2009 (8) TMI 676 - HC - Income Tax

Manufacture - the assessee claimed deduction of export profit in respect of the blended tea exported from the industrial unit under Section 10A of the Income Tax Act. However, the assessing authority held that blending does not answer the description of manufacture or processing and so much so, assessee is not entitled to deduction of export profits claimed under Section 10A of the Act. It is the specific case of the department that blending can be treated as a manufacturing activity only after the definition clause of manufacture contained in Section 2(r) of the Special Economic Zones Act, 2005 is incorporated in the provisions of Section 10AA of the Income Tax Act with effect from 10-2-2006. submission that benefit of exemption u/s 10A eligible even before said date applying definition of manufacture as contained in EXIM Policy 2002-07. Held that - EXIM Policy definition applicable. Later amendment to section 10aA of Income Tax Act, 1961 only clarificatory and definition applies to section 10A also. Deduction of export profit allowed.

Summary

Issues Involved:
1. Whether blending and packing of tea for export in a Special Economic Zone (SEZ) amounts to "manufacture" or "production" qualifying for exemption under Section 10A of the Income Tax Act for the assessment year 2004-2005.

Detailed Analysis:

1. Definition and Scope of "Manufacture" under Section 10A:
The primary issue revolves around whether the activities of blending and packing tea qualify as "manufacture" or "production" under Section 10A of the Income Tax Act for the assessment year 2004-2005. The assessee's industrial unit is located in the SEZ at Kakkanad, Kochi, and engages in blending and repacking tea for export. The assessing authority denied the deduction of export profit under Section 10A, arguing that "blending" does not meet the criteria for "manufacture" or "processing."

2. Applicability of Definitions from Different Legislations:
The assessee contended that, in the absence of a specific definition of "manufacture" in the Income Tax Act, the definition from the Export Import Policy (EXIM Policy) of 2002-2007 should apply. The EXIM Policy defines "manufacture" broadly to include processes such as repacking, labelling, and other activities that do not necessarily produce a new article with a distinctive name, character, or use. The court noted that the definition of "manufacture" in the EXIM Policy is similar to that in Section 2(r) of the Special Economic Zones Act, 2005, which includes blending.

3. Clarificatory Nature of Subsequent Amendments:
The court observed that the definition of "manufacture" in Section 2(r) of the Special Economic Zones Act, 2005, was incorporated into Section 10AA of the Income Tax Act with effect from 10-2-2006. This definition explicitly includes blending. The court held that this amendment is clarificatory, indicating that the intention was always to include such activities under "manufacture." Therefore, the definition should apply to Section 10A as well, even for periods before the amendment.

4. Liberal Interpretation of Exemption Clauses:
The court referred to the Supreme Court's principles on interpreting exemption clauses, emphasizing a liberal and purposive approach. The court cited the decision in Commissioner of Income-tax v. Gwalior Rayon Silk Mfg. Co. Ltd., which advocates for a reasonable construction of tax laws in favor of the assessee. The court concluded that the purpose of Section 10A is to implement the EXIM Policy, which aims to incentivize export-oriented units in Free Trade Zones and SEZs.

5. Conclusion and Ruling:
Given the broad and liberal definition of "manufacture" in the EXIM Policy and the clarificatory nature of the subsequent amendment, the court held that blending and packing of tea qualify as "manufacture" under Section 10A. Consequently, the assessee is entitled to the exemption for the assessment year 2004-2005. The court vacated the Tribunal's order and restored the order of the first appellate authority, allowing the appeal in favor of the assessee.

Summary:
The Kerala High Court ruled that blending and packing of tea for export in a Special Economic Zone qualify as "manufacture" under Section 10A of the Income Tax Act, even for the assessment year 2004-2005. The court emphasized a liberal interpretation of the term "manufacture," aligning it with the definitions in the EXIM Policy and the Special Economic Zones Act, 2005. The subsequent amendment to Section 10AA, which explicitly includes blending, was deemed clarificatory, thus applicable retrospectively. The court allowed the appeal, granting the assessee the claimed tax exemption.