TaxTMI 
TaxTMI 
TaxTMI 
2007 (1) TMI 234
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....ioner of Income-tax (Appeals) erred in confirming the disallowance of deduction under section 80-IB holding that the asses see is not engaged in manufacturing activities and instead is only doing trading of mushroom powder in a capsule form though the assessee is engaged in the operation of production of capsules. (3) The Commissioner of Income-tax (Appeals) erred in confirming the disallowance of payment of differential duty of tax demanded by the Excise Department. Alternatively, the Commissioner of Income-tax (Appeals) has erred in not directing the Assessing Officer to consider this claim of the assessee as a petition for rectification under section 154 of the Income-tax Act since this payment was actually made as per section 43B of the Act. (4) The Commissioner of Income-tax (Appeals) erred in not deciding the issue on the merits the taxability of interest income of Rs. 4,41,564 and Rs.7,53,385 for the assessment years 2003-04 and 2004-05, respectively, though the Assessing Officer treated it as income from other sources. (5) The Commissioner of Income-tax (Appeals) erred in confirming the levy of interest under sections 234B and 234C of the Income-tax Act. 2. The brief....
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....powder was put in hard gelatin capsules which are polished and inspected before bottling in HDPE bottles which also contain Dhy Drating (dehydrating) agents. These bottles are capped, labelled, shrink packed and dispatched to the warehouse for final packing. According to the Department, the assessee' s job is limited to packing the pre-prepared powder in the form of capsules before marketing it. The assessee has got imported requisite mushroom powder RG and GC which is manufactured by the assessee' s parent company, a non-resident, by name M/s. DXN International (P) Ltd. The Department also relied on the agreement entered into by the assessee with M/s DXN International (P) Ltd., and the assessee-company did not have the know-how of any kind. According to the Department, the assessee has not manufactured any product to enable it to claim deduction under section 80-IB of the Act. 5. Before us, the contention of the assessee is that the Assessing Officer relied on the sworn statement and other information collected from its production in charge, and the copy of the sworn statement obtained from the production in charge on December 23, 2005, was not furnished to the assessee a....
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....of filled capsules are within the limit. Simultaneously, quality control will come for inspection and take samples of the filled capsules to carry out the necessary tests like disintegration test, microbiological test, moisture content test, stability test, weight test parameters and specification test, etc. The filling section maintains a separate production record. (ii) Polishing section.-In polishing, the outer surface of the capsules having powder masses shall be polished by polishing machine operated by the said machine operator. Again, QC inspector/personnel shall inspect and observe the quality of the capsules so polished. This section also maintains a separate job record. (iii) Sorting/inspection section.-The operators will inspect and sort out the defected capsules as per in-house specification. Again, QC inspector and personnel will inspect the capsules sorted and the capsules defected. Those defected filled capsules will be rejected accordingly. This section also maintains separate job record. (iv) Counting and bottling section.-In counting and bottling, the filled capsules are counted either in 30 Nos. or 90 Nos. by the operator via the counting plate, then it wil....
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....ed goods" shall be stored and kept at separate places so as to comply with the Drugs and Cosmetics Rules, 1945. 8. From the above, it is evident that no injury was caused to the assessee by the Departmental authorities. The purpose of natural justice was not to defeat the justice but to promote and protect the justice. The argument of the assessee is only superficial and peripheral for which this forum cannot be a party. After going through the entire facts of the case, we feel that no useful purpose will be served by setting aside the matter back to the Departmental authorities for giving an opportunity to the assessee to cross-examine the production in charge. The object of the principles of natural justice is to foster justice and not to thwart justice. The principles of natural justice should reflect and guard the values of fairness and impartiality. It is true that audi alteram partem and nemo judex in causa sua are twin formidable pillars supporting the natural justice. In order to decide whether in the instant case cross-examination of production in charge was necessary, it becomes necessary to know whether the appellant assessee suffered any prejudice on account of non-fur....
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....nature of the decision-making body, the nature of the action proposed, the grounds on which the action is proposed, the material on which the allegations are based, the attitude of the party against whom the action is proposed in showing cause against such proposed action, the nature of the plea raised by him, his admissions by conduct or otherwise of some or all of the allegations, the effect of the ruling made and all other matters which help the mind of the authority in coming to a fair conclusion on the question. In Smt. Maneka Gandhi v. Union of India, AIR 1978 SC 597, the Supreme Court was pleased to observe at page 628 that : "The rules of natural justice are not embodied rules. What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the enquiry is held and the constitution of the Tribunal or body of persons appointed for that purpose. Whenever a complaint is made before a court that some principle of natural justice had been contravened the court has to decide whether the observance of that rule was necessary for a just decision on the facts of the ....
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....he original commodity experiences a change. But it is only when the change, or a series of changes, take 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." 11. Learned counsel for the assessee submitted that the final product of the assessee is in the capsule form which is different from original raw material used and it is a new and distinct product from what it was prior to the process employed. For this process of production, the assessee has obtained various licence and the assessee has carried out various process by which imported raw material has to undergo changes to become final product. He further submitted that by putting the raw mushroom powder into gelatin capsule, new product has been emerged which is different from raw material and only capsulation makes the product marketable and consumable. It is only because of the capsulation, the product becomes digestible in the human system slowly and delayedly and because of this capsulation, drug will function in the human body in the manner it is expected to function and wi....
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.... is the process or activity, which brings into existence new, identifiable and distinct goods. Goods have been understood to be articles known as identifiable articles known in the market as goods and marketed or marketable in the market as such. It was an essential requirement to be goods to be wrapped in paper. Anything required to make the goods marketable must form part of the manufacture and any raw material or any materials used for the same would be a component part of the end-product. Processes incidental or ancillary to wrapping are to be included in the process of manufacture, and manufacture in the sense to bring the goods into existence, as these are known in the market. Here the paper to be marketed is not complete until it is wrapped in wrapping paper. Apart from that, under rule 56A of the Central Excise Rules, the assessee would be entitled to the benefit of deduction of the duty to be charged on all wrapping papers, if any. 14. Learned counsel for the assessee further placed reliance in the case of CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412, wherein the honourable Supreme Court has categorically held as under (headnote) : "The word ' production' h....
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....ually in fine powder which, combined with freedom or near-freedom from adjuncts, provides rapid and uniform release of medicament in the gastro-intestinal tract. 7. The shells can be specified (with titanium dioxide) or coloured, to give protection from light (contrast cachets). 8. The shells are made to very fine limits ; hence the cap and base fit well and give substantial protection against air and moisture (contrast cachets). 9. The shells are physiologically inert and easily and quickly digested in the gastrointestinal tract. 10. Presentation of a drug in capsules, rather than in tablets, allows quicker submission of a new drug for clinical trials, because fewer development problems are involved. Also it is easier to vary the dose. 11. Complicated machinery is unnecessary for the extemporaneous dispensing of a few capsules (contrast tablets). 17. In a nutshell, he submitted that the preparation of capsule is very important activity of the manufacturing process. 18. The learned Departmental representative submitted that the assessee is importing bulk mushroom powder and putting it in the gelatin capsules. Even these empty capsules are not being manufactured by the a....
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.... (iv) S. P. Jaiswal Estates P. Ltd. v. CIT [1995] 216 ITR 145 (Cal) (v) CIT v. Bharath Sea Foods [1999] 237 ITR 46 (Ker) (vi) CIT v. Relish Foods [1999] 237 ITR 59 (SC) (vii) CIT v. Venkateswara Hatcheries P. Ltd. [1999] 237 ITR 174 (SC) (viii) CIT v. Hindusthan Metal Refining Works P. Ltd. [1981] 128 ITR 472 (Cal) (ix) CIT v. Lucky Mineral P. Ltd. [1997] 226 ITR 245 (Raj) (x) CIT v. Anjani Kumar and Co. Pvt. Ltd. [1997] 227 ITR 786 (Raj). 20. We have heard the rival submissions and perused the material on record. We have gone through the case law relied on by the parties. The main contention of the assessee is that it is engaged in the capsulation of mushroom powder. This capsulation makes the commodity marketable and consumable. Without capsulation the commodity has no marketable value. Only after capsulation, the commodity becomes marketable and consumable and becomes distinct from the original commodity and the gelatin is swallowed along with the mushroom powder which leads to uniform release of the medicament in the gastrointestinal tract. The capsulation involves various stages of production like filling into the capsules, polishing of the surface, sorting, ins....
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....ing. 24. Now, the first question for consideration before us is whether there is a difference between the expressions "produce" and "manufacture" or they are exactly synonyms. The words "manufacture" or "production" have not been defined in the Income-tax Act, therefore, have to be accepted in their ordinary meaning as part of the statute. The expressions "manufacture" and "produce/production" have definite connotations in the judicial vocabulary and have been held to be not an expression of art. The expression "manufacture" has been explained in the Black' s Law Dictionary as under : "The process or operation of making goods or any material produced by hand, by machinery or by other agency ; anything made from raw materials by the hand, by machinery, or by art. The pro duction of articles for use from raw and prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine." The aforesaid explanation has been given as noun. 25. The Black' s Law Dictionary defines "manufacture" as the making of goods or wares by manual labour or by machinery, especially on a large scale, has expanded as workmanship and art ....
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....icate, make, manufacture (material objects) ; (e) To produce the goods, money, results." 30. Apparently, the expression used in the provision with which we are concerned relates to "produce" . 31. In contrast, the word "manufacture" has been defined to mean : "1b. The action or process of making articles or material (in modern use, on a large scale) by the application of physical labour, or mechanical power. 1. To work up (material) into forms suitable for use" . 32. These definitions denote one inherent property of the term "manufacture" that is, existence of raw material which is subjected to a certain process, whether manually or by machine or by chemical treatment and as a result of which it undergoes a change and brings about a new commodity known to the commercial world. Thus, manufacture is an activity which is applied to an existing product known as raw material for altering its face to something else. 33. However, the question still arises whether the expression "produce" is wide enough to cover even a process which though makes the commodity more marketable does not result in bringing into existence any article or thing which did not earlier exist or brought out....
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....7, where the United States Supreme Court held that dressed and frozen chicken was not a commercially distinct article from the original chicken. It was pointed out (page 66) : "killing, dressing and freezing a chicken is certainly a change in the commodity. But, it is no more drastic a change than the change which takes place in milk from pasteurizing, homogenizing, adding vitamin concentrates, standardizing, and, bottling. . . There is hardly less difference between cotton in the field and cotton at the gin or in the bale or between cotton seed in the field and cotton seed at the gin, than between a chicken in the pen and one that is dressed. The ginned and baled cotton and the cotton seed, as well as the dressed chicken, have gone through a processing stage. But, neither has been ' manufactured' in the normal sense of the word." 37. In a recent case of Aman Marble Industries P. Ltd. v. CCE [2005] 1 SCC 279 ; [2003] 58 RLT 595, the Supreme Court has held that cutting of marble block into marble slabs or tiles does not amount to manufacture as in both the forms marble remains marble. However, for the present context, the principle which emerged from the Supreme Court cas....
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....essee. The court referring to its earlier decision in Pio Food Packers [1980] 46 STC 63 (SC) ; [1980] Supp. SCC 174, reiterated the difference as under (page 423) : " Commonly, manufacture is the end result of one or more pro cesses through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing, at each stage. With each process suffered, the original commodity experiences a change. But, it is only when the change, or a series of changes, take 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." 42. Coming to expression "production", the court added as seen in page 423 that : "The word ' production' or ' produce', when used in juxtaposition with the word ' manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products wh....
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....anufacture of another commodity. The goods purchased should be consumed and the consumption should be in the process of manufacture and result must be manufacture of other goods. There are special criteria for determining whether the commodity is consumed in the manufacture of another. Generally, the prevalent test is whether the article produced is regarded in the trade by those who deal in it as distinct in identity from the commodity involved in its manufacture. Manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another and indeed there may be special stages of processing and different kinds of processing. In each process, the original commodity experiences a change. It is only when a change or series of changes takes place in the commodity, the point that it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article with the manufacturing process can be said to take place. Where there is no essential difference in identity between the original commodity and processed article, it is not possible to say that one c....
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....ence the ratio of this case also cannot be applied to the present case. The Supreme Court in the case of Aspinwall and Co. Ltd. v. CIT [2001] 251 ITR 323 and in the case of N. C. Budharaja [1993] 204 ITR 412 was of the opinion that bringing into existence a new commodity is of essence of manufacture or production. 48. Now, the question before us is whether putting the mushroom powder into the gelatin capsule to make it fit for marketing, the product can be considered as producing the thing or article under section 80-IB. It is a matter of fact that mushroom powder can be consumed in bulk form nakedly without being put into any enclosure or it can be consumed by putting into the gelatin capsule. Putting of the mushroom powder into the gelatin capsule is for the purpose of smoothening its marketability which is nothing but a processing which does not amount to manufacture or production of a thing or article so as to fulfil the conditions stipulated for availing of the benefit under section 80-IB of the Act. For this purpose, we feel it pertinent to place reliance on the judgment of the Bombay High Court in the case of Nilgiri Ceylon Tea Supplying Co. v. State of Bombay [1959] 10 STC....