Manufacture through gas compression recognised where natural gas becomes a distinct fuel product for tax purposes.

Compressing natural gas into compressed natural gas was treated as manufacture and production because the process created a commercially distinct product with a different name, character and use. Natural gas in its original form was not suitable for use as automobile fuel, whereas compressed natural gas emerged as a separate fuel product after processing. The statutory concept of manufacture was applied to cover transformation of a non-living physical object into a new and distinct article. The Tribunal's view that the activity was merely compression was rejected, and the issue was answered in favour of the assessee.

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Issues: Whether conversion of natural gas into compressed natural gas results in manufacture or production for the purposes of the Income-tax Act, 1961.

Analysis: The activity of compressing natural gas was found to create a commodity having a distinct name, character and use. Natural gas in its original form was not suitable for use as automobile fuel, whereas compressed natural gas emerged after processing as a separate commercially identifiable product used as fuel. The Court applied the statutory concept of manufacture, which covers a change in a non-living physical object resulting in transformation into a new and distinct object having a different name, character and use. The Tribunal had not adequately considered this aspect and had incorrectly treated the process as mere compression without emergence of a new product.

Conclusion: The process amounts to manufacture and production; the question was answered in favour of the assessee and against the department.

Ratio Decidendi: Where processing of an article results in a new commodity with a distinct name, character and use, the activity constitutes manufacture.

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