2008 (11) TMI 15 - SC - Income Tax

Converting jumbo photographic film rolls into small flats constitutes manufacturing activity under tax law

M/s India Cine Agencies & Computer graphics Ltd. Versus CIT

The SC held that conversion of jumbo rolls of photographic films into small flats and rolls constituted manufacturing activity. The court established that ... Entitlement of benefit in terms of Section 32AB, Section 80HH and Section 80I - effect of conversion of Jumbo rolls of photographic films into small flats and rolls in the desired sizes - Whether activity undertaken was 'manufacture' or 'production' - Meaning of word 'manufacture' and 'production' - HELD THAT:- Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes 'manufacture' takes place and liability to duty is attracted. The expressions 'manufacture' and 'produce' are normally associated with movables articles and goods, big and small but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road and a building. The matter can yet be looked from another angle. If there was no manufacturing activity, then the question of referring to Item 10 of the Eleventh Schedule for the purpose of exclusion does not arise. The Eleventh Schedule, which was inserted by Finance (No.2) Act, 1977 w.e.f. 1.4.1978 has reference to Sections 32A, 32AB, 80CC (3)(a)(i), 80-I(2), 80J(4) and 88A (3)(a)(i) of the Act. In view of what has been stated above the appeals deserve to be allowed which we direct. Issues:Entitlement of benefit under Section 32AB, Section 80HH, and Section 80I of the Income Tax Act, 1961 due to the conversion of Jumbo rolls of photographic films into small flats and rolls.Analysis:1. The core issue in the appeals revolved around determining whether the conversion of Jumbo rolls of photographic films into smaller flats and rolls constituted manufacture or production for the purpose of claiming tax benefits under the Income Tax Act, 1961. The contention of the assessees was that such conversion amounted to manufacture or production, while the revenue argued otherwise, stating it did not qualify as either. High Courts in some cases ruled in favor of the revenue due to the Eleventh Schedule's Item 10, which disallowed deductions. The appeals were filed by the assesses challenging these decisions.2. The definition of 'manufacture' was crucial in determining the outcome of the appeals. 'Manufacture' involves the process of making goods or materials by hand, machinery, or other means, resulting in a new commercial commodity distinct from the original material. Not every change constitutes manufacture, but any operation that transforms the original commodity into a new distinct article qualifies as manufacturing. The transformation must lead to a commercially different commodity capable of being sold or supplied.3. The distinction between 'manufacture' and 'production' was also highlighted. While every manufacture can be considered production, every production may not amount to manufacture. 'Production' involves bringing new goods into existence through a process that may or may not qualify as manufacturing. The test for determining whether an activity amounts to manufacture is whether a new, distinct commodity emerges with its own name, use, and character, signifying a transformation into a commercially different article.4. The judgment referenced previous cases and legal definitions to emphasize the significance of the transformation in determining whether an activity constitutes manufacture. The decision in Kores India Ltd. case affirmed that certain activities amounted to manufacture, contrary to the revenue's stance. Additionally, the meaning of 'production' was discussed in relation to mining activities involving the extraction and processing of mineral ores, emphasizing that production is broader than manufacture.5. The Eleventh Schedule's relevance was also addressed, indicating that if there was no manufacturing activity, the exclusion under Item 10 of the Eleventh Schedule would not apply. The Eleventh Schedule's provisions were linked to specific sections of the Income Tax Act, and the absence of manufacturing activity negated the need to consider this exclusion. Ultimately, the appeals were allowed in favor of the assesses based on the analysis and conclusions presented in the judgment.