2010 (1) TMI 1263 - SC - Income Tax

Deduction u/s 80IA - Whether twisting and texturising of partially oriented yarn ('POY') amounts to 'manufacture' in terms of Section 80IA? - HELD THAT - As examined the process in the light of the opinion given by the expert, which has not been controverted, we find that POY is a semi-finished yarn not capable of being put in warp or weft, it can only be used for making a texturized yarn, which, in turn, can be used in the manufacture of fabric. In other words, POY cannot be used directly to manufacture fabric. According to the expert, crimps, bulkiness etc. are introduced by a process, called as thermo mechanical process, into POY which converts POY into a texturized yarn. If one examines this thermo mechanical process in detail, it becomes clear that texturising and twisting of yarn constitutes 'manufacture' in the context of conversion of POY into texturized yarn. See M/s. Oracle Software India Ltd. 2010 (1) TMI 9 - SUPREME COURT as held term manufacture implies a change, but, every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manipulation. If an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process fall6 s within the meaning of the word manufacture Applying the above test to the facts of this case, it is clear that POY simplicitor is not fit for being used in the manufacture of a fabric. It becomes usable only after it undergoes the operation/process which is called as thermo mechanical process which converts POY into texturised yarn, which, in turn, is used for the manufacture of fabric. Our judgment in the present case is to be confined to the facts of the present case. We are not saying that texturising or twisting per se in every matter amounts to manufacture. It is the thermo mechanical process embedded in twisting and texturising when applied to a partially oriented yarn which makes the process a manufacture. In the circumstances, the judgment in the Swastik Rayon Processors's case 2006 (11) TMI 31 - SUPREME COURT will not apply. Decided in favour of assessee.

Summary

Issues:
Whether twisting and texturising of partially oriented yarn amounts to 'manufacture' in terms of Section 80IA of the Income Tax Act, 1961?

Analysis:
The Supreme Court, in a batch of Civil Appeals, addressed the issue of whether twisting and texturising of partially oriented yarn constitutes 'manufacture' under Section 80IA of the Income Tax Act, 1961. The lead matter involved in the appeals was C.I.T., Mumbai Vs. M/s. Emptee Poly-Yarn Pvt. Ltd., concerning the Assessment Year 1996-97. The Court emphasized the importance of examining the specific process applied to a product rather than relying solely on dictionary meanings, as consistently recommended to the Department across various acts. In this case, the Court noted the absence of any counter opinion to the expert opinion provided by Mumbai University, supporting the view that twisting and texturising of partially oriented yarn could amount to 'manufacture' in certain circumstances.

The Court proceeded to analyze the process of converting partially oriented yarn (POY) into texturized yarn. It was observed that POY, in its original state, is a semi-finished yarn not suitable for direct use in fabric manufacturing. The introduction of crimps and bulkiness through a thermo mechanical process transforms POY into texturized yarn, which is then utilized in fabric production. The Court referenced the definition of 'manufacture,' highlighting that a process that renders a commodity fit for a purpose it was previously unsuitable for falls within the scope of 'manufacture.' Additionally, the Court noted the structural changes brought about by the thermo mechanical process, aligning with the definition of 'manufacture' under the Income Tax Act as amended in 2009.

In comparing the present case to a previous judgment involving twisting of cellulosic filament yarn, the Court distinguished the applicability, emphasizing that POY is a raw material that undergoes a transformative process into a usable form, unlike the cellulosic filament yarn which is a final product ready for fabric manufacturing. The Court reiterated that its decision should be limited to the specific facts of the case and clarified that not all instances of twisting and texturising would amount to 'manufacture.' The crucial factor was the thermo mechanical process applied to partially oriented yarn, making it suitable for fabric production.

Ultimately, the Court found no flaw in the High Court's judgments and dismissed the Civil Appeals filed by the Department, emphasizing that the judgment in the previous case of twisting cellulosic filament yarn did not apply to the current scenario. The decision highlighted the significance of the specific process involved in transforming partially oriented yarn into a usable form for manufacturing fabric, indicating that such transformation could constitute 'manufacture' under the Income Tax Act.