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TMI Blog2007 (1) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... of fact that mushroom powder can be consumed in bulk form nakedly without being put into any enclosure or it can be consumed by putting into the gelatin capsule. Putting of the mushroom powder into the gelatin capsule is for the purpose of smoothening its marketability which is nothing but a processing which does not amount to manufacture or production of a thing or article so as to fulfil the conditions stipulated for availing the benefit u/s 80-IB of the Act. For this purpose, we feel it pertinent to place reliance on the judgment of the Hon'ble Supreme Court in the case of Nilgiri Tea Co.[ 1959 (7) TMI 40 - BOMBAY HIGH COURT] , it was held that when different brands of tea are mixed by the assessee for the purpose of producing of tea mixture of a different kind and quality, according to the formula evolved by them, there was plainly indubitably processing of different brands of tea because these brands of tea experienced as a result of mixing, qualitative change in that the tea mixture which came into existence was of different quality and flavour than the different brands of tea which went into the mixture. But the question whether the processing brings into existence an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eswarlu ORDER CHANDRA POOJARI (ACCOUNTANT MEMBER) . 1. These two appeals by the assessee are directed against the common order of the Commissioner of Income-tax (Appeals), dated August 17, 2006, for the above assessment years. Since, the issues involved in all these appeals are common, these appeals were clubbed together, heard together and are being disposed of by this common consolidated order for the sake of convenience. The assessee raised the following grounds : (1) The Assessing Officer passed the order in violation of the principles of equity and natural justice and also denied opportunity of examining the witness from whom statements were recorded and used against the assessee for completing the assessment. (2) The Commissioner of Income-tax (Appeals) erred in confirming the disallowance of deduction under section 80-IB holding that the asses see is not engaged in manufacturing activities and instead is only doing trading of mushroom powder in a capsule form though the assessee is engaged in the operation of production of capsules. (3) The Commissioner of Income-tax (Appeals) erred in confirming the disallowance of payment of differential duty of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en purchased as a raw material from our suppliers. As finished goods when the powders are capsules they are then also in the nature of fine powder both in respect of Reishi Gano and Ganocelium, both in quality and in nature. Thus, the raw material does not undergo any change in quality and in nature with reference to the end product . . . the raw mate rial is filled in the same form in gelatin capsules. 4. The lower authorities observed that the assessee was importing two combination of edible mushrooms in bulk powder form and simply filling them into capsules so as to make them convenient for use as also its marketability. The assessee has not carried out any process of whatever nature on the inputs received in powder form. The so procured ready made mushroom powder was put in hard gelatin capsules which are polished and inspected before bottling in HDPE bottles which also contain Dhy Drating (dehydrating) agents. These bottles are capped, labelled, shrink packed and dispatched to the warehouse for final packing. According to the Department, the assessee' s job is limited to packing the pre-prepared powder in the form of capsules before marketing it. The assessee has got i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee stated more or less verbatim of what the production in charge stated before the Departmental authorities and also before us. For proper appreciation, we reproduce the same hereunder : The manufacturing/production activities including the process are as follows : (i) Filling section. The bulk drugs powder are filled in the powder hopper and the empty gelatin capsules are filled in capsules hopper of semi-automatic filling machine. The filling machine will be operated by the machine operators. The filling machine will be set to achieve the weight required for each filled capsule. The prescribed weight for RG capsule is 270 mg and GL capsule is 450 mg. During the production, it should be ensured that the temperature and humidity are within the limits and the weights of filled capsules are within the limit. Simultaneously, quality control will come for inspection and take samples of the filled capsules to carry out the necessary tests like disintegration test, microbiological test, moisture content test, stability test, weight test parameters and specification test, etc. The filling section maintains a separate production record. (ii) Polishing section. In polishing, the ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s affixed and subsequently released to warehouse. (ix) All the above manufacturing process of each section in production shall be done in the specified temperature and humidity as well as quality control and testing, and manufactured as per Schedule T to the Drugs and Cosmetics Rules, 1945. The RG and GL drugs are checked by quality control at each and every process. That every batch of raw mate rials packing materials , and batch of finished goods shall be tested by quality control by various test such as microbiological test, disintegration test, specifications test, moisture test, stability test, etc. (x) The warehouse also shall maintain the inventories of raw mate rials , packing materials and finished goods . The raw materials , packing materials and finished goods shall be stored and kept at separate places so as to comply with the Drugs and Cosmetics Rules, 1945. 8. From the above, it is evident that no injury was caused to the assessee by the Departmental authorities. The purpose of natural justice was not to defeat the justice but to promote and protect the justice. The argument of the assessee is only superficial and peripheral for which this foru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1960 SC 468, the Supreme Court observed that the concept of fair hearing is an elastic one and is not susceptible of easy and precise definition . Again, the Supreme Court in Fedco P. Ltd. v. S. N. Bilgrami, AIR 1960 SC 415, observed that there can be no invariable standard for reasonableness in such matters except that the court' s conscience must be satisfied that the person against whom an action is proposed has had a fair chance of convincing the authority who proposes to take action against him that the grounds on which the action is proposed are either non-existent, or, even if they exist, they do not justify the proposed action. The core decision on this question will necessarily and invariably depend upon the peculiar facts and circumstances of each case, including the nature of the decision-making body, the nature of the action proposed, the grounds on which the action is proposed, the material on which the allegations are based, the attitude of the party against whom the action is proposed in showing cause against such proposed action, the nature of the plea raised by him, his admissions by conduct or otherwise of some or all of the allegations, the effect of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court while determining as to what would amount to a manufacturing activity held in Deputy CST v. Pio Food Packers [1980] 46 STC 63 (SC) ; [1980] Supp. SCC 174 that the test for determination whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognized in the trade as a new and distinct commodity. It was observed (page 65) that : Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. 11. Learned counsel for the assessee submitted that the final product of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture. The honourable Supreme Court held that the article that emerged from manufacture should be distinct and new article recognized and known as such in the commercial parlance for sale or supply. He further submitted that in the case of Laminated Packings (P) Ltd. v. CCE [1990] 4 SCC 51, the short question that arose is whether the lamination of duty paid kraft paper with polyethylene would amount to manufacture. The honourable Supreme Court held by this process of lamination, distinct goods come into being and therefore it was manufacture. 13. Learned counsel for the assessee further relied on the case law in the case of CCE v. Eastend Paper Industries Ltd. [1990] 186 ITR 105 (SC), and submitted that the honourable Supreme Court held : excise is a duty on manufacture . Manufacture is the process or activity, which brings into existence new, identifiable and distinct goods. Goods have been understood to be articles known as identifiable articles known in the market as goods and marketed or marketable in the market as such. It was an essential requirement to be goods to be wrapped in paper. Anything required to make the goods marketable must form part of the manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch required. Capsules are solid dosage form in which drugs are enclosed in gelatin capsule cells and these capsules are prepared by special process designed to modify the rate at which the active ingredients are released. 16. Learned counsel for the assessee submitted that there are various advantages in putting the drug in capsule form as detailed below : 1. They obscure the taste and odour of unpleasant drugs. 2. They are attractive in appearance. 3. They are slippery when moist and, hence, easy to swallow with a draught of water. 4. If properly stored, the shells contain 12-15 per cent. of moisture which gives flexibility and, consequently, very considerable resistance to mechanical stress. 5. Less adjuncts are necessary than for tablets (see Carter et al., 1972b). 6. The contents are usually in fine powder which, combined with freedom or near-freedom from adjuncts, provides rapid and uniform release of medicament in the gastro-intestinal tract. 7. The shells can be specified (with titanium dioxide) or coloured, to give protection from light (contrast cachets). 8. The shells are made to very fine limits ; hence the cap and base fit well and give subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of another. No distinct article or thing had been produced. Alcohol remained alcohol throughout the processing stage till it was marketed. There was no difference between the potable spirit and the whisky or brandy except that in the process of production, water and certain essences had been added to them. The dealer and the consumer regarded both as alcohol. The activities of the assessee did not involve any manufacturing but only processing. Therefore, the assessee was not entitled to the benefit of section 80HH. 19. Apart from the above decision, learned counsel for the assessee relied on the following judgments : (i) CIT v. S. P. Jaiswal Estates P. Ltd. [1992] 196 ITR 179 (Cal) (ii) S. P. Jaiswal Estates P. Ltd. v. CIT [1994] 209 ITR 307 (Cal) (iii) CIT v. S. P. Jaiswal Estates P. Ltd. [1995] 214 ITR 448 (Cal) (iv) S. P. Jaiswal Estates P. Ltd. v. CIT [1995] 216 ITR 145 (Cal) (v) CIT v. Bharath Sea Foods [1999] 237 ITR 46 (Ker) (vi) CIT v. Relish Foods [1999] 237 ITR 59 (SC) (vii) CIT v. Venkateswara Hatcheries P. Ltd. [1999] 237 ITR 174 (SC) (viii) CIT v. Hindusthan Metal Refining Works P. Ltd. [1981] 128 ITR 472 (Cal) (ix) CIT v. Lucky Mineral P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s section. To avail of this deduction the industrial undertaking is required to fulfil certain conditions mentioned in the section. The important conditions in clause (iii) sub-section (2) of section 80-IB which reads as under : (iii) it manufactures or produces any article, or thing not being any article or thing specified in the list in the Eleventh Schedule or operates one or more cold storage plant or plants in any part of India: Provided that the condition in this clause shall in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub- section (4) shall apply as if the words ' not being any article or thing specified in the list in the Eleventh Schedule had been omitted' . 23. Thus, it is important that the assessee is engaged in the manufacture or production of any article or thing. 24. Now, the first question for consideration before us is whether there is a difference between the expressions produce and manufacture or they are exactly synonyms. The words manufacture or production have not been defined in the Income-tax Act, therefore, have to be accepted in their ordinary meaning as part of the statute. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abour or process on the existing raw material but also bringing to surface a natural produce of soil like agricultural product, horticultural product, production of fruits and vegetables and excavation of minerals and mineral oil from the product of plants which are grown by the cultivators, agriculturists through labours and other plant products as well as exploitation of other natural resources like mines. Thus, learned counsel for the assessee is right when he says that the word produce or production has a wider connotation than the term manufacture . 29. The expression produce in the context of producing any thing or article has been assigned its meaning in the Oxford Dictionary as under : 3b. of an animal or plant ; to generate, bring forth, give birth to, bear, yield (offspring, seed, fruit, etc.) ; (d) To work up from raw material, fabricate, make, manufacture (material objects) ; (e) To produce the goods, money, results. 30. Apparently, the expression used in the provision with which we are concerned relates to produce . 31. In contrast, the word manufacture has been defined to mean : 1b. The action or process of making articles or materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext of the provision of the Kerala Sales tax Act which required consumption of the fruit in the process before it could be termed as manufacture. The court said (page 66) : There is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient form and by reason of being canned, it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as a preservative. On a total impression, it seems to us, the pineapple slices must be held to possess the same identity as the original pine apple fruit. 36. In coming to this conclusion, the court referred to yet another decision from the East Texas Motor Freight Lines v. Forzen Food Express [1995] 100 L ed 917, where the United States Supreme Court held that dressed and frozen chicken was not a commercially distinct article from the original chicken. It was pointed out (page 66) : killing, dressing and freezing a chicken is certainly a change in the commodity. But, it is no more drastic a change than the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... growing plants on soil, or by operating mines and the like or for example, by milking the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk. 41. In CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412, the question has arisen before the Supreme Court for interpreting the like provision contained under section 80HH of the Income-tax Act, 1961, as is contained in section 80-IB with which we are concerned. Under section 80HH, one of the conditions for availing of the benefit of deduction under section 80HH was prescribed under sub-section (2) which was couched in the same language as is the provision of section 80-IB(2)(iii) with which we are concerned. The assessee had claimed that the foundation for superstructures on which the dam is to be constructed is an article manufactured by the assessee. The court referring to its earlier decision in Pio Food Packers [1980] 46 STC 63 (SC) ; [1980] Supp. SCC 174, reiterated the difference as under (page 423) : Commonly, manufacture is the end result of one or more pro cesses through which the original commodity is made to pass. The na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to undergo before it ultimately results into coffee beans amounts to manufacture as the coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished product. 45. In the case of Sterling Foods (Goa) [1995] 213 ITR 851, the honourable Bombay High Court has held that the expression manufacture and production used in the Act are to be understood in the context in which they have been used. These words used in different taxation statutes are not inter-changeable. Every process does not mean manufacture unless the processing results in the production of an article having a distinctive character, name, use and value. In the case of Deputy CST v. Pio Food Packers [1980] 46 STC 63 (SC) ; [1980] Supp. SCC 174 it was held that manufacture normally involves consumption of a particular commodity in the process of manufacture of another commodity. The goods purchased should be consumed and the consumption should be in the process of manufacture and result must be manufacture of other goods. There are special criteria for determining whether the commodity is consumed in the manufacture of another. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject matter of that Act. This principle has been clearly stated by the honourable Supreme Court in its judgment in the case of Ashirwad Ispat Udyog v. State Level Committee [1998] 8 SCC 85 wherein it was held that the decision constituting the meaning of the word manufacture as used in other statutes do not apply unless the definition of that word in a particular statute under consideration is similar to that constituted in the decision. The case of Laminated Packings (P) Ltd. v. CCE [1990] 4 SCC 51, and CCE v. Eastend Paper Industries Ltd. [1990] 186 ITR 105 (SC), and CCE v. Johnson and Johnson Ltd. [2005] 188 ELT 467 (SC) are all related to the Central Excise Act and hence the ratio of these cases cannot be applied to the present case on hand. Similarly, the judgment in the case of Deputy CST v. Coco Fibres 80 STC 249 (SC) was delivered in the context of the Kerala General Sales tax Act, 1963, and hence the ratio of this case also cannot be applied to the present case. The Supreme Court in the case of Aspinwall and Co. Ltd. v. CIT [2001] 251 ITR 323 and in the case of N. C. Budharaja [1993] 204 ITR 412 was of the opinion that bringing into existence a new commodity is of esse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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