2014 (5) TMI 777 - HC - Income Tax

High Court affirms metal scrap segregation as 'manufacture,' upholds Tribunal decision.

Commissioner of Income Tax Versus M/s. Ambika Recycling

The High Court ruled in favor of the assessee, affirming that the processes employed in segregating metal scrap from cable scrap qualified as 'Manufacture ... Scope of section 10B of the Act – Process of segregation of metal scrap from cable scrap - Whether the Tribunal erred in treating the processes employed by the assessee in segregating the metal scrap from cable scrap as 'Manufacture or produce' within the meaning of section 10B of the Act and whether the assessee carried out manufacturing process or not – Held that:- The term 'manufacture', which definitions are worded slightly differently, the Courts have accepted the principle of fairly universal application that where the change or series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognised as a distinct and new article that has emerged as a result of the process, it would amount to manufacture of an article or thing – Relying upon M/s. Ujagar Prints and others (II) vs. Union of India [1988 (11) TMI 106 - SUPREME COURT OF INDIA] - the word 'manufacture' implies a change but every change in the raw material is not manufacture - There must be such a transformation that a new and different article must emerge having a distinct name, character or use. In case of mix cable scrap the material would be sorted and segregated in the factory in different diameters of various lengths - jackets and upper layers would be removed mechanically in order to make them suitable for feeding in different cable cutting machines and stripping machines - various strips in the cables are removed and sorted cable scrap would be put in cable cutting machines for cutting and stripping - several types of copper wires would be generated - Impurities such as plastic, dust and other metals would be separated through this detailed process and clean copper material would be sold after baling them on the baling machines and packing for export sale. Mix metal scrap would consist of several substances such as stones, rubber, steel, ferrous as well as nonferrous metals - This would be derived mostly from dismantling of buildings and other structures and plants - Scrap as such would have no other use or marketability before subjecting to manufacturing process - Assessees would segregate and remove attachments, sorting out various metals in categories from the mix metals - This process would derive ferrous metal, other non-metallic parts etc. - the Tribunal correctly came to the conclusion that the process amounted to manufacturing - the assessee, as an EOU is required to carry out manufacturing activity and on its DTA sales is also required to pay excise duty which the assessee paid and excise department collected. The assessees were to pay excise duty on the ground that the same amounted to manufacturing activity but would be declined deduction under the Income Tax Act on the ground that the same did not - the Tribunal has merely remanded the entire issue before the AO for fresh consideration of the entire issue without any observations and/or directions, we do not see any reason to interfere - the AO shall examine whether on DTA sales by the assessee, claim of deduction under section 10B of the Act would be allowable - whether the remittances on such sales have been received in foreign exchange or not would be just one of the additional aspects of the matter – Decided against Revenue. Issues Involved:1. Whether the processes employed by the assessee in segregating the metal scrap from cable scrap qualify as 'Manufacture or produce' under section 10B of the Income-tax Act.Detailed Analysis:Central Controversy:The primary issue revolves around whether the respondent-assessee, a 100% Export Oriented Unit (EOU), engaged in a manufacturing process. The respondent imported metal scrap, segregated it, and produced various articles such as graded brass metal and metal wires, which were then re-exported. The Tribunal relied on a previous decision in the case of Assistant Commissioner of Income-tax v. Metal Recycling Industries, where similar issues were addressed.Tribunal's Observations:Both parties agreed that the facts of the present case were similar to those in Metal Recycling Industries. The Tribunal had previously decided in favor of the assessee, dismissing the revenue's appeals and allowing the assessee's appeals. The Tribunal noted that the processes employed resulted in the production of distinct and commercially different commodities from the raw material.High Court's Analysis:The High Court referred to its previous judgment in Commissioner of Income-tax v. Mitesh Impex, where it was held that the processes involved in extracting materials from imported scrap amounted to manufacturing. The High Court detailed the processes:- Mix Cable Scrap: Sorting and segregating, removing jackets and layers, cutting and stripping cables to generate clean copper material.- Mix Metal Scrap: Segregation and removal of attachments, sorting various metals from a mixture of substances.- Old/Used Transformers: Removing metals and other parts from used machinery and gadgets.The Court emphasized that these processes transformed the raw materials into new, distinct commodities that were marketable, thus qualifying as manufacturing.Legal Definitions and Precedents:The Court examined various definitions of 'manufacture' from the Income-tax Act, Central Excise Act, and Special Economic Zones Act. It noted that the term 'manufacture' implies a change resulting in a new and distinct article. The Court cited several Supreme Court decisions, including M/s. Ujagar Prints and M/s. Tungabhadra Industries, to support the principle that a series of changes that result in a new commodity qualifies as manufacturing.Specific Findings:- The processes employed by the assessee, involving manual and mechanical steps, resulted in new and distinct commodities.- The Tribunal correctly concluded that these processes amounted to manufacturing.- The assessee, as an EOU, was required to carry out manufacturing activities and paid excise duty on its Domestic Tariff Area (DTA) sales, reinforcing the manufacturing nature of its activities.Conclusion:The High Court answered the primary question in favor of the assessee, affirming that the processes employed qualified as manufacturing under section 10B of the Income-tax Act. The second question was remanded to the assessing officer for fresh consideration without specific observations or directions.Result:The Tax Appeals were dismissed with no order as to costs.