TaxTMI 
TaxTMI 
2019 (4) TMI 1367
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....le of readymade mouth fresheners and wrist watches without any process that would qualify as "manufacturing" within the strict test of eligibility condition provided u/s 80IC of the I.T. Act, 1961. 2. That, on the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), Ahmedabad, has failed to appreciate the fact that the assessee was unable to produce evidence of manufacturing to the Assessing Officer nor could produce list of Plant & machinery with installed manufacturing capacity. 3. That, on the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), Ahmedabad has failed to note that the unit was running with only one mixer to manufacture 79120 pieces of wrist watches and 159529 Kgs of mouth fresheners to record a whopping income of Rs. 12,64,40,955/- allegedly claimed as deduction u/s 80IC of the I.T. Act, 1961. 4. That, on the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), Ahmedabad has erred in accepting the fact that 04 labourers could manufacture 159259 Kgs of Mouth Fresheners and 7910 wrist watches without the required technical expertise for qu....
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....he impugned recourse to section 148 proceedings had be validly undertaken. 5. The Assessing Officer thereafter came to assessee's profit and loss account. It had stated itself to be engaged in business of manufacturing "pan masala/mouth frershner"; as per the relevant sales, closing stock finished goods, raw material consumption and assets' depreciation details qua section 80IC deduction of Rs.436,98,608/-. Its manufacturing unit as per records was at Khasra (No.786/1064; opposite Nayabazar, Majhigaon, Jorethang, Sikkim). 6. The Assessing Officer then issued a detailed show cause notice dated 05.03.2015 inter alia spelling out various clarification(s) sought from the taxpayer. Both the Learned Departmental Representatives are very fair in informing us at this stage that the Revenue's grievance is confined to assessee's section 80IC deduction claim only. We keep in mind the same to notice that the assessee's reply dated 16.03.2015; as per page 6 in assessment order in issue, inter alia pleaded that it had commenced its manufacturing operations from 24.04.2006 i.e. during the relevant previous year only. Its case was stated to be covered under It....
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....5,56,005/- to conclude that its main activity was that of mere packing mouth freshner's pouches only instead of having carried out any manufacturing as per the deduction provision in question. He noticed fluctuation in consumption of raw material purchases as well. Next came assessee's power and fuel consumption of Rs.9,116/- only unreasonably high gross profit ratio, purchase suppliers to have either closed down their business or suspicious resulting its disallowance of deduction claim of Rs.4,36,98,608/-. This followed disallowance of partners' remuneration of Rs.47,250/- and treatment of fixed deposit interest income and excise incentive receipts of Rs.1,300/- and Rs.295,28,821/-as income from other sources. 8. The CIT(A) has reversed assessment findings as follows:- "A. I find that effective from 01.04.2007, the Govt of India has notified that new unit which manufacture Pan Masala from 01.04.2007 will not be eligible for exemption as Pan Masala was shifted to negative list. I also therefore conclude that the converse is equally true. I find that manufacture of Pan Masala was covered as an exemption prior to 01.04.2007. I find that since the Appella....
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.... in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Section 80IA of the Income Tax Act, 1961.' 9. We have given our thoughtful consideration to Revenue's contentions inter alia pleading that the CIT(A) has erred in law and on facts in deleting section 80IC deduction disallowance in question after holding that the assessee had manufactured or produced it "pan masala" within the scheme of the Act. It is vehemently contended that this "pan masala" is an article or thing specifically included in the Thirteen Schedule and the instant taxpayer has failed to satisfy its case to be covered under item 7 part-B of the Fourteenth Schedule for Sikkim state. We find no force in Revenue's first argument. Learned Departmental Representative(s) are fair enough in not disputing. The fact remains that the assessee has been registered under the central excise department, Sikkim state government VAT law as well as Industries Department and under the service tax regime(s); right from the relevant previous ye....
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....tion has been granted to the appellant under the category of a "small" Unit engaged in "Manufacturing" activity. * The products manufactured by the appellant are excisable products falling under the Central Excise Tariff Heading No.3302. However the appellant's unit being situated in a Notified area, was granted exemption from excise levy by virtue of Exemption Notification No.50/2003-CE dated 10.06.2003. * The appellant has obtained an NOC from the Pollution Control Board, owing to effluent discharge from the manufacturing process undertaken by the appellant. * The appellant is also registered under the Factories Act. * The appellant was paying VAT on the products depending on the item produced and the VAT rates were different for different products and also for different raw materials. (6)(6)(i) The appellant is engaged in manufacture of Odoriferous Compounds and Industrial Perfumes. The appellant in its business activity consumes over 1500 raw materials and produces more than 500 finished goods, all different from each other. The finished goods manufactured by the appellant are used in various industries which include Skin care products, D....
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....r manufacture. The price list of raw materials and finished goods is also totally different. Further, once the finished product is made, it is either a flavor or a fragrance and the same can, by no means, be either converted or separated back to raw materials stage. Further some raw materials are received in solid state, some liquid and sum in lumps. Some are essential oils, some are aromatic chemicals, some are spices, some are spice, extracts and some are oleoresins. Thus all these types of raw materials are required to produce the finished goods. It may be submitted that these raw materials fall under various tariff classifications of Central Excise and hence differ in type, properties, product groups, usage etc. Whereas several raw materials are unfit for human consumption or inhalation or application, the finished goods were used for all these purposes. Therefore the finished goods had a distinct chemical composition, properties and usage, which can only be achieved through manufacture which inter alia included studied and controlled chemical reactions, multiple stages of testing, formulations, R & D etc. 6(8) The facts and evidences brought on record therefore clearl....
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.... not appreciate this fact while the CIT(A) was able to appreciate the line of the industries in which the assessee is engaged. The assessee is engaged in manufacture of odoriferous substance. There are more than 1,500 raw materials which are being used for manufacturing. The finished goods produced are also more than 500 all of which are different from each other. The finished goods manufactured by the assessee are used in various industries which include (but are not limited to) skin care products, detergents and toilet soaps, consumer edibles, incense sticks and room fresheners, industrial perfumes and flavors used by pan masala and other industries. He furnished price list of the firm showing the nature and type of finished goods manufactured or produced and it was submitted that each of the above category of the product require the different chemical compositions and properties. For example, an essence of rose has to have different ingredients when it is used in a toilet soap, as an agarbatti compound, as a food flavor and as a perfume spray etc. He submitted a flow chart in this regard and pointed out that the process of manufacture involves melting, grinding, mixing, stirring....
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....ced the production on 04/10/2006 in a notified area as per Notification No.SO741(E) dated 28/06/2004. The assessee is engaged in manufacture of odoriferous compounds and industrial perfumes which are not specified in XIII Schedule. Our attention was also drawn towards the definition of 'manufacture' as given u/s 2(29BA) of the Act. The reliance was placed on the following case laws: (i) CIT vs. Vinbros & Co. 349 ITR 697 (SC) (ii) CIT vs. Vinbros & Co. 218 ITR 634 (Mad) (iii) Shree Par Frangrances (P) Ltd. vs. Income Tax Officer 20 SOT 440 (Mum) (iv) Natural Frangrances Bhimtal vs. DCIT Nainital, I.T.A. No.4183/Del/2011 (Del) (v) DCIT Nainital vs. Natural Fragrances 219 TM 28 (Mag) (Uttaranchal) (vi) CIT vs. Innovative Industries (Guj) I.T.A. No. 2570 of 2010 (vii) Income Tax Officer Udaipur vs. Arihant Tiles and Marbles (P) Ltd. 320 ITR 79 (SC) (viii) Shree Veer Aromatic Herb Products vs. Income Tax Officer 147 ITD 86 (Del) (ix) Madhu Jayanti International Ltd. vs. DCIT 137 ITD 377 Kolkatta (SB) (x) Shree Bhavani Minerals vs. CIT, I.T.A. No.68/PNI/2013 (Goa) (xi) Fiberfill Eng....
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....tely brought us the smell of the product manufactured called sweet gulab, which was in liquid form. When we asked him to mix up these products in a different order, the chemical engineer showed us the reaction by mixing 3-4 raw materials in a different order. Similarly, the demonstration was also made in respect of the compound bela which is being made by using the following chemicals: 1 Aldehyde C 18 0.1 2 Benzyl Phenyl Acetate 2.4 3 Benzyl Alcohol 5 4. Benzyl Acetate 36.5 5 Benzyl Butyrate 0.5 6 DEP 36 7 Ebanol 0.2 8 Galaxolide 100% 2.1 9 Hexyl Cinnamic Aldehyde 1.7 10 Hedione 0.4 11 Indole 2.5 12 Linalool 6.1 13 Methyl Anthranilate 2.8 14 Folione 0.015 15 Phenyl Ethyl Alcohol 1.7 16 Sandela 2 17 S Absolute 0.1 5.6 The chemical engineer has also brought the small bottle showing the fragrance and the smell of the product which were handed over to Learned D. R. On the basis of the demonstration held before us, we noted that the product being produced by mixing the various chemicals is entirely different from the raw material. Its usage as well as the utility is different. It cannot be converted again in the same form of the raw material. It has resulted in the tra....
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....clude the cutting and polishing of precious and semi-precious stones." 5.8 Under section 10B the definition of 'manufacture' was again amended to mean 'manufacture' shall have the same meaning as assigned to it in clause (r) of section 2 of Special Economic Zone Act, 2005. Subsequently, Special Economic Zone Act, 2005 was passed by the Parliament in May, 2005, which was brought into effect w.e.f. 23/06/2005. Section 2(r) of Special Economic Zone Act defines the expression 'manufacture' as under:- "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinct name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisci culture, poultry, sericulture, aviculture and mining". 5.9 This definition was adopted by the Legislature in section 10AA w.e.f. 10/02/2006 as adopted by the Special Economic Zones Act, 2005 by inserting Explanation 1(iii) to section 10AA of the Act which reads as under:- ....
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....ore mixed together in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical composition, because what is produced by such blending is ore of a different chemical and physical compositions. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to "processing" of ore within the meaning of Section 8(3)(b) and Rule 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities for such ore on the conveyor belt of the mechanical ore handling plant, but to our mind it is immaterial as to how the blending is done and what process is utilized for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical composition is a result of blending and so far as this aspect of the question is concerned, it is impossible to argue tha....
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....ase of Chowgule & Co. (supra), it cannot be held that the assessee is engaged in these units in manufacturing. 5.13 Further, in CIT Vs N.C. Budharaja & Co. (1993) 204 ITR 412 (SC), Hon'ble Supreme Court further observed that the word "production" is much wider than the word "manufacture". It was said (page 423): "The word "production" has a wide connotation than the word "manufacture". While every manufacture can be characterized as production, every production need not amount to manufacture... 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." 5.14 In Christian Mica Industries Ltd. Vs. State of Bihar (1961) 12 STC 150 (SC), Hon'ble Supreme Court defined the word 'production', albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word "production" in the Oxford English Dictionary, as ....
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....led to deduct from their turnover under Section 8(a), the value of the tea purchased by them. The High Court of Bombay held that different brands of tea purchased by the assesses could not be regarded as 'processed' within the meaning of the proviso to clause (a) of Section 8, because there was "not even application of mechanical force so as to subject the commodity to a process, manufacture, development or preparation" and the commodity remained in the same condition. The argument of the Revenue before us was that this decision of the Bombay High Court was on all fours with the present case and if the blending of different brands of tea for the purpose of producing a tea mixture in accordance with a formula evolved by the assesses could not be regarded as 'processing' of tea, equally on a parity of reasoning, blending of ore of different chemical and physical compositions could not be held to constitute 'processing' of the ore. Now undoubtedly there is a close analogy between the facts of Nilgiri Tea Company case [10 STC 500 (Bom HC)] and the facts of the present case, but we do not think we can accept the decision of the Bombay High Court in the Nilgiri Te....
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....plainly and indubitably processing for the different brands of tea, because these brands of tea experienced, as a result of mixing, a qualitative change, in that the tea mixture which came into existence was of a different quality and flavor than the different brands of the tea which went into the mixture; (ii) There are, it is true, some observations in the judgment of the Bombay High Court which seem to suggest that if instead of manual application of energy in mixing the different brands of tea, there had been application of mechanical force in producing the tea mixture, the court might have come to a different conclusion and these observations were relied upon by the assessee, since, in the present case, the blending was done by application of mechanical force, but that is not the correct test to be applied for the purpose of determining whether the operation constitutes is 'processing'. (iii) The question is not whether there is any manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of d....
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....(292 ITR 444 (SC) relied upon by the Sr. Standing Counsel for the revenue, wherein Hon'ble Supreme Court clearly held that blending of tea does not amount to 'manufacture' or 'production' of an article or thing, but is only processing. Hon'ble High Court allowing the appeal of the assessee held that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognized as a 100% EOU division and the Department had no case that the assessee's unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial units of the assessee's 100% EOU, it would defeat the very object of section 10B of the Act. (similar to assessee's case). Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, would continue to enjoy tax exemption under section 10A of the Act and section 10AA of the Act respectively. The assessee was allowed exemption on the profit deriv....
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.... tax exemption under section 10A and section 10AA respectively. The still worse position is that the appellant would be denied of export exemption available under section 80HHC even to a merchant exporter. In our view, the decision of the Supreme Court in Tara Agencies' case [2007] 292 ITR 444 (SC) is not applicable for the purpose of considering exemption for industries in the export processing zones, free trade zones and to 100 per cent export oriented units covered by sections 10A, 10AA and 10B of the Income tax Act. Therefore, following the judgment of this court above referred to we hold that the assessee is entitled to exemption on the profit derived by its 100 per cent export oriented unit engaged in blending, packing and export of tea bags and tea packets. Consequently, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders "Manufacture/Producer" of the tea for the purpose of Section 10A/10B of the I.T. Act, 1961?" 5.23 The brief facts in the case of Madhu Jayanti International Ltd. in ITA No. 1463/Kol/2007 were that the assessee was engaged in the business of manufacturing, processing, exporting and dealing in various commodit....
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....y prior to the enactment of SEZ Act, 2005. Clause (iii) of Explanation 1 to section 1OAA lays down that the expression "manufacture" shall have the same meaning as assigned to it in section 2(r) of the Special Economic Zones Act, 2005, which definition is as under: "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering and includes agriculture, aquaculture, animal husbandly, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining". In Exim Policy, the expression "manufacture" is defined, in paragraph 9.30 & 9.31 thereof almost in the same manner as in the Special Economic Zone Act, 2005, which is as under: "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, repacking, polishing and labeling. Manufacture, for the purpose of this Policy, shall also include a....
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....Yarn Pvt. Ltd. (2010) "Green Tea" means the variety of manufactured tea commercially known as green tea; 320 ITR 665,667 (SC). 33. The Assessee Company carries out its operations of blending, packaging and export of tea bags, tea packets and bulk tea packs in its modern factory, well equipped with all imported and sophisticated automatic plant and machineries with the help of over 100 workmen engaged on contract basis through M/s. Trot Pvt. Ltd. The manufacturing'. operations are carried in its said factory situated at 19/4A, Munshiganj Road (under Falta Export Processing Zone), Kolkata. We find from facts of the case that the details of turnover of the assessee shows Bulk Tea (0.94%), Packet Tea and Tea Bags .(99.06%),. as. per different descriptions, brand names and varieties, as listed APR. Assessee Company is duly registered as a 100% EOU by the Government of India, Ministry of Industry, Department of industrial Policy and Promotion Secretarial for Industrial Approvals, ECU Section in the state of West Bengal for manufacture of Packet Tea, Tea Bags/Bulk Tea with annual capacity of 3110 Mt. in terms of Registration Certificate dated 26th December, 1995, inter alia, ....
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....emption available to units in the SEZ u/s. TOA of the Act and units in the free trade zone provided u/s, 10AA of the Act and the exemption available to 100% EOU u/s. 1OB of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature is correct. We find that Hon'ble Kerala High Court also considered the judgment in-the decision of Supreme Court in Tara Agencies, supra relied on by the Ld. CIT, DR, wherein Hon'ble Supreme Court clearly held that blending of tea does not amount to 'manufacture' or 'production' of an article, but is only processing. We find that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division and the Department had no case that the assessee's unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial unit of the assessee's 100% EOU, it would defeat the very object of sections 10B of the Act. We, in view of the above, hold that when the p....
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.... As regards other appeals and that of the interveners, the matters are restored back to the Division Bench, with directions to decide those appeals in the light of principle laid down herein, so far as the claim for relief u/s. 10A or 10B of the Act in accordance with law." 5.24 From the reading of para 35 of the aforesaid judgment we noted that the Special Bench in this case clearly held that the assessee was engaged only in processing and was not engaged in the manufacture or production but had ultimately under para 36 it took the view in view of the fact that the definition of 'manufacture' u/s 2(r) of the SEZ Act, 2005 which is incorporated in section 10AA w.e.f. 10/02/2006 includes 'processing'. Therefore, following the decision of Kerala High Court in the case of Girnar Industries and Tata Tea Ltd. (which was discussed by us in the preceding paragraphs) held that the assessee is entitled for exemption u/s 10B of the Act on account of blending of tea. 5.25 We have also gone through the decision of Hon'ble Supreme Court in Indian Cine Agencies Vs CIT 308 ITR 98. In this case the question before the Hon'ble Supreme Court was: Wh....
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....g to the conclusion that the activity undertaken by the respondentsassessees did constitute manufacture or production in terms of Section 80IA of the Income Tax Act, 1961. 23. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Sec....
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....trued in Revenue's or to the subject / assessee favour. Their lordships sum up answer of the reference made in para 51 that an exemption provision in a taxing statute is to be interpreted strictly. It is the assessee's burden to how that his case comes within the specified parameters envisaged in the exemption clause or notification and any ambiguity in such a provision has to be interpreted in Revenue's favour. 11. Coupled with this, their lordship earlier decision in Raghunath Rai Bareza vs. PNB (2007) 135 Company cases 163 (SC) holds that it is a cardinal principle of interpretation of a statute that the words used therein by the legislative are to be understood in their natural, ordinary or popular sense and construed as per their grammatical meaning unless such a construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. Their lordships further invoked "Golden Rule" of interpretation that the words of a statute must prima facie to be given their ordinary meaning. We find it very much relevant at this stage that their lordships yet another judgment in Smt. Tarulata Shyam vs. C....
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....ry much containing the crucial expression "tobacco and tobacco products including cigarettes and pan masala. It is thus clear that legislature's clinching expression "etc" used in former part-A is inclusive in nature which is sufficiently answered in part-B of the very schedule wherein the tobacco products category includes "pan masala" since "etc" has been omitted to be used. We observe therefore that the legislative intention is explicitly clear that it had sought to exclude tobacco products as segment including cigarettes and pan masala from the ambit of section 80IC of the Act. We apply necessary implication principle in these facts and circumstances to hold that "pan masala" definition used in para-B of the Thirteenth Schedule is included in tobacco products would also cover part- A thereto describing very categories of tobacco products to be not eligible for section 80IC deduction. We conclude in these peculiar facts and circumstances that the assessee's impugned claim fails to clear the rigor of the above negative list in Thirteenth Schedule Part-1 Item No. 1 applicable for Sikkim. We further are of the view that an item covered in the negative list cannot b....