme Court in the case of CIT v, Sesa Goa Ltd. reported in 271 ITR 331 while considering the question under section 32A(2)(b)(iii) for grant of investment allowance dealt with the question of ‘production’ in a case where the assessee’s undertaking was engaged in the business of excavating, mining and processing mineral ore. Mineral ore was not excluded by the Eleventh Schedule. The only question was whether such, business was one of manufacture or production of ore. The Honourable Supreme Court held that the issue was dealt with by different High Courts over a period of time, and it was held that the activity! Amounted to “production” and answered the issue in question in favour of the assessee. The Honourable Supreme Court held as under :- :
“The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable: This court had, As early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar {1961] 12 STC 150, defined the word ‘production’ , albeit) in connection with the Bihar Sales .Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the j Oxford English Dictionary as meaning ‘amongst other things that which is produced: a thing that results from any action, process of effort; a product: a product of human activity or effort’. From the wide definition of the word ‘production’ , it has to follow that mining activity for the purpose of production of mineral ores should come within the ambit of the word ‘production’ since ore is ‘a thing’, that which is the result of human activity of effort ..
It is. therefore, not necessary, as has been sought to be contended by learned counsel for the Revenue, that the mined ore .”must be a commercially new product .
Learned counsel appearing on behalf of the asses see, correctly submitted that the chief provisions of the Act, particularly section 33(1) b)(B) read with Item No. 3 of the Fifth Schedule to the Act, would show that mining of ore is treated as ‘production’ . Section, 3 of the production in the context of mining activity. The language of these sections, is similar to the language of section 32A(2), There is no reason for us to assume that the word ‘production’ was used in a different sense in section 32A.” [underlined for emphasis by us]
9.4. Thus, having regard to the proposition as discussed above, particularly in view of the decision in Sesa Goa Ltd (supra) it is evident that, that the word “production’ has been used in a very wide sense to mean-to bring out a new product albeit not a commercially new product. In fact, it may be relevant to state here that, in the aforesaid ju4gewHc#t;, The Honourable Supreme Court affirmed the judgement of the Honourable Karnataka High Court in the Case of CIT v.. Mysore Minerals Ltd. 250 ITR 725 (Kar.) wherein activity of cutting granite blocks into slabs and sizes and polishing them was held to be manufacturing or production of goods. It was held therein as under:
“Section 80-1 also refers to profits and gains in respect of an industrial] undertaking. In view of the decision given in the case of the assessee, we are of the view that the Appellate Tribunal is right in law in coming to the conclusion that the original assessment which granted the relief under sections 32A and 80-1 to the assessee was not erroneous and ,the mjerence of the Commissioner of Income-tax under section 263 was not proper. The Tribunal is also right in law in holding that extracting granite from quarry and cutting it to various sizes and polishing should be considered as manufacture or production of any article or thing and the assessee’s business activity must be considered as an industrial undertaking for the purpose of granting reliefs under sections 32A and ’80-1 of the Income-tax Act, 1961.”
9.5. Further, following the judgements in the case of Sesa Goa Ltd. (supra), Mysore: Minerals Ltd (supra) and, another judgement of the Honourable Supreme Court in the case of Kores India Ltd Vs CCE reported in 174 ELT 7 (2004), the Honourable Rajasthan High Court in the case of Arihant Tiles and Marbles Ltd v ITO 295 1TR 148 (Raj) held as under:
“Apparently, the principle applied by the Supreme Court was that if without applying the process a thing in its raw form cannot be ‘usable and it is made usable for particular purpose, it amounts to manufacture.
The court approved the principle enunciated in Saraswati Sugar Mills Vs. Haryana State Board [1992] 1 SCC 4 18 that essence of manufacture is a change of one object to another for the purpose of making it marketable.
On this principle. the court accepted the contention that by cutting jumbo rolls into smaller sizes, a different commodity has come into existence and the commodity which ‘was already in existence serves no purpose and no commercial use, after the process. A new name and character has come into existence. The original commodity after processing does not possess original identity. Obviously, so far as physical characteristic of jumbo rolls and its shorter version in the form of typewriter and telex roll may have the same physical properties, none the less on the basis of their different use as a marketable commodity and after being cut, the same cannot be used for the purpose for which it could be used in original shape, the activity was held to be manufacture.
The principle aptly applies to the present case. Here also, the’ original commodity, namely, marble block could not be used for building purposes as such until it is cut into different sizes id be used as building material. It is only by the process of cutting the marble block into slabs and tiles that it is made marketable. The marble block cannot be used for the same purpose as the marble slab or tile can be used dated after the marble block has been cut into different sizes, the end product by putting it simultaneously cannot be used as a block. The principle in Kores India Ltd.’s case J2004J 3 RC 613 (SC) supports the contention of appellant.’ (underlined for Emphasis by us.
9.6. Also the aforesaid view has been followed by the Honourable Bombay High Court in the case of CIT Vs Fateh Granite (P.) Ltd 3l4 ITR 32 (3om.J and, the Honourable Delhi High Court in the case of ClT Vs Sophisticated Granite Marble Industries reported 225 CTR 410 (Del) and, it was held that process of purchasing marble slabs and then converting these into tiles by applying Various processes like cutting sizing, polishing so as to produce marketable tiles constitutes “manufacturing” an article.
10. Now, we may revert back to the facts of the captioned appeals. On consideration of the principles stated above and the different steps of manufacturing through which the raw materials i.e. Wire rods are processed, we are of the considered opinion that, wire so manufactured can no longer be regarded as the original commodity. In fact, the final product is recognised in the trade as a new and distinct commodity. Ostensibly, the wire rod having undergone various mechanised and chemical based processes like annealing, galvanising etc. results into manufacture of wire with distinct name, character and use. The name of the raw material, originally is wire rod before processing .and after processing, it becomes wire of different types, say paper/ enamel insulated- wires or etc. Therefore, it is commercially distinct commodity with a distinct name. The wires so produced are used for power cables, industrial control i cables, electrify motors, transformers, etc. but’ Wire rod as a raw material cannot be Used as such. Therefore, a; new and distinct commodity is manufactured and produced by the assessee namely wire. In fact, in Union of India and Others Vs. J.G. Glass Industries-Ltd. and Others (1998) 2 SCC 32, the Honourable Supreme Court had laid down a two-fold, test for determining whether a particular process amounts to ‘manufacture! or not ? First, ,whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to ./exist. Secondly, whether the commodity which was already in existence would not serve: the desired purpose but for the said process. Applying this two-fold test to the fact situation of the appellants, it is irresistible to hold that the process undertaken by the appellants amount to manufacture.
11. In fact, Hon’ble Madras High Court’s decision in the case of Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. (supra) supports the case of the appellant. In this case, the assessee was receiving un-treated crankshafts, forgings and castings from its clients and was subjecting them to heat treatment to toughen them up for being used as automobile spare parts. The said activity was held to be a manufacturing activity by the Honourable High Court.
The Hon’ble Madras High Court held as under:
“12.In the back drop and setting of the principles, as enunciated by 1he’ Supreme Court and various High Courts as relatdbt’e7 to the activity of “manufacture’ ‘ of “processing of goods” and in the light of the various literature and books of foreign authors, felatable to the qualitative change having been brought about by Well termed process, as referred to above, we may now proceed to consider and decide the moot question as to’ whether the activities carried on by the assessee namely receiving untreated crankshafts and forgings and castings from its clients and subjecting them to heat treatment to: toughen them up for being used as automobile spare parts can ever the construed as activities relaiable to manufacture and, to enable it to claim investment allowance under s. 32 A Y)f the IT Act.
13. Further, even if the test of marketability is applied to the facts of the case of the appellants, the process carried out by them constitutes manufacture, as enunciated by the Honourable Rajasthan High Court in the case bf Arihant Tiles and Marbles (P) Ltd v ITO (supra) following the judgement of the Honourable Supreme Court in the case of Sesa Goa Ltd. (supra) and, Kores India (supra), since the , original commodity, namely, wire rod could not he used for transformers, power cables, etc. as such, in drawn into enamelled/ insulated wires. It is only by this process that, input is made marketable as la distinct commodity and, therefore we hold, in the facts and, circumstances of the case, the process undertaken by the appellants amounts to manufacture of thing or article within the meaning of section 80IC of the Act.
14. In any case, the process amounts to production, as interpreted by the Honourable Supreme Court in the case of Sesa Goa Ltd. (supra) wherein it has been held that, the word “production” has been used in a very wide sense to mean to bring out a new product, may be not a commercially new product. In this case, undisputed and, irrefutably new product has been produced as a result of the various processes undertaken by the appellant and, as such, even on this ground, the appellants are eligible for claim of deduction u/s 80IC of the Act.
15. Now, so far as the judgement of the Honourable Supreme Court in the case of Technoweld Industries (supra), which has been heavily relied upon Revenue, the same, in our considered opinion, is fully inapplicable to the facts of the captioned instant cases. It is evident from the ‘ aforesaid {judgement that, assesses in that case, was engaged in the business of wire drawing from thicker gauge to thinner gauge by cold drawing process and, not in the manufacture of wire with different chemical / electrical/ mechanical properties/ end use and, that too after undergoing various processes, which have already been elaborately culled out above and such processes are not shown to have been carried out in the case of Technoweld Industries (supra). It is thus evident that said judgement has no semblance of resemblance to the facts of the instant case. It is settled law that, a judgment is a proposition of what it actually decides and not what can be logically or•-‘remotely deduced there-from, as has been held in the following judgements:
(a) Goodyear India Ltd. Vs. State of Haryana |SG) 1&8 ITR 402 (SC)
(b) Padmasundara Rao Vs. State of Tamil Nadu 255 ITR 153 (SC)
(c) CIT Vs. Sun Engineering Works P. Ltd. 198 ITR 297 (SC).
15.1 In fact, the Hon’ble Supreme Court in Technoweld Industries (supra) case, has referred to the decision of the Excise Tribunal in the case of Jyoti Engineering Corporation vs. Collector of Central Excise, (1989) 42 ELT100 (Tribunal).In the case ‘of Jyoti Engineering Corporation (supra) also the issue before the
Tribunal was also in respect of wire drawn from thicker gauge to thinner gauge. The process of ‘Annealing’ and the other processes undertaken by the appellants “are not shown to have been involved even in the case of Jyoti Engineering Corporation (Supra). In the case of captioned appellants, after drawing of wire, the drawn wire is subjected to various other mechanised, chemical and other processes which brings into existence a totally new product, having different properties and different integral structure. In the case of Technoweld Industries (supra) only process undertaken was drawing of wire, whereas in the present cases, other processes are also carried Out after drawing of wire. It is only after considering the entire set of processes undertaken by the appellants, it can be said that a new product tomes into existence and the same amounts to manufacturing. Thus, factually speaking, the process and the product considered in the case of Technoweld Industries (supra) stand on a different footing than those in the present cases.
15.2. Placed in the factual scenario that has emerged, in our humble opinion, the decision in the case of Technoweld Industries (supra) relied upon by the Revenue, does not support its stand, wherein the test of marketability was neither contended and, nor decided. In fact, eve in the expression ‘production’ was never a subject matter of consideration. Likewise, in the case of . Lai Kunwai Stone Crusher (P) Ltd (supra) relied upon by the Revenue, the activities of the assessee therein consisted §f conversion of boulder stone into gilty after cutting the boulders, It was in this backdrop that the Honourable Court came to the conclusion that cutting of boulders right have been with the aid of machinery but ,the original commodity retained a substantial identity in spite of processing carried out by the assessee and was, such not regarded as manufacturing or producing any or thing. As against this, in the captioned cases, raw wire rod has undergone distinct change as a result of the various processes undertaken and, has thus not retained its original substantial identity. On the other hand, recently the Honourable Supreme Court in the case of Indian Cine Agencies (supra) has held that, conversion of jumbo rolls of photographic films into small flats and, rolls in desired sizes is manufacture. It was also observed therein as under:
15.3. Applying the aforesaid parity of reasoning, it is noteworthy that wire and wire rods come under chapter 74-76 under the Central Excise classification whereas insulated wires and, paper coated insulated wires come under chapter 85 and, therefore classification under different chapters also support the stand that, the industrial undertakings of the appellants are manufacturing units.
15.4. In the light of the foregoing discussion we are of the view that the appellants, in the given set of, facts, are eligible for deduction under section 80-lC of the Act, as their industrial undertakings can be said; to have manufactured or produced an article or a thing.
