Finance Bill 2009 - Proposed definition of "manufacture" will unsettle many settled things and is likely to involve further litigation.

[C.A. DEV KUMAR KOTHARI]

As per memorandum  to the Finance (No.2) Bill 2009 a new definition of word "manufacture" is proposed in order to remove any kind of ambiguity which may still persist after several judicial pronouncement and review. However, it appears that the proposed definition itself contains ambiguities and inconsistencies and it is likely to unsettle many settled things and create more confusions, doubts, debates and litigation. A proper review of the definition is necessary. In fact, in context of particular provision, the term manufacture may have different colors and meanings, even after the new insertion.   

The Finance Bill 2009;

Though the word 'manufacture' is used in the Income Tax Act at several places but apparently for the first time it is proposed to insert a definition of "manufacture", in the Income-tax Act, 1961 vide a new clause to be inserted as clause (29B) in section 2. The proposed definition after insertion will have effective definition or meaning as follows  below:

Definitions.

2. In this Act, unless the context otherwise requires,—

xxxxx

'(29BA) "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,—

(a) resulting in transformation of the object or article or thing into a new and distinct object or

article or thing having a different name, character and use; or

(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

Notes in relation to above insertion reads as follows:

It is proposed to insert a new clause (29BA) to the said section (that is section 2) so as to define the expression "manufacture". The term "manufacture" with its grammatical variations would mean a change in a non-living physical object or article or thing resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use, or bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

This amendment will take effect retrospectively from 1st April, 2009 and will, accordingly, apply in relation to the assessment year 2009-2010 and subsequent years.

Memorandum explaining the proposals:

As per the explanatory memorandum, the purpose of inserting definition is to remove any kind of ambiguity. However, as discussed later the definition itself has inconsistencies and ambiguities. The new definition may in fact unsettle many settled legal positions.  

Use of word manufacture in the Income Tax Act:

We find use of this word in several sections and in different context within the existing Act. We find use of the expression in section 2(13), 2(18), 10, 10A, 10AA, 10B, 10BA, 10C, 28, 32, 32A, 32AB, 33, 33A, 33AB, 33ABA, 33B, 35, 35AB, 43, 55, 72A, 80HH, 80HHA, 80HHC, 80I, 80IB, 80IC, 80IE, 80JJAA, 80P, 80RRA, 80RRB, 92A, 115WC, 139, 206C, 280ZB, the Schedules  V, XI, XIII, XIV AND APPENDIX I. some of these provisions are now not in force and same may be redundant also. However, judicial pronouncements in respect of those provisions are still relevant. On many redundant provisions also some disputes are still to be resolved as matters are pending before authorities and/ or courts in different stages. Therefore, it can be said that the new clause may be useful in decision making of pending cases also.   

Analysis of new definition:

Flexibility of expression or definition:

The definition is flexible and is subject to the context in which the word may appear. Therefore different views may be taken in different contexts and in respect of different propositions.

The flexibility is further extended by use of expression with its grammatical variations. This is because grammatical variations can be reasons of different purposes, meanings and conclusions.

Restrictive word 'means'

However, the word 'means' has also been used. The use of word 'means' in provision can be considered as lending to exactness or exhaustive meaning. Therefore, it will again depend on grammatical variations and also context. In some circumstances wider and in other restricted meaning can be applied by courts.

Therefore, the preamble of section and words used in beginning of the new definition provide scope of taking different views and therefore ambiguities and lack of clarity which will lead to litigation.

Necessary attributes for manufacture:

Considering it as a meaning we find following attributes necessary for an activity or end result to be considered as manufacture:

Non-living objects: it is applicable to non-living physical object or article or thing, therefore living articles or things are out of scope. Thus growing of chicks into hen will not manufacture. Similarly growing of a sapling into a big tree will not be considered as manufacture. (These activities are really called production or producing)

There should be a change in a non-living physical object or article or thing.

The change should result in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

The change should bring into existence a new and distinct object or article or thing with a different chemical composition or integral structure.

Object or article or thing:

Use of above three expressions increase scope of the items that can be covered. For example a fixed bridge may not be regarded as an article or thing but a flexible or movable bridge can be regarded as an article or thing. However, a fixed bridge or building can definitely be regarded as an object. A building is made out of various raw material, fittings, and it is definitely different from the materials from which it is made say bricks, steel rods, sand, cement etc. Therefore, in the context of the new definition it can be said that a building or a fixed bridge is also a result of manufactured item because they are something material that may be perceived by the senses and they are different from what goes into making them.

No change no manufacture:

As discussed above any of specified change is necessary attribute to involve manufacture. Therefore, in case there is no change, it may not amount to manufacture for the purpose of Income Tax Act. There may be a manufacture as per Central Excise Act but it is not necessary that the activity will be a manufacturing activity for the purpose of Income Tax Act. For example, packing of goods in small packets, labeling, relabeling etc may amount to manufacture for excise duty, but it may not amount to manufacture for the purpose of Income Tax Act. Therefore, in many circumstances a process which involves a factory, application of power and label, addition of further materials etc. but it may not be manufacture in context of new clause.

Mere processing may not involve manufacture:

Therefore, in many cases many processing activities will not amount to manufacture for the purpose of Income Tax Act, though they may amount to manufacture for other laws like Central Excise Act, Factories Act etc.

Retrospective effect:

The provision has been given retrospective effect only for the assessment year 2009-10 and it will apply for future also. Why the retrospective is only for the just current affair (by way of filing of current regular returns) is not understandable. The definition is in nature of aid for interpretation, therefore why this definition should not be applied for pending matters. In view of author the definition can be applied for earlier years also.

Living things or articles are produced but once rendered non living, they may be manufactured:

Living animals and vegetation will be covered by this expression therefore. Even otherwise production of living things is considered as production and not manufacture in common parlance and as per general understanding. Fro example It is said that green tea leaves are produced in a tea garden and black tea is manufactured in a tea factory. Another example can be of hens - chickens and eggs are produced in a poultry farm but Chicken curry or omlate or egg curry is processed and manufactured in a kitchen. Egg omlate and omlate curry are different things used for different purposes they have different chemical composition, character, trade name, utility. Therefore, now kitchen will also be a place of manufacturing article or things.

Once tea leaves or any other leaves or fruits are plucked from tree, bush, shrub or plant, they are no longer a living thing. Any process of such items will involve manufacture. Similarly once a hen or got is cut/ killed it is no longer a living object, processing of  meat of hen or got or other animal will therefore involve manufacture.

Non living things- bricks and buildings:

Bricks are not same as sand, similarly a heap of bricks is not a wall of bricks. Therefore we find that sand, bricks, brick walls and a building all are different article or thing or object. A fixed building may not be considered an article or thing, but it is definitely an object.

Definition in the Central Excise Act, 1944:

The definition is analyzed with highlights as follows:

Section 2. Definitions. In this Act, unless there is anything repugnant in the subject or context,—

(f) "manufacture" includes any process,—  

i. incidental or ancillary to the completion of a manufactured product; (See Note 1)

ii. which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or

iii. which, in relation to the goods specified in Third Schedule involves packing or re-packing of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer, and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;

The above definition of manufacture in Central Excise Act is materially different from the new definition proposed in the Income Tax Act, 1961 even if we ignore that the definition in Central Excise Act is in relation to scheduled items thereto.