TaxTMI 
TaxTMI 
2005 (7) TMI 61
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.... garden and lot number. The samples of available quality are dispatched to the "blend master" who after going through his own process, suggests the mixing ratio and process of mixing for making the perfect blend of tea. The activity of blending of different types of leaves obtained from different gardens in a definite ratio results in production of a commodity having its own identity and though may not amount to manufacture, it amounts to production, which is a word of wider connotation. Therefore, it being an industrial undertaking set up in the backward industrial area and fulfilling all other conditions, is entitled to avail of the benefit of deduction equal to 100 per cent, of its profits derived from its business of producing and trading of in blended tea under the specific brand name of "Maa Betee Tea". The Assessing Officer has found that the assessee purchases different types of tea, blends them in different proportion and thereafter sells the tea. The mixing of different types of tea in no way can be said to be manufacture or production of article or thing for the purpose of claiming benefit of deduction under section 80-IA/80-IB of the Income-tax Act of 1961. The activ....
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....her dealers engaged in the like business the said issue requires to be settled by this court to minimise litigation on this issue. Considering the aforesaid circumstances, it appears to us to be a fit case in which availing of alternative remedy may not be considered a ground for not examining the issue on the merits, thus, we admitted the special appeal. Section 80-IB, under which the assessee has claimed deduction, was substituted for section 80-IA vide the Finance Act, 1999, with effect from April 1, 2000. Prior to its enactment, section 80-IA was inserted in the Act of 1961 vide the Finance (No. 2) Act, 1991, with effect from April 1, 1991. Section 80-IA, as it was originally enacted, provided that where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise of any eligible business as stated in sub-section (4) of section 80-IA, the assessee was entitled to avail of deduction equal to 100 per cent, of the profits and gains derived from such industrial undertaking for ten consecutive assessment years. Section 80-IA, in its original incarnation envisaged "where the gross total income of an as....
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....ng under clause (iii) of sub-section (2) of section 80-IB, which reads as under: "(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India: Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply if the words 'not being any article or thing specified in the list in the Eleventh Schedule' had been omitted." Learned counsel for the appellant contends that the Legislature has specifically used two expressions, namely, "manufactures" or "produces" any article or thing, therefore, the expressions "manufactures" and "produces" are not the same thing. The expression, "produces" cannot be identical and synonymous with the expression "manufactures". The expression "produces" has a wider connotation than the expression "manufactures". Bringing into existence altogether a new and distinct commodity than the raw material on which the manufacture process is applied is not an essential condition to be fulfilled to fall w....
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....essing for the purpose of selling pineapple in tins was held not to be manufacture because no new commercially distinct commodity comes into existence. The first question we have to consider 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 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 production 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. Black's Law Dictionary defines "manufacture" as the making of go....
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....h, give birth to, bear, yield (offspring, seed, fruit, etc.); d. To work up from raw material, fabricate, make, manufacture (material objects); e. To produce the goods, money, results." Apparently, the expression used in the provision with which we are concerned relates to "produce". 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." 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. 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 resul....
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.... Freight Lines v. Forzen Food Express [1995] 100 L Ed 917 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: "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, standardising, and, bottling .... There is hardly less difference between cotton in the field and cotton at the gin or in the bale or between cottonseed in the field and cottonseed at the gin, than between a chicken in the pen and one that is dressed. The ginned and baled cotton and the cottonseed, as well as the dressed chicken, have gone through a processing stage. But, neither has been 'manufactured' in the normal sense of the word." In a recent case of Aman Marble Industries (P.) Ltd. v. CCE [2005] 1 SCC 279; [2003] 58 RLT 595 (SC), 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 whi....
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..... The court referring to its earlier decision in Pio Food Packers [1980] 46 STC 63 (SC), reiterated the difference as under: "Commonly, 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 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 recognised as a new and distinct article that a manufacture can be said to take place." Coming to expression "production", the court added: "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 which emerge in the course of manufacture of goods." In the case of manufacture, the origin....
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....f the term "manufacture" or "produce", it must result in bringing into existence a thing or article which is new. This brings us to consider the Supreme Court decision in Chowgule's case [1981] 47 STC 124, on which reliance has been placed by both learned counsel. The court was considering the case of a dealer under the Central Sales Tax Act. The assessee was a private limited company carrying on the business of mixing iron ore and selling it in the export market after dressing, washing, screening and blending it. Under section 8(1)(b) of the Central Sales Tax Act, 1956, certain transactions in the course of inter-State trade or commerce are subject to lower rate of tax at 3 per cent, of the turnover. The condition is that the goods which are subject to inter-State trade or commerce must be those falling within the description referred to in sub-section (3). The court was concerned with clause (b) of sub-section (3) of section 8 which reads as under: "8.(1) Every dealer, who in the course of inter-State trade or commerce- (a) sells to the Government any goods; or (b) sells to a registered dealer other than the Government goods of the description referred to in sub-secti....
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....dity bring into existence a commercially different and distinct commodity? On an application of this test, it is clear that the blending of different qualities of ore possessing differing chemical and physical composition so as to produce ore of the contractual specifications cannot be said to involve the process of manufacture, since the ore that is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together. What is produced as a result of blending is commercially the same article, namely, ore though with different specifications than the ore which is blended and hence it cannot be said that any process of manufacture is involved in blending of ore." Applying this test to the present case, it can be said that blending of different grades of tea may on blending result in bringing tea of a particular specification, but it cannot be held to involve the process of manufacture because the tea, which arrives as a result of the blending activity cannot be regarded as a commercially new commodity. What is produced as a result of blending is commercially the same article, namely, tea, though with different combinati....
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....ifferent brands of tea which went into the mixture." The assessee relied on the later part of the judgment of Chowgule and Co.'s case [1981] 47 STC 124, wherein the court equated the blending process of iron ore with the blending of different grades of tea. However, the court clarified that the process in either case does not amount to manufacture. In other words, it does not bring into existence a new commodity, commercially different from that which has gone into the blending. Thus, blending though not manufacturing of goods amounts to processing of goods in the sense that it brings some change in the goods, hence it was entitled to the lower rate of tax under the Central Sales Tax Act. However, we are not concerned with the expression "process" in juxtaposition with expression "manufacture". The Legislature has clearly used "manufacture" and "produce" in juxtaposition of each other. We have noticed above the ratio of the decision of the Supreme Court in N.C. Budharaja's case [1993] 204 ITR 412 that in either case bringing into existence a new commodity is of essence. The Supreme Court in Chowgule's case [1981] 47 STC 124, drawing analogy between blending of iron ore and bl....
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....e apex court was dealing. "Manufacture" and "production" of tea: A perspective under the Tea Act, 1953. It is to be noticed that tea is a natural product of a bushy plant. The Tea Act, 1953, was enacted by Parliament to provide for control by the Union of the tea industry, including the control, in pursuance of the International Agreement then in force, of the cultivation of tea in, and of the export of tea from, India and for that purpose to establish a Tea Board and levy a duty of excise on the tea produced in India. The Act defines "tea" to mean the plant camellia sinensis (L) O. kuntze as well as all varieties of the product known commercially as tea made from the leaves of the plant camellia sinensis (L) O, kuntze including green tea. Significantly, it uses the expression in the main provision of the Act more than once, "the manufacture of tea". Section 4 provides for establishment and constitution of the Tea Board. The Tea Board includes representatives of owners of tea estates and gardens and growers of tea and manufacturers of tea. The Act defines "manufacturer" under section 3(i) to mean manufacturer of tea. While Chapter III provides for control over the extensio....
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.... stages. Firstly, producing of tea leaves by the owner of the garden, the second stage is manufacture of tea from green leaves plucked from the bushes, and lastly, sorting and grading tea, as it comes in different groups and different quantities not of uniform quality. The blending becomes an important part of tea marketing. Therefore, if the blending which comes after manufacture of tea is a part of the process of manufacture or making the tea marketable. The question has to be viewed from different angles. If the entire process is done by the grower of tea then the entire income being an agricultural income derived from applying process to the goods to make them fit to bring them to market as per section 2(1A) is not taxable under section 10(1) and consequently, eligibility under section 80-IB does not arise. Further, if this process is applied by different persons, the question may arise who manufactured tea. The manufacturer may not be absolved from the charge of income-tax as he is not a cultivator and for him it is not an agricultural income and in such case he is subject to tax. But, he may avail of the benefit of deduction under section 80-IB as an industrial undertak....
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....an be brought to market. The second stage is properly described as preparing or making or manufacturing of tea. The hand method for preparation of tea shoots consisting of young leaves and terminal leaf bud have their origin in antiquity. The prepared teas are designated broadly as black (fermented), green (unfermented) or oolong (semi-fermented). In its most simple form, the preparation of black tea has been described as under: "When black tea is made by the small producer, the leaf is plucked on a clear day after the dew is gone, exposed to the sun and air for at least an hour, then lightly rolled on a table to develop a red colour and an aroma. The leaves are heated in a hot iron pan, rolled, heated several additional times, and finally dried in a basket over a charcoal fire." The modernisation of tea preparation has introduced mechanised tea making. In India, when tea cultivation began, a new withering process was developed. In the new withering process, the leaves were spread on trays and left overnight, then rolled only once, and spread on the floor to ferment. Drying began in a hot iron pan and was finished, on trays placed over a charcoal fire. Hand-rolling requ....
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....d as making or manufacturing of tea which results in bringing green tea leaves to the stage of usability as tea of different grades having different chemical contents and properties depending upon the process applied and the geographical region in which the tea is grown, the soil over which plantation has taken place and the period in which the leaves have been plucked and collected from the tea growing centre. The making and manufacturing of tea results in bringing into existence the tea which is brought to the market for selling. However, as the tea is not a uniform product, different traders who purchase the tea brought to the market by different growers and manufacturers, resort to blending of tea to suit their own markets and consumers before they are sold loosely in retail or in branded packets to bring uniformity of taste and flavour for the buyers. This process of tea trading is also evidenced in the book Tea written by T. Eden, who was the Director of Tea Research Institute, East Africa. In its second edition, he has described the entire gamut of tea in its cultural aspect and in its trading aspect. After describing the whole process of growing tea, he deals with the ch....
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....t may be taken as illustration for other countries, the reason being obvious that at the time the book was published, the major tea trading took place at London and the traditional markets were at Calcutta, Colombo. A similar view has been expressed by E. Jaiwant Paul in his recently published book The Story of Tea. He describes "Planting and Manufacture of Tea", and "Tea Tasting and Blending" in two separate chapters. According to him also, as noticed above, bulk tea is sold by public auction, though the gardens could sell their tea to private buyers. It has been noticed that multinational tea companies like Brooke Bond own not only tea plantation companies in India, Sri Lanka and Africa, but also separate companies which blend, pack and market tea. The procedure for auction is described as under: "The procedure for the auction is virtually the same whether in Calcutta, Colombo or London. When the tea arrives from the gardens, it is stored in bonded warehouses. The brokers then inspect the tea, taste samples and value it. Full particulars are printed in the brokers' sale catalogue. The prospective buyers, who are generally the packet tea companies, consider the brokers' idea....
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....y a blend of different grades derived from a variety of estates and usually from more than a single country of origin. The blend may contain in various proportions twenty to forty different components. In blending tea, different components are chosen for their contribution to a number of desirable qualities in the brew, such as, colour, strength, pungency and flavour. The prescription for a blend is based on various tea-tasters' reports on various teas. There are no quantitatively precise methods of evaluating quality and consequently, tea-tasting remains an art, rather than a science. The concerted opinion of a panel of tea-tasters provides a reliable evaluation of a tea's worth. It is true that blending the tea of different qualities by their purchaser, brings some qualitative change and a particular brand of tea carrying uniformity in its appearance, taste and chemical contents rules the market as a blend or mixture of tea. So far as making of tea from green tea leaves is concerned, it may amount to manufacture or production of tea. We have noticed above in two different decided cases that the expression "produce" or "production" has a wider connotation. The manufacture is in....
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....y a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause;..." It is to be noticed that agricultural income includes income derived from any such land by the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market. In view of the aforesaid provision, if a grower of tea himself is performing activities which are essential for bringing the produce of tea to the market, for him it becomes agricultural income and not liable to tax. Obviously, in such case, section 80-IB would have no application. The income in the hands of a grower or cultivator of tea who applies the process of manufacturing of tea to make it marketable and without which it is not marketable....
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....cultural or horticultural produce, grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, or poultry or dairy products from fowls or animals kept by him, shall be excluded from his turnover." It may be noticed that no specific definition of "agricultural turnover from the agriculture or horticulture produce grown by himself or grown on any land" in which such person has interest was provided, yet the principle made explicit in the definition of "agricultural income" under the Income-tax Act, was read implicit in the expression of turnover of agricultural produce. It was held to include sale of agricultural produce after applying the process by the grower of agricultural produce to make it fit to bring it to the market. The question which fell before the Supreme Court for determination was that the assessee-respondent had owned some tea gardens in the State of U.P. He had sold the tea leaves grown by him in his garden in the market after being processed and packed. The stand taken on behalf of the assessee was that the tea leaves sold by him were agricultural produce grown by himself, therefore, the sales w....
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....s an agricultural produce ...". With this background, the court said: "Unlike many agricultural products tea leaves are not marketable in the market fresh from the tea gardens. Nobody eats tea leaves. It is meant to be boiled for extracting juice out of it to make tea liquor. Tea leaves are, therefore, only fit for marketing when by a minimal process they are made fit for human consumption. Of course, the processing may stop at a particular point in order to produce inferior quality of tea and a bit more may be necessary to be done in order to make it a bit superior. But, that by itself will not substantially change the character of the tea leaves, still they will be known as tea leaves and sold as such in the market ... Withering, crushing and roasting the tea leaves will be surely necessary for preserving them. The process of fermentation or final roasting with charcoal for obtaining suitable flavour or colour and also the process of grading them with sieves were all within the region of minimal process and, at no point of time, it crossed that limit and robbed the tea leaves, the agricultural produce, of their character of being and continuing as such substantially." In....
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....les through auction or through the dealer and not directly from the grower. The samples of available qualities are dispatched to the "blend master", who after going through his own process suggests the mixing ratio and process of mixing for making the perfect blend of tea. So, apparently, the assessee is not the producer of green tea leaves and he only applies the process to make made tea marketable tea, as noticed by us above. The circular to which the appellant has referred applies to made tea or manufacture of tea in the sense that green tea leaves themselves are not marketable and are subjected to the process by which they are converted into marketable tea. Annexure 2 dated November 20, 1996, refers to made tea and refers to a notification issued under the Small Scale Industries Development Scheme for registering an industry engaged in packing or repacking of made tea. It has nothing to do with the question whether the appellant is an industrial undertaking which manufactures or produces tea as an article or thing which is not included in Schedule 11 to the Act. As a matter of fact, the provisional registration of the appellant is only for tea packing. The registration is not f....
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....in growing tea, so that he may be called a producer of tea, nor is he engaged in manufacturing of potable tea from green leaves, which cannot be used as otherwise potable drink. In such event, a different conclusion may be reached, depending upon whether the grower of tea himself undertakes the process of manufacturing tea as a marketable and usable commodity, resulting in agricultural income or a different person is engaged in such activity of producing taxable income. So far as the emphasis laid by learned counsel for the appellant on overruling the decision in Nilgiri Tea Co.'s case [1959] 10 STC 500 (Bom), it may be noticed that the Supreme Court made it clear that though it is not manufacture, the question still remains whether ore blended in the course of loading it into the ship through the mechanical ore handling plant constitutes processing. In the light of the expression used in the Central Sales Tax Act, the question was examined and the court answered that blending does amount to processing which does result in some change in the commodity though it does not bring about a new article or thing into existence. In examining Nilgiri Tea Co.'s case [1959] 10 STC 500 (B....
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....n Brooke Bond Upton India Ltd.'s case [1998] 109 STC 265. It may be noticed, at the outset, that the Karnataka High Court was dealing with the issue arising under the provisions of the Karnataka Sales Tax Act, 1957, and notifications issued thereunder. The relevant notifications provide for exemption to industrial units engaged in "agro-food processing", agro-based high-tech packaging units amongst other industries. These industries were listed as "thrust sector" industries. The incentive scheme issued vide notification dated June 19, 1991, under the Karnataka Act envisaged exemption in respect of goods manufactured and sold by new industrial units. Vide earlier notification dated July 25, 1990, which was published in the Karnataka Gazette dated March 7, 1991, provided for enhanced incentives and concessions for the thrust sector which was dealt with under annexure II under which "agro-food processing and agro based hi-tech packaging" industrial units were included for making them eligible for enhanced concession as a part of thrust sector industries. The Bench made it clear that they have referred to the above entry because one of the contentions debated at the Bar was as to wheth....
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....ax Act, it refers to Chowgule's case [1981] 47 STC 124 (SC) for supporting its conclusions while considering the question whether blending of different teas amounts to manufacture. The Karnataka High Court, with great respect, has not relied on Chowgule's case [1981] 47 STC 124 (SC) and reached its conclusions in para. 29, in which it was said as under: "For the same very reason, it can conveniently be held that the blending of different kinds and varieties of tea to provide a balance in terms of flavour, strength and colour is only a processing of the tea to suit the demands of a particular class of consumers. Mere blending of the tea by itself cannot be characterised as manufacturing of a different commercial product." Ironically, while reaching this conclusion that blending of different varieties of tea does not amount to manufacture within the meaning of the two notifications issued under the Karnataka Act, there has been no reference to Chowgule's case [1981] 47 STC 124 (SC) in the judgment and the case has been founded on the principle laid down in Ujagar Prints' case [1989] 179 ITR 317 (SC) dealing with textiles and the provisions of the Central Excise Act. It is a ....
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....manufacture' was not intended to be applied in the said Act. Again, the definition speaks of 'the process of lopping the branches (of trees), cutting the trunks'. The lopping of branches and the cutting of trunks of trees also, self-evidently, does not produce a new article. The clear words of the definition, therefore, must be given due weight and cannot be overlooked merely because in other contexts the word 'manufacture' has been judicially held to refer to the process of manufacture of new articles." Consequently, the process adopted by the assessee was held to be eligible for exemption under the M.P. General Sales Tax Act, therefore, this case does not assist the appellant. Likewise, the decision of learned single judge of this court in Dhunseri Tea Industries' case [2001] 1 Tax Update 235, is also of little assistance. The learned single judge was considering the question of manufacture under the provisions of the Rajasthan Sales Tax Act, 1954, as it was existing at the relevant time, against the rejection of the application of the petitioner for grant of exemption eligibility certificate under the Rajasthan Sales Tax Act New Incentive Scheme. The "manufacture" as defin....
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....s own price structure, custom and other commercial incidents and that there was in that sense a 'manufacture', within the meaning of section 2(f), even as unamended, is an eminently plausible view and is not shown to suffer from any fallacy. Indeed on this point, the referring Bench did not disagree or have any reservations either. It is to be noticed that if the amending law is valid, this aspect becomes academic." This clearly goes to show that accepting the general principle and the meaning of "manufacture" in the specific case of the Central Excise Act with its amending provision having retrospective effect, the court came to the conclusion that even under the unamended provision, the view taken in the Empire Industries case [1986] 162 ITR 346 (SC), did not require reconsideration. Therefore, no support can be drawn from the ratio laid down in Ujagar Prints' case [1989] 179 ITR 317 (SC). Similarly, the decision of the Supreme Court in CCE v. Tata Tea Ltd. [2002] 128 STC 331 is of little assistance to the appellant. It was a case under the Tea Act in which cess was levied on instant tea. We have noticed the provisions of the Tea Act which has drawn distinction between tea ....
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....s case [1981] 47 STC 124 distinguishing "manufacture" and "process". The term "process", in our opinion, cannot be equated with "manufacturing" or "producing" in each and every case. Lastly, reliance was placed by learned counsel for the appellant in this regard on the Supreme Court decision in the case of S.S.M. Bros. P. Ltd. v. CIT [2000] 243 ITR 418; [1999] 3 SCC 229. Again, this was a case where the court was construing different provisions of the Income-tax Act. The question relevant was allowing development rebate where the machinery or plant is installed for the purpose of manufacturing of any one or more of the articles or things specified in the list in the Fifth Schedule. Item 32 of the Fifth Schedule reads as under: "'Textile' (including those dyed, printed or otherwise processed) made wholly or mainly of cotton, including cotton yarn, hosiery and rope." Reading the two provisions together, the Supreme Court concluded that the production of textiles including those dyed, printed or otherwise processed is to be taken into account. The embroidered textiles, as they fall within the list of articles listed at entry 32 of the Fifth Schedule, were held to be eligib....