2014 (9) TMI 502 - HC - Income Tax

Deduction u/s 80IC Process amounts to manufacture or not - Whether the process of drawing wire of thinner gauge from wire or rods of thicker gauge followed by finishing processes like annealing would amount to manufacture or production or consequently whether the assessee was eligible for deduction u/s 80IC of the Income Tax Act Held that - Following the decision in India Cine Agencies vs. Commissioner of Income Tax 2008 (11) TMI 15 - SUPREME COURT extracting granite from quarry and cutting it to various sizes and polishing should be considered as manufacture or production of any article or thing and the assessee s business activity must be considered as an industrial undertaking for the purpose of granting reliefs u/s 32A and 80-I of the Income tax Act. Wire manufactured can no longer be regarded as the original commodity In fact the final product is recognized in the trade as a new and distinct commodity - the wire rod having undergone various mechanized and chemical based processes like annealing galvanizing etc. results into manufacture of wire with distinct name character and use - The name of the raw material originally is wire rod before processing and after processing it becomes wire of different types say paper/enamel insulated wires or strips or barbed wire GSS/Stay Earth wire chainlink etc. - Therefore it is commercially distinct commodity with a distinct name - The wires so produced are used for power cables industrial control cables electric motors transformers etc. but wire rod as a raw material cannot be used as such - even qualitative changes effected in the raw material through heating also amounts to a manufacturing activity . The qualitative changes effected in the raw material by various means like annealing quenching acid pickling and flux application galvanizing and following the zinc hot dip definitely amounts to manufacture - There is a complete transformation of raw materials into a new and different article having a different identity characteristic and use - The series of changes transform the commodity into a different commercial commodity whereby it can no longer be regarded as the original commodity but recognised as a new and distinct article - the Appellate Tribunal was justified in concluding that the paper insulated wires and strips of copper and aluminium being manufactured/processed by the assessees were commercially different from its raw material and further it is commercially known different in the market - the assessees were engaged in the manufacture of the product were entitled to the deductions claimed u/s 80IC of the Act Decided against revenue.

Issues Involved:
1. Whether the process of drawing wire of thinner gauge from wire or rods of thicker gauge, followed by finishing processes like annealing, amounts to manufacture or production, and consequently whether the assessee was eligible for deduction under Section 80IC of the Income Tax Act.
2. Whether the impugned judgment is contrary to the ratio of the judgment of the Hon'ble Supreme Court in Collector Central Excise vs. Technoweld Industries.

Issue-wise Detailed Analysis:

Issue 1: Process of Drawing Wire and Deduction under Section 80IC
The primary issue was whether the process of drawing wire of thinner gauge from wire or rods of thicker gauge, followed by finishing processes like annealing, constitutes 'manufacture' or 'production' under Section 80IC of the Income Tax Act, thus making the assessees eligible for deductions.

1. Assessee's Claim: The assessees argued that their process of drawing wires from wire rods, followed by insulation coating and other finishing processes, constituted 'manufacture' or 'production' of a new article or thing. They detailed the various stages involved, including annealing, pickling, galvanizing, and coating, which transformed the wire rods into insulated wires or strips used in electrical transformers.

2. Revenue's Argument: The revenue contended that the process did not amount to 'manufacture' or 'production' as the original commodity (wire rod) did not undergo a substantial change, and the resultant commodity was still wire, albeit of different dimensions.

3. Tribunal's Findings: The ITAT allowed the appeals, holding that the processes undertaken by the assessees amounted to 'manufacture' or 'production'. They noted that the wire rods underwent significant transformations, including changes in size, chemical composition, and physical properties, resulting in a commercially distinct product.

4. High Court's Analysis:
- The court examined various precedents, including the Supreme Court's interpretation of 'manufacture' and 'production' in cases like India Cine Agencies vs. Commissioner of Income Tax and CIT vs. Sesa Goa Ltd.
- It was noted that 'manufacture' involves a transformation resulting in a new and distinct article, while 'production' has a broader meaning, encompassing activities that bring new goods into existence.
- The court emphasized that the processes described by the assessees, such as annealing, galvanizing, and insulation, resulted in a new product with distinct commercial identity and use, different from the original wire rods.
- The court concluded that the processes undertaken by the assessees constituted 'manufacture' or 'production', making them eligible for deductions under Section 80IC.

Issue 2: Comparison with Technoweld Industries Judgment
The second issue was whether the impugned judgment contradicted the Supreme Court's decision in Collector Central Excise vs. Technoweld Industries, where the process of drawing wire from thicker to thinner gauge was held not to constitute 'manufacture'.

1. Revenue's Reliance on Technoweld Industries: The revenue argued that the case of the assessees was similar to Technoweld Industries, where the Supreme Court held that drawing wire to a thinner gauge did not amount to 'manufacture'.

2. High Court's Distinction:
- The court distinguished the present case from Technoweld Industries, noting that the assessees were engaged in additional processes beyond mere wire drawing, including chemical treatments and insulation, which significantly altered the properties and commercial identity of the product.
- The court observed that in Technoweld Industries, the process involved only mechanical drawing without substantial transformation or creation of a new product with different properties.
- The court reiterated that the processes undertaken by the assessees resulted in a new and distinct product, thus constituting 'manufacture' or 'production'.

Conclusion:
The High Court dismissed the appeals, holding that the processes undertaken by the assessees amounted to 'manufacture' or 'production' under Section 80IC, and the assessees were entitled to the claimed deductions. The court found no contradiction with the Technoweld Industries judgment, as the facts and processes involved were significantly different. The court's detailed analysis and reliance on various judicial precedents reinforced the conclusion that the assessees' activities qualified for the deductions under the Income Tax Act.

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