IN THE ITAT KOLKATA BENCH (Special bench)
Madhu Jayanti International Ltd.
V/s.
Deputy Commissioner of Income Tax
IT Appeal Nos. 2039 (kol.) of 2006
and 1463 & 2089 (Kol.) of 2007
[Assessment Years 2003-04 and 2004-05]
Date of Pronouncement – July 20, 2012
ORDER
The Hon’ble President of Income-tax Appellate Tribunal, on a reference made by a Division Bench, has constituted this Special Bench by referring the following question for consideration and decision:
“Whether, on the facts and in the circumstances of the case, the Assessees, who are in the business of blending & processing of tea and export thereof, can be said to be “Manufacturer/Producer” of the tea for the purpose of Section 10A/10B of the I.T. Act, 1961?”
2. We will take up brief facts in the case of Madhu Jayanti International Ltd. in ITA No. 1463/Kol/2007, which is a lead case. Brief facts are that the assessee is engaged in the business of manufacturing, processing, exporting and dealing in various commodities, more particularly, tea, coffee, jute, pepper, chillies, cardamom, turmeric and similar other spices, etc. The assessee, as per the claim is a 100% export oriented undertaking within the meaning of section 10B of the Income-Tax Act, 1961 (in short ‘the Act’) and claimed exemption under section 10B of the Act. The assessee buys tea from auctions held in Tea Board recognized Auction centres at Kolkata, Guwahati, Siliguri, Cochin, Coimbatore and Coonoor. The assessee conceded the factual position that it imports small quantity of tea of the type and quality not produced in India. It further conceded the factual position that it does not grow or manufacture any tea. According to the assessee, tea so bought in different auctions is processed with a view to remove all dust and foreign substances and thereafter it blends different varieties of tea to make it of ‘uniform and consistent’ quality throughout the year. Thereafter, it is packed in consumer packets of 50,100,250,500 or 1000 gms. etc. or packed in the form of tea bags of 1.94 gms or 2 gms etc., as the case may be. During the relevant assessment year 2004-05, the assessee filed its return of income on 01.11.2004 along with the tax audit report in form no.3CA/3CD and in form no.3CEB.
3. The A.O. issued notices under sections 143(2) and 142(1) of the Act for framing assessment. The assessee claimed exemption under section 10B of the Act in respect of its 100% Export Oriented Undertaking (EOU) for export of manufactured jute bags, packet tea, tea bags, bulk tea, etc. The assessee also claimed deduction under section 80HHC of the Act. During the course of assessment proceedings, the AO, while framing assessment vide order dated 08.12.2006 under section 143(3) of the Act in respect of its 100% EOU observed that the assessee was not entitled to any exemption under section 10B as well deduction under section 80HHC of the Act. Aggrieved, assessee preferred appeal before CIT(A), who discussing the provisions of section 10B of the Act and various case laws, rejected the claim of assessee of exemption under section 10B of the Act in respect of export of blending of tea, by giving following findings in para 2.3 of the impugned order.
“2.3 Exemption u/s. 10B applies to an assessee; as already mentioned earlier, in which the undertaking begins to “manufacture” or “produce” articles or thing or computer software…… As against the contention of the Ld. A/R that time word ‘manufacture’ or ‘production’ has not been defined in the Act or this section, Explanation 4 at the end of the section (effective from 01.4.04 i.e. Assessment year 2004-05 and onwards) mentions as follows. “For the purpose of this section ‘manufacture’ or ‘production’ shall include the cutting and polishing of precious and semi-precious stones”. This means the word ‘manufacture’ or ‘production’ will have the meaning as understood in common parlance or as defined judicially plus the activity mentioned in this Explanation. In the case the appellant company engaged in the blending of tea. The word ‘blend’ has been defined in the Concise Oxford Dictionary (Tenth Edition) as “(1) Mix or combine something else, (ii,) form a harmonious combination or part of a whole, (iii) a mixture of different things or people.” The Ld. A/R has sought to explain the activities of blending of tea as carried out by the appellant company. In short, it purchases various kinds of tea from action houses, mix or b1end this mechanically, in automatic electrical operated blending drum and then prepares different packages of various sizes and weight according to customer’s needs. In short, the input is tea and output is also of tea. The intervening process is known as “blending” or “mixing” mechanically and packaging the same according to specific commercial needs. In this case the out-put is hardly distinguishable from the input. No physical or chemical change takes place during the process of blending. In this case the definition of ‘manufacturing” as given by the Hon’ble Apex Court in its signal decision in the case of collector of Central Excise v. Kutty Flush Door and Furniture Pvt. Ltd. (1988) 17 ECC 37) the Hon’ble Apex Court held that “manufacturing refers to production of articles for use from raw, semi-raw or prepared materials by giving these materials new forms, qualities, properties or combination whether by hand labour or machinery” It may be worthwhile to note that manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment labour and manipulation but something was necessary and there must be transformation; a new and different article must emerge having a definite name, greater use; thus manufacture implies bringing in something new. Almost similar definition has been provided by the Hon’ble Apex Court in another singal decision i.e. CIT v. N. S. Budharaja & Co. [1993] 204 ITR 412. Similarly, in another important case i.e. Ujagar Prints v. Union of India & hers [1989] 179 ITR 317, the Hon’ble Apex Court held that “‘manufacture’ Involves the change or series of changes brought about by the application of process that take the commodity where commercially it can no longer be regarded as the original commodity but is instead recognized as distinct, new article that has emerged as a result of the process.” Applying this yardstick of manufacturing to the process of blending of tea (as is the case in this appeal), It can clearly be seen that blending of tea can under no stretch of imagination be Included in the definition of “manufacture” as has expounded by the Hon’ble Apex Court in these decisions. So far as blending of tea is concerned two important decisions of the Hon’ble Jurisdictional High Court are worth mentioning. The first one is APJ Pvt. Ltd. v. CIT 206 ITR 367 where the Hon’ble Court held that the blending of different brands of tea does not constitute ‘manufacture’ or ‘production’ of articles. In the case of Brooke Bond India Ltd. v. CIT [2004] 269 ITR 232 the Hon’ble Jurisdictional High Court, after dismissing the appeal, held that “dismissal of the special leave petition even on the merits in respect of the judgement of the different Bench of the Karnataka High Court did not amount to a declaration of law by the Supreme Court thereby making it operative under article 141 of the constitution. In such circumstances the finding of the co-ordinate bench of the High Court in the case of Appejay Pvt. Ltd. v. CIT [1993-94] 206 ITR 367 being a finding that the assessee was not entitled to a deduction for investment allowance u/s. 32A of the Act as the assessee could not be held to be a manufacturer or producer of articles or goods. In this regard the Ld. A/R argued during the course of appellate proceedings that Hon’ble Apex Court has dismissed the SLP filed by the department against the judgement of the Karnataka High Court (Supra) with the following observation. “Delay condoned; the special leave petitions are dismissed on merit”. ‘In this regard the Hon’ble Calcutta High Court while quoting the decision of the Hon’ble Apex Court in the case of Kunhayammed v. State of Kerala 245 ITR 360 observed as under:
To sum up, our conclusions are:
(iv) An order refusing special leave to appeal maybe a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the court was not inclined to exercise its discretion so as to allow the appeal being filed.
(v) If the order refusing leave to appeal is a speaking order, i.e. gives reasons for refusing the grant of leave then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within tile meaning of article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the apex court of the country. But, this does not amount to saying that the order of the court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent preceding between the parties.
Similar view was taken by the apex Court in the case of Supreme Court Employees’ Welfare Association, AIR 1990 SC 334.”
Accordingly, the arguments of the Ld A/R stand rejected and the two decisions expounded by the Hon’ble jurisdictional High Court n the case of Appejay Pvt. Ltd. and Brooke Bond India Ltd. will squarely apply in this case. Although these two decisions have been rendered with reference to admissibility the claim of deduction u/s. 32A, yet the basic issue decided is whether blending of tea constitutes “manufacturing” or “production”. In both these decisions the jurisdictional High Court has ordered against the appellant company. Respectfully following the same, the arguments of the Ld. A/R are rejected and the decision of the AO not to allow u/s. 10B in respect of export of blended tea is upheld.”
Aggrieved, assessee preferred second appeal before Tribunal.
4. Ld. Counsel for the assessee Shri G. C. Srivastava stated facts that assessee is a 100% EOU granted registration vide Development Commissioner, Falta Special Economic Zone (FSEZ) and Falta Export Processing Zone (FEPZ), Govt. of India, Ministry of Commerce under provisions of Export Oriented Scheme as envisaged in Export /Import Policy of 1995-2000 vide letter bearing no. PGR: 650 (1995)/EOB/739/95 dated 26.12.1995 for establishment of a new industrial undertaking at Paharpur, Kolkata in the state of West Bengal for the manufacture and export of packet tea /tea bags / bulk tea, subject to the conditions imposed therein. Copy of the terms given by the Development Commissioner, FSEZ/FEPZ, Govt. of India, Ministry of Commerce vide letter dated 26.12.1995, filed before the AO, during assessment proceedings and even before CIT(A) and is now filed by the assessee in its paper book at pages 120 to 121. A green card was also issued to the assessee company by the Development Commissioner FSEZ/FEPZ and copy of the said green card which is valid upto 31.11.2006, is enclosed at assessee’s paper book pages 122-123 and which were also filed before the lower authorities during the relevant proceedings. The assessee company is also registered with the Central Excise authorities in terms of registration certificate no. AABCN 7502RXN001 dated 03.07.2003 issued by the Assistant Commissioner of Customs 100% EOU Customs House, Kolkata under the Central Excise Rules, 1944. This copy of registration certificate issued by the Central Excise authorities is filed in assessee’s paper book at page 124, which was also filed before AO as well as before CIT(A). The assessee company entered into an agreement with Trot Private Ltd. having their registered office at 19/4A, Munshiganj Road, Tollygunge, Kolkata -700023 for carrying out, on contract basis, various manufacturing, processing, blending, packing including loading and unloading activities for and on behalf of the assessee company. This agreement was initially entered into on 15.05.1996 for 10 years and later revised on 15th May, 2006. The above-said Trot Pvt. Ltd. had provided their own premises with shop floor and warehouse etc. and in turn, the assessee company provided various machineries to the said company for carrying out operations set out hereinabove. All raw materials, packing materials, spares and finished goods are owned by the assessee company and stored at the warehouse facilities provided by the Trot Pvt. Ltd. and some raw materials are stored at other warehouses hired by assessee.
5. The ld. Counsel for the assessee, in view of the above facts, stated that in relation to its 100% EOU unit, the assessee company buys tea of different grades in bulk from various persons and particularly, from recognized auction centres in India and thereafter blend the same in appropriate proportions in accordance with the technical advice received from experts, package the same in specialized paper bags with screen printed specifications, as advised in the respective export orders and thereafter export such packaged tea on CIF basis to countries overseas. The export order is supported by Letters of Credit (L/C), as received by the assessee company from the overseas buyers for export of tea, which contains specifications of tea to be exported. Such specifications are analysed by tea experts including directors of the company as well as tea testers outsourced on specific requirements. According to the ld. Counsel, thereafter, samples of different grades and brands of tea available in tea auctions are analyzed and identified, having regard to the particular specification set out in the export order. The ld. Counsel narrated one more fact that tea being an agricultural crop, is subject to variations in quality and taste from garden to garden because of soil, altitude, climate, harvesting and processing etc. According to him, each garden has its own subtle shade, flavour, colour, brightness, strength and aroma. He also stated that the assessee company also imports tea from overseas to meet the quality specifications of overseas buyers. The ld. Counsel stated that the blending of different varieties of tea is made container-wise and details of such blending are recorded in the ‘blend sheets’. He also drew our attention to a sample copy whereof, which was filed before the lower authorities also and even now, which are filed at assessee’s paper book at pages 127 and 128. He stated that during the relevant previous year 2003-04, relevant to assessment year 2004-05, Trot Pvt. Ltd., on contract basis, for carrying out various activities at its factory premises i.e., unloading, blending, filling in paper sacks, marking of paper sacks, weighment, stacking and container stuffing etc. in relation to the tea purchased by it from various auction centers in India and also imported by it for export purposes. The ld. Counsel for the assessee stated that some export orders require the pre-packing inspection and analysis of the blended tea conforming to the specifications set out in the respective export orders. Such inspection and certification, in the instant case, was carried out by Cargo Inspectors & Superintendence Co. Pvt. Ltd., SGS International Certification Services S.A. etc. through their respective representatives. He stated that before packaging the blended tea, the above-stated agencies used to carry out inspection/ supervision by drawing samples so as to ensure that the packaged tea is free from foreign smell, impurities, free from being mouldi, musty or acidic and is also fit for human consumption and conforms to the specifications as to quality controls as set out in the respective export orders.
6. The ld. Counsel for the assessee explained the process involved in export of blended and processed tea by the assessee which involves various steps right from the purchase of tea in bulk packaging from different Auction Centres in India and overseas to the physical stuffing of the packaged teas in containers for shipment. He stated that teas are purchased mainly from six tea auction centres in India at Kolkata, Siliguri, Guwahati, Cochin, Conoor and Coimbatore. He also stated that it also imported tea from various overseas countries including, inter alia, Argentina, China, Kenya, Sri Lanka etc. According to the Counsel, teas are tasted at testing rooms by assessee’s expert tasters from samples of teas bought, which are of different qualities and grades, and thereafter blend sheets are prepared which indicates teas of different qualities/ grades which are to be blended by the contractors on behalf of the assessee to achieve the required standard of tea for export. According to him, tea purchased in various auction centres is passed through a series of automatic cleaning processes through machines owned by the assessee to remove diverse foreign materials including metals, particles from the packaging materials, jute strings, etc. Teas of different qualities/grades as selected are fed into the blending drum on the basis of blend sheets prepared by the experts and then the contractor, in the present case, Trot Pvt. Ltd. gets the teas blended in the automatic electrically operated blending drums. After completion of each blend, representatives of the inspection agencies draw samples blend-wise and they make the composite sample and seal with their markings. One such sample of tea from each blend was tasted on leaf, liquor, infusion and grades against buyer’s specifications and also for submission to an independent laboratory for analysis. According to the Counsel, they analyses the total ash, acid insoluble ash, water soluble ash, water extract, crude fibre and alkalinity of the tea, moisture and submit their report. In the case of bulk order, the tea is packed in packs of 20 kgs or more and dispatched for export. The blended tea is also filled into paper sacks and these paper sacks are made of craft paper and have a metalized polyester inner ply. For tea bags, the hoppers with blended tea are connected to the tea bagging machines. The filter paper rolls, wire for staples, thread and tags for tea bags are loaded on the machines which automatically manufacture the tea bags. The quantity of tea that has to go in each bag is measured using sophisticated and automatic volumetric measurement systems in the tea bagging machines. The two major types of tea bags are single chamber and double chamber. The tea bags are then packed into a carton. The ld. Counsel also explained the process of packing in pouches. The pouches are produced in an FFS machine which fills and seals the tea in laminated pouches and the quantity required to be packed in each pouch is measured through electro-mechanical weighing system which is in-built in the machine itself. Some pouches are directly packed into CFC boxes and others are packed in cartons. These cartons are then ready for export. The ld. Counsel for the assessee explained the entire process of manufacturing and blending of different teas.
7. The ld. Counsel for the assessee drew our attention to assessee’s paper book-IV at page 387 where percentage of value addition is given. The same reads as under:
Details of Sales from 100% EOU during Financial Year 2003-04 (AY 2004-05)
