Sec 2(29BA) Process of drawing wire of thinner gauge from thicker gauge would amount to manufacture

Brief of the case:

The Hon’ble Himachal Pradesh High Court in the case of CIT vs. Pawan Agarwal and others that the activity of drawing wires of thinner gauges from wires and rods of thicker gauges amount to manufacture as the paper insulated wires and strips of copper and aluminum manufactured by the assessees were different from its raw material, having different use and also having different commercial identification.

Facts of the case:

• The assessees have industrial undertaking in backward area of Himachal Pradesh and have claimed deductions under Section 80 IC of the Act. The assessee was engaged in manufacturing of paper insulated wires and strips of copper and aluminum, which are used in the oil filled electrical transformers. During the course of assessment proceedings AO held that the activity of drawing wires of thinner gauges from wires and rods of thicker gauges does not amount to manufacture or production as wire did not undergo any change in the process and the resultant commodity was also wire, though of different dimensions.
• Accordingly AO disallowed the deduction claimed u/s 80IC as the process was not amounting to manufacture. The order of assessment was confirmed by CIT (Appeals). On appeal before tribunal , the assessee’s appeal was allowed by it by holding that the thin and thick wires cannot be said to be same products as both them have different use and have different commercial name. As such the process has brought a change in raw material resulting in a new product having different name, character and use.

Contention of the Assessee:

Learned counsel for the assessee simply supported the order of tribunal passed in his favour and not pleaded anything additionally.

Contention of the Revenue:

• Revenue placed reliance on the decision of Hon’ble Supreme Court in Collector of Central Excise vs. Technoweld Industries Ltd, (2003) 11 SCC 798 and contended that activity of drawing wires of thinner gauges from wires and rods of thicker gauges does not amount to manufacture or production as the original commodity i.e. wire did not undergo any change in the process and the resultant commodity was also wire.

• Since process is not a manufacturing activity as the deduction u/s 80IC cannot be claimed.

Issue before the High Court:

Whether the process of drawing wire of thinner gauge from wire or rods of thicker gauge, followed by finishing processes like annealing would amount to manufacture or production or consequently whether the assessee was eligible for deduction under Section 80 IC of the Income Tax Act?

Held by Hon’ble High Court:

• The word ‘manufacture’ was not defined under the Act for the first time by way of insertion of Section 2 (29BA) of the Finance Act, 2009 introduced w.e.f. 1.4.2009 which provides that manufacture is a change by which a new product having different name , character and use arises.
• High relied on an number of judgments of Supreme Court and various other High Courts the crux of those is that “manufacture” can be said to have taken place only when there is transformation of raw materials into a new and different article having a different identity, characteristic and use. Mere improvement in quality does not amount to manufacture. Thus, the essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made.
• Applying the ratio of above judgements and considering the definition of manufacture as provided in Sec 2(29BA), the court held that in the present case qualitative changes effected in the raw material by various means like annealing, quenching, acid pickling and flux application, galvanizing and following the zinc hot dip, definitely amounts to manufacture. It is because there is a complete transformation of raw materials into a new and different article having a different identity, characteristic and use as there is no error in finding of tribunal that the paper insulated wires and strips of copper and aluminum being manufactured by the assessees were different from its raw material and further it is commercially known different in the market.
• Therefore, the assessee is entitled to claim deduction u/s 80IC as the products processed by it is manufacturing activity. In result appeal of the revenue was dismissed.