2016 (12) TMI 814 - HC - Income Tax

Manufacture or production - Whether the compressed natural gas produced by the appellant, having different name, character and use from natural gas can be said to be covered by the phrase manufacture or production? - Held that - Compressed natural gas in its compressed form has a distinct identity and character and use. It is settled law of the Apex Court in the case of Income Tax Officer Vs.Arihant Tiles and Marbles P. LTD. reported in (2009 (12) TMI 1 - SUPREME COURT) that when a commodity acquires a distinct name, use and commercial identity, it would acquire the trait of manufacture . In view of above, the question is answered in favour of the assessee

Summary

Issues:
1. Interpretation of the term "manufacture or production" in relation to compressed natural gas (CNG) production.

Analysis:
The case involved an appeal under Section 260A of the Income Tax Act, 1961 against a Tribunal order regarding the classification of compressed natural gas (CNG) production as "manufacture or production." The main issue was whether the conversion of natural gas into CNG constitutes manufacturing. The appellant procured natural gas from GAIL India Limited, compressed it into CNG using specialized equipment, and sold it as a vehicle fuel. The appellant argued that the compression process transformed natural gas into a new product with different characteristics, uses, and commercial identity, thus constituting manufacturing.

The Tribunal initially ruled that compressing natural gas into CNG did not create a new product and did not amount to manufacturing or production. The Tribunal cited a previous judgment regarding the bottling of LPG gas, which was deemed as manufacturing. However, the Tribunal found that the process of converting natural gas to CNG did not result in a new product with different characteristics, uses, or chemical composition. The Tribunal concluded that the activity of compression did not amount to manufacturing or production.

The appellant contended that the compression process resulted in a distinct product, CNG, with unique characteristics and uses. They argued that under Section 29(BA) of the Income Tax Act, manufacturing involves transforming an object into a new and distinct form with different characteristics, uses, or commercial identity. The appellant highlighted the Supreme Court judgment in Income Tax Officer Vs. Arihant Tiles and Marbles P. LTD. to support their position that a commodity with distinct characteristics constitutes manufacturing.

The High Court analyzed the case, emphasizing that CNG, in its compressed form, had a distinct identity, character, and use as a vehicle fuel. The Court noted that natural gas, without compression, could not serve the same purpose as CNG in the automobile industry. The Court found that when a commodity acquires a unique name, use, and commercial identity, it fulfills the criteria of manufacturing. Therefore, the Court ruled in favor of the appellant, overturning the Tribunal's decision and allowing the appeal.

In conclusion, the High Court interpreted the term "manufacture or production" in the context of converting natural gas into compressed natural gas (CNG). The Court determined that the compression process resulted in a new product with distinct characteristics, uses, and commercial identity, meeting the criteria of manufacturing. The judgment favored the appellant, recognizing the production of CNG as manufacturing and overturning the Tribunal's decision.