2017 (8) TMI 197 - SC - Income Tax

Eligibility to benefit of Sections 80HH, 80-I and 80-IA - whether bottling of LPG is an activity which amounts to production or manufacturing for the purposes of the aforesaid provisions of the Act - Held that - No distinction was drawn between manufacture and production and the matter was not looked into from the angle as to whether the aforesaid process would amount to production or not. Other reason which prevailed with the AO and which was also the argument of for the Revenue was that, on identical facts, the Gujarat High Court in the case of State of Gujarat v. Kosan Gas Company (1991 (6) TMI 226 - GUJARAT HIGH COURT) had held that refilling the LPG after purchasing from M/s. HPCL into small cylinders would not amount to manufacture. That was a case which was decided in the context of the Gujarat Sales Tax Act, 1969. The Court held that transfer of LPG from bulk containers into cylinders did not amount to process of manufacture. It is pertinent to point out that Section 2(16) of the Gujarat Sales Tax Act, 1969 defines manufacture and, therefore, the entire case was examined keeping in view the said definition of manufacture and the issue was as to whether the process amounted to manufacture or not. As pointed out above, the question as to whether it amounts to production as well did not arise for consideration. The AO committed manifest error in relying upon the said decision inasmuch as the provisions with which we are concerned in the instant case use the words manufacture or production and are not limited to manufacture alone. Here, the case set up by the assessees is not that bottling of LPG is processing as distinguished from manufacture or production . We may, at this juncture, refer to the judgment of this Court in Commissioner of Income Tax, Madras v. Vinbros and Company (2012 (9) TMI 802 - SUPREME COURT) where bottling and blending of alcohol is held to be manufacture or production for the purpose of Section 80-IB of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether bottling of Liquefied Petroleum Gas (LPG) amounts to 'production' or 'manufacture' under Sections 80HH, 80-I, and 80-IA of the Income Tax Act, 1961.
2. Eligibility of respondents/assessees for deductions under the aforementioned sections based on their bottling activities.

Detailed Analysis:

1. Whether bottling of Liquefied Petroleum Gas (LPG) amounts to 'production' or 'manufacture':

The central issue in these appeals is whether the process of bottling LPG cylinders for domestic use constitutes 'production' or 'manufacture' under Sections 80HH, 80-I, and 80-IA of the Income Tax Act, 1961. The Assessing Officers (AOs) disallowed the deductions claimed by the assessees, arguing that bottling LPG does not change its chemical composition or properties, and thus does not qualify as 'production' or 'manufacture.' This view was initially upheld by the Commissioner of Income Tax (Appeals) but overturned by the Income Tax Appellate Tribunal (ITAT). The ITAT found that LPG bottling is a complex activity essential for making LPG marketable and usable for domestic consumers, thus qualifying it as a 'manufacturing activity.'

The Tribunal referred to the Gas Cylinders Rules, 2004, specifically Rule 2(xxxii), which defines 'manufacture of gas' to include the filling of a cylinder with any compressed gas. The High Court concurred with the ITAT's view, leading the Department to appeal to the Supreme Court.

The Supreme Court noted that the provisions of Sections 80HH, 80-I, and 80-IA use both 'manufacture' and 'production,' and an activity qualifying as either would entitle the assessee to the benefits. The Court emphasized that 'production' is a broader term than 'manufacture,' as established in the case of Income Tax Officer v. Arihant Tiles and Marbles P. Ltd. and Commissioner of Income Tax, Goa v. Sesa Goa Ltd.

2. Eligibility of respondents/assessees for deductions:

The Court examined the process of LPG bottling, which includes receiving bulk LPG, unloading it, compressing it into liquid form, and filling it into cylinders. This process involves multiple stages and technical expertise, making LPG suitable for domestic use. The Court agreed with the ITAT's findings that LPG bottling is a complex and essential process that renders the product marketable and usable for domestic consumers. The Court also noted the definition of 'manufacture of gas' in the Gas Cylinders Rules, 2004, which supports the assessees' case.

The Court found that the AO's reliance on the Gujarat High Court's decision in State of Gujarat v. Kosan Gas Company was misplaced, as that case dealt with the definition of 'manufacture' under the Gujarat Sales Tax Act, 1969, and did not consider 'production.' The Court also distinguished the judgments in Servo-Med Industries Private Limited v. Commissioner of Central Excise, Mumbai and Commissioner of Income Tax, Kerala v. Tara Agencies, which dealt with the Central Excise Act and the definition of 'manufacture' under that Act.

The Supreme Court concluded that the process of bottling LPG cylinders qualifies as 'production' under Sections 80HH, 80-I, and 80-IA of the Income Tax Act, and the assessees are entitled to the deductions claimed. The Court dismissed the appeals, affirming the ITAT and High Court's decisions.