2009 (8) TMI 676 - HC - Income Tax

Blending and packing of tea held 'manufacture', qualifies for exemption under section 10A; amendment deemed clarificatory

HC allowed the appeal, holding that blending and packing of tea constitute 'manufacture' and qualify for exemption under section 10A of the Income Tax ... Eligibility for exemption u/s 10A - Special Economic Zone - Industrial unit engaged in blending and repacking of tea for export - 'manufacture' or 'production' - deduction of export profit - HELD THAT:- It is pertinent to note that though Section 10A did not contain a definition for 'manufacture', definition of the said term contained in Section 2(r) of the Special Economic Zones Act, 2005 is incorporated in Section 10AA with effect from 10-2-2006. Admittedly the said definition covers blending also. Therefore, blending and packing of tea done by the appellant-assessee qualifies for exemption under Section 10AA from 10-2-2006 onwards. We notice that 'manufacture' is given a very wide definition to take in even processing involving conversion of something to another with distinct name, character and use. Further, even refrigeration of an item which involves only freezing, repacking, labelling etc. are also covered by the definition of 'manufacture'. We are of the view that since the purpose of exemption under Section 10A is to give effect to the EXIM policy of the Government the definition of 'manufacture' contained in the EXIM Policy is applicable for the purpose of the said provision. We have already noticed that 'manufacture' as defined under the EXIM Policy has a wide and liberal meaning covering tea blending as well and so much so, blending and packing of tea qualifies for exemption under Section 10A. Besides this, appellant-industry presently in the Special Economic Zone engaged in the same process of blending and packing of tea is specifically brought under the exemption clause through incorporation of Section 2(r) of the Special Economic Zones Act, 2005, in the provisions of Section 10AA of the Income Tax Act. We are, therefore, of the view that the later amendment is only clarificatory and the definition of 'manufacture' contained in Section 2(r) of the Special Economic Zones Act, 2005, incorporated in Section 10AA of the Income Tax Act with effect from 10-2-2006, which is essentially the same as the definition contained in the EXIM Policy, applies to Section 10A also. We, therefore, hold that blending of tea is a manufacturing activity which entitles the appellant-assessee for exemption under Section 10A of the Income Tax Act for the assessment year 2004-2005. Accordingly the appeal is allowed by vacating the order of the Tribunal and by restoring the order of the first appellate authority. Issues Involved:1. Whether blending and packing of tea for export in a Special Economic Zone (SEZ) amounts to 'manufacture' or 'production' qualifying for exemption under Section 10A of the Income Tax Act for the assessment year 2004-2005.Detailed Analysis:1. Definition and Scope of 'Manufacture' under Section 10A:The primary issue revolves around whether the activities of blending and packing tea qualify as 'manufacture' or 'production' under Section 10A of the Income Tax Act for the assessment year 2004-2005. The assessee's industrial unit is located in the SEZ at Kakkanad, Kochi, and engages in blending and repacking tea for export. The assessing authority denied the deduction of export profit under Section 10A, arguing that 'blending' does not meet the criteria for 'manufacture' or 'processing.'2. Applicability of Definitions from Different Legislations:The assessee contended that, in the absence of a specific definition of 'manufacture' in the Income Tax Act, the definition from the Export Import Policy (EXIM Policy) of 2002-2007 should apply. The EXIM Policy defines 'manufacture' broadly to include processes such as repacking, labelling, and other activities that do not necessarily produce a new article with a distinctive name, character, or use. The court noted that the definition of 'manufacture' in the EXIM Policy is similar to that in Section 2(r) of the Special Economic Zones Act, 2005, which includes blending.3. Clarificatory Nature of Subsequent Amendments:The court observed that the definition of 'manufacture' in Section 2(r) of the Special Economic Zones Act, 2005, was incorporated into Section 10AA of the Income Tax Act with effect from 10-2-2006. This definition explicitly includes blending. The court held that this amendment is clarificatory, indicating that the intention was always to include such activities under 'manufacture.' Therefore, the definition should apply to Section 10A as well, even for periods before the amendment.4. Liberal Interpretation of Exemption Clauses:The court referred to the Supreme Court's principles on interpreting exemption clauses, emphasizing a liberal and purposive approach. The court cited the decision in Commissioner of Income-tax v. Gwalior Rayon Silk Mfg. Co. Ltd., which advocates for a reasonable construction of tax laws in favor of the assessee. The court concluded that the purpose of Section 10A is to implement the EXIM Policy, which aims to incentivize export-oriented units in Free Trade Zones and SEZs.5. Conclusion and Ruling:Given the broad and liberal definition of 'manufacture' in the EXIM Policy and the clarificatory nature of the subsequent amendment, the court held that blending and packing of tea qualify as 'manufacture' under Section 10A. Consequently, the assessee is entitled to the exemption for the assessment year 2004-2005. The court vacated the Tribunal's order and restored the order of the first appellate authority, allowing the appeal in favor of the assessee.Summary:The Kerala High Court ruled that blending and packing of tea for export in a Special Economic Zone qualify as 'manufacture' under Section 10A of the Income Tax Act, even for the assessment year 2004-2005. The court emphasized a liberal interpretation of the term 'manufacture,' aligning it with the definitions in the EXIM Policy and the Special Economic Zones Act, 2005. The subsequent amendment to Section 10AA, which explicitly includes blending, was deemed clarificatory, thus applicable retrospectively. The court allowed the appeal, granting the assessee the claimed tax exemption.