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TMI Blog2019 (4) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Revenue s statement of facts in the instant case file makes it clear that the said watches formed part of assessee s brought forward stock worth 3,55,72,579/-. It therefore emerges that the assessee had very well manufactured the said wrist watches in the eligible undertaking only in earlier assessment years and derived profits from sale in the impugned assessment year. Revenue s grievance regarding the assessee s deduction claim relating to this latter issue of wrist watches. Direct the Assessing Officer to finalise consequential computation of assessee s claim u/s 80IC deduction disallowance only to the tune of the amount relating to the former issue of pan masala manufacturing as per law. X X X X Extracts X X X X X X X X Extracts X X X X ..... r appellate proceedings. The Revenue states very fairly that at the outset that all the relevant fact qua the above sole issue are identical in these five assessment year(s). We therefore treat ITA 1962/Kol/2016 for assessment year 2007-08 as the "lead" case. 3. We now come to relevant facts. The assessee stated to be engaged in manufacturing and trading activities. The relevant manufactured items is "pan masala". The Assessing Officer issued section 148 notice dated 03.03.2014 after forming reasons to believe that the instant taxpayer's business activity neither amounted to manufacture nor production of any article or thing u/s 80IC(2) and therefore its corresponding deduction claimed of ₹436,98,608/- resulted in escapement of taxable income from being assessed. 4. Case file suggests that assessee filed its objection petition dated 16.03.2015 challenging validity of reopening. The Assessing Officer declined the same in his separate order dated 30.03.2015 as reproduced in extempore in impugned re-assessment framed on 31.03.2011. He was of the view that the assessee inter alia not filed its return within the stipulated time of thirty days', sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 01.04.2007. The Assessing Officer further held that "pan masala" could not be treated as a food item in view of National Food Processing policy specifying various projects namely fruits and vegetables, fisheries, meat and poultry products milk, diary, Brewesy items, consumer industry's major products & plantation major products. He took note of the legislative developments incorporating section 80IE of the Act with effect from 01.04.2007 specifically excluding the above corresponding manufactured items in the relevant list. 7. The Assessing Officer further went for a very comprehensive and detailed discussion on manufacturing aspect of the issue. He observed that the same had to involve inter alia production of article from use of raw material by giving such material of new form, quality, properties by applying process upon the said raw material, material concerned to have undergone transformation into a new and different article commercially different from the initial raw material and that the relevant process must be connected with the ultimate production of goods only. The assessing authority further was of the view that assessee's Form 3CD containing capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Excise Department B. Sales Tax and VAT Department of the Govt of Sikkim. C. Registration under the relevant provisions of the Industries Act (DIC) of the Govt of Sikkim D. Service Tax Registration All the above registrations are valid and are effective form the date / year of manufacture viz 2006. C. I find that Gazetted Officers of the Ministry of Finance, Central Board of Excise and Customs have made sworn affidavits before the Hon'ble High Court of Sikkim certifying and confirming that the Appellant firm was engaged in the Manufacture of Pan Masala and Wrist Watches from the inception of the firm and also in the AY in question. D. Be that as it may be, the Apex Court in Arihant Tiles & Marbles Pvt. Ltd. case ([2010] 186 TAXMAN 439 SC) by a Three Member Bench has settled this issue once and for all. The Apex Court held as follows in its concluding paragraph. 'Before concluding we would like to make one observation. If the contention of the Department is to be accepted, namely that thee activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondent is paying excise dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed by the Assessing Officer but allowed by the CIT(A). The facts relating to this ground are that the Assessing Officer found that there had been search in the case of the assessee and during the course of search conducted at the residential and business premises, the statement of the employee of the assessee was recorded. The Assessing Officer, on the basis of the statement, took the view that the assessee was not doing any manufacturing or processing activity. It was only mixing and repacking various ingredients and selling these in the market. The Assessing Officer was not convinced with the reply of the assessee therefore, he took the view that the assessee has not complied with primary condition as given u/s 80IC of being engaged in manufacturing or processing. The Assessing Officer therefore, disallowed the claim u/s 80IC of the Act. The assessee went in appeal before the CIT(A) who examined the manufacturing process and the relevant evidence and came to conclusion that the assessee is engaged in manufacturing process whereas finished product is distinct from raw material and allowed the deduction to the assessee u/s 80IC by holding as under: "6(5) The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be added in a proper chronological manner and a proper formulation without which the finished goods cannot be produced. 6(6)(ii) Some of the features explained by the appellant outline the following significant characteristics - • Mixing has to be done at controlled temperatures to get the desired chemical reaction. The finished goods are themselves a result of Chemical reactions only. • Several raw materials used by the appellant are hazardous chemicals, which are not per se fit for human consumption or application. However scientifically derived formulations, whereby other chemicals and substances are mixed with such material, such that the hazardous properties are removed are used by the appellant. • Several natural oils and flavours, which may otherwise rot/decay with passage of time, and are in concentrated form are required to be treated and blended with other chemicals etc. so as to render them usable in various types of industries and applications. • Mixing cannot be done without proper lab testing techniques and without studying the behavioral pattern of various blends over a period of time, which may range from one hour to 15 days. The blen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. I therefore direct the AO to allow deduction of ₹ 31,31,98,995/- to the appellant. The appellant gets consequent relief." 5. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below as well as the documents placed before us. The only question before us is whether the assessee is engaged in manufacturing activities to be eligible for deduction u/s 80IC of the Act. The provision of section 80IC although lays down various conditions to be complied with by an undertaking to be eligible for deduction u/s 80IC(3) of the Act but the Revenue did not raise any objection in this regard except that the assessee is not engaged in manufacturing or production of an article. Learned D. R. even though vehemently relied on the order of the Assessing Officer but did not deny that the assessee has not failed to comply with other conditions as stipulated u/s 80IC of the Act for the purpose of being eligible for deduction 80IC of the Act. His main thrust of the argument was that the assessee was not engaged in manufacturing or production of an article. He was simply mixing the various chemicals and on that basis he was claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hemicals, which are not per se fit for human consumption or application. However, scientifically derived formulations, whereby other chemicals and substances are mixed with the material, such that the hazardous properties are removed, are used by the assessee. Several natural oils and flavors, which may otherwise rot/decay with passage of time, and are in concentrated form are required to be treated and blended with other chemicals etc. so as to render them usable in various type of industries and applications. Mixing cannot be done without proper lab testing techniques and without studying the behavioral pattern of various blends over a period of time, which may range from one hour to 15 days. The blended mixtures' properties change as some chemicals react over a period of time, while in some cases reactions are instant. It was further submitted that the testing is done at each stage by again reacting the finished products with other chemicals and substances, at various temperatures depending on the intended use of the finished product. Thus, it was expressed that the industry requires high expertise, specialization and knowledge of organic as well as inorganic chemistry. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee i.e. sweet gulab and compound bela. 5.4 On 15/09/2016 the representative of the assessee appeared along with three chemical engineers of the assessee company having different chemicals in small bottles along with the induction and glass jars. The assessee first demonstrated how the sweet gulab is manufactured. The chemical engineer showed us 15 items out of which two were in solid form while 13 were in liquid form. He pointed out that the items brought by him for manufacturing 100 gms of sweet gulab were as under: 1. Aldehyde C 11 Undecylic 0.1 2. Aldehyde C 8 0.02 3. Aldehyde C 9 0.05 4. Benzophenone 10 5. Cis-3-Hexanol 0.05 6. Cis-3-Hexanyl Acetate 0.08 7. Citral 0.5 8. Citronellol 15 9. Damascone Beta 0.04 10. Geraniol 12 11. Geranium Chinese 4 12. Linalool 0.8 13. Phenyl Ethyl Alcohol 47 14. Rose Crystals 10 15. Rose Oxide Indian 0. 5.5 He told us about each and every item and also pointed out that each of the items has to be put up in the jar in the same seriatim as it appeared in the list. If these items are mixed up in different order, the desired sweet gulab will not come and the product will be just a waste. Two items namely Benzo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing shall include production of computer programme. CBDT vide its circular no. 528 dated 16/12/1988 176 ITR ST. 154 explained the [provisions enacted by the Finance Act, 1988 under para 8.2 of the circular. In this circular, CBDT had clearly explained that the said new sec. 10B had been inserted in the statute book with a view to provide further incentive for earning foreign exchange so as to secure that the income of a 100% EOU shall be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years. The exemption provided under this new section was similar to the one provided under sec. 10A of the Act to industrial undertaking operating under the free- trade zone. It was also clarified therein that the expression 'manufacture' for the purpose of both sections 10A and 10B of the said Act would include any processing or assembling or recording of programme on disc, tape, perforated media or other information storage device. 5.7 This definition of 'manufacture' was removed when sec. 10A and 10B of the Act were amended by the Finance Act, 2001 w.e.f. 01/04/2001. Sections 10A and 10B of the Act were further amende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot;development or preparation for the market", as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Om Prakash Gupta Vs Commissioner of Commercial Taxes [16 STC 935 (Cal)]. What is necessary in order to characterize an operation as "processing" is that the commodity must as a result of the operation, experience some change. Here, in the present case, diverse quantitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the mixing, as shown to us during the course of hearing and during the course of demonstration of two items, as given by us in the preceding paragraph, both the products manufactured are entirely different from the various chemicals and the items used by the assessee. These items so produced have a different name, different utility and they are being used for different purposes in soaps, detergents, edible items, juices etc. according to the fragrances and taste to be given to these items. These items so produced are different in physical appearance and chemical composition. We do not agree with Learned D. R. that there is not any change in physical and chemical composition of the output than the input as is being processed in the case of the assessee. If we go to section 2 sub-section (29BC) inserted with effect from 01/04/2009, we find that clause (b) of this section clearly states that bringing into existence of new and distinct object or article or thing with different chemical composition or integral structure, tantamount to manufacture. Even though they remain in liquid form but it is not a case that all the ingredients which are being mixed are in liquid forms. The taste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o existence some goods. 5.16 In paragraph 7 of its in the case of Chowgule & C0 (P) Ltd. Vs. UOI (supra), Hon'ble Apex Court also considered the question whether the different brands of tea purchased and blended by the assesses for the purpose producing the tea mixture could be said to have been 'processed', after the purchase, within the meaning of the proviso to section 8(a), so as to preclude the assesses from being entitled to deduct their turnover under section 8(a), so as to preclude the value of the tea purchased by them. The relevant observations made by the Hon'ble Supreme Court in this respective are quoted and set out herein below for ready reference: "7. The Revenue however relied on the decision of the Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay [10 STC 500 (Bom HC)]. The assessees in this case were registered dealers in tea under the Bombay Sales Tax Act, 1953 and they purchased in bulk diverse brands of tea and without the application of any mechanical or chemical process blended these brands of different qualities according to a certain formula evolved by them and sold the tea mixture in the market. The question a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court might have come to a different conclusion and these observations were relied upon by the Assessee, since in the present case the blending was done by application of mechanical force, but we do not think that is the correct test to be applied for the purpose of determining whether there is 'processing'. The question is not whether there is manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes 'processing' we are clearly of view that the blending of ore in the course of loading through the mechanical ore handling plant amounted to 'processing' of ore within the meaning of Section 8(3)(b) and Rule 13 and the mechanical ore handling plant fell within the description of "machinery, plant, equipment" used in the processing of ore for sale...... " 5.17 In deciding the said question, the Hon'ble Supreme Court after considering the judgment of the Hon'ble Bombay High Court in Nilgiri Ceylon Tea Supplying Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a mixture of a different kind and quality according to a formula evolved by them, there was plainly and indubitably processing of the different brands of tea, because these brands of tea experienced, as a result of a qualitative change, in that the tea mixture which came into existence was of a quality and flavor from the different brands of tea which went into the mixture. 5.19 Hon'ble Kerala High Court had the occasion to consider whether assessee is engaged in the manufacture or production of an article or thing when assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285. Hon'ble High court noted in that case that the Revenue's stand is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending and packaging of tea for export was treated as 'manufacture' or 'production' of an article qualifying for exemption. Hon'ble Kerala High Court considered the contention of the assessee that the scheme of income tax exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f that was so, then the Legislature would have only modified the definition clause. Further, the definition of 100 per cent export oriented unit even after the amendment is retained in the said section, which defines it as an undertaking which has been approved as a 100 per cent export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of powers conferred by section 40 of the Industries (Development & Regulation) Act, 1951, and the Rules made under that Act. It is pertinent to note the products for which the assessee's unit is recognized as a 100 per cent export oriented unit are tea bags, tea in packets and tea in bulk packs. In fact, the assessee is exclusively engaged in blending and packing of tea for export and is not manufacturing or producing any other article or thing. Still it is recognized as a 100 per cent export oriented unit by the concerned authority within the meaning of that term contained in the definition clause of section 10B of the Income tax Act and the Department has no case that the assessee's unit engaged in export of tea bags and tea packets is not a 100 per cent export oriented unit. So much so, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rieties of tea to make it of 'uniform and consistent' quality throughout the year. Thereafter, it is packed in consumer packets of 50, 100, 250, 500 or 1000 gms. Etc. or packed in the form of tea bags of 1.94 gms. Or 2 gms. etc., as the case may be. The assessee claimed exemption u/s 10B of the Act in respect of its 100% EOU for export of manufactured jute bags, packet tea, tea bags, bulk tea, etc. The AO rejected the claim of assessee of exemption u/s 10B in respect of export of blending of tea. The rejection of exemption u/s 10B was confirmed by the CIT(A). When the matter went before the special Bench, Special Bench after discussion the relevant provisions as well as the various decisions of High Court and the Supreme Court held as under:- The provisions of section 10AA of the Act was inserted on the statute book by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006. Even prior to the enactment of the said SEZ Act, Special Economic Zones (including units therein) were all along treated like EQU / FTZ / EPZ for all purposes whatsoever and were dealt within the Exim Policy accordingly. Section 2(k) of the Special Economic Zone Act, 2005 defines the expression "E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol Order, 1957 issued by the Government of India, Ministry of Commerce & Industry (Department of Commerce) the expressions "flavour tea", "green tea" "instant tea", "packet tea" "quick brewing black tea", "tea" and "test bag" have been separately defined as distinct product. In Tea (Marketing) Control Order, 2003 issued by the ' Central Government, in exercise of the powers conferred by section 30(5)(3) of The Tea Act, 1953, the expressions "manufacturer", "Buyer", "Packet Tea", "Tea Bag",- "Green Tea", "Quick Brewing Black Tea", "Instant Tea" and "Made Tea" have also been distinctly and separately defined. Clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 w.e.f. 01.04.2009 to define the expression "manufacture" as under: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said Act is manufacture / production of tea ; the object being grant of benefits of tax exemption to exporters carrying out their operations in FTZ, EOU, EPZ & SEZ areas in accordance with the Exim Policy declared by the Government of India in Parliament and in the light of allied and governing laws; in the light of allied laws e.g. The Tea Act, 1953, The Prevention of Food Adulteration Act, 1953 read with Prevention of Food Adulteration Rules, 1955. The Tea (Marketing) Control Order, 2003, The Tea (Distribution & Export) Control Order, 2005 as well as the Rules and Regulations framed by the Tea Board and also Calcutta Tea Traders Association from time to time as discussed above. We find from the above facts and circumstances and case laws relied on by both the sides that the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee's division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce & Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for AYs 2000-01 onwards, which was granted upto the AY 2003-04. However, for the AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 2003, etc. We also find that the definition of 'manufacture' as per Section 2(r) of the SEZ Act, 2005 is incorporated in Section 10AA of the Income-tax act with effect from 10.02.2006. Hon'ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in Section 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term `manufacture' under the common parlance, and it includes processing, blending, packaging etc. In view of the above and respectfully following the decision of Hon'ble Kerala High Court in the case of Girnar Industries (supra) and Tata Tea Limited (supra), we "hold that the assessee is entitled for exemption under Section 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under Section 10A of the Act. Accordingly, we answer the question referred in favour of the assessee by hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility of deduction under section 80HH and 80-I as has been given by the Kerala High Court in the case of Tata Tea discussed herein above for the purpose of section 10B, that if there was no manufacturing activity, then the question of referring to item 10 of Eleventh Schedule for the purpose of exclusion does not arise. From this judgment, thus, it is apparent that the Hon'ble Apex Court accepted that manufacture/production includes processing also. 5.26 We have also gone through the decision of Hon'ble Supreme Court in the case of ITO Vs. Arihant Tiles and Marbles Pvt. Ltd. 320 ITR 79(sc). In this case when the assessee was engaged in the activity of cutting and polishing of marble blocks, the question before the Supreme Court was whether the activities undertaken by the assessee would fall within the meaning of the words 'manufacture or production' in section 80-IA of the Income-tax Act, 1961? In this case, Hon'ble Supreme Court, after discussing the definition of 'manufacture' given in section 2(29BA) of the Income-tax Act, 1961 and also discussing the provisions of section 80- IA(2)(iii) and after going through various decisions, held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the assessee shall be entitled for the deduction available u/s 80IC of the Act. We accordingly confirm the order of CIT(A) as in our opinion, no illegality or infirmity is found in the order of CIT(A)." We adopt the above detailed discussion mutatis mutandis to decline Revenue's first and foremost plea qua "manufacturing" aspect to conclude that the assessee can be safely held to have manufactured / produced its "pan masala" in the specified unit site in Sikkim. 10. Next come the Revenue's latter arguments based on inter-play of impugned section 80IC deduction provision vis-à-vis operation of the restrictive covenant enshrined in Thirteen Schedule's negative list read with positive list of the Fourteenth Schedule (supra) relevant to the specified list of article(s) or thing(s) in issue. We find first of all that hon'ble apex court's latest constitutional bench's decision in Commissioner of Cusoms vs. Dilip Kumar Roy Civil Appeal No.3327 of 2017 decided on 30.07.2018 has gone into a very elucidate discussion on the issue of basic tenets of literal or strict interpretation to be adopted with regard to a taxing statute, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y now that it has manufactured "pan masala" in its specified unit situated in Sikkim state. Its claim throughout was that "pan masala" is covered in 7th item Part-B in the Fourteenth Schedule (applicable for the state of Sikkim) to be "Food processing including agro-based industries, processing, preservation & food packaging of fruits and vegetables (excluding conventional grinding / extraction units). We are of the view that the above item in the positive list is meant to promote food processing including of agro- based industries, processing, preservation & food packaging of fruits and vegetables only. We go by ordinary grammatical meaning of food processing to be " the process by which food is processed for consumption by humans or animals" as per Collins English dictionary therefore. We repeat that the Assessing Officer threw sufficient light as per suitable references; sector-wise, that "pan masala" does not find place in National Food Processing policy as well. The assessee's section 80IC deduction claim therefore fails to satisfy the requisite test of its inclusion in positive list of specified articles or things prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form no. 35 and statement of facts. His further case is that section 80IC deduction issue does not emanate from the Revenue's grounds. We find no merit in this technical objection as both form no. 35 as well as statement of facts form part of record before us in the instant case file. It further transpires that the above stated grounds sufficiently seek to revive the Assessing Officer's action disallowing assessee's section 80IC deduction claim of ₹ 12,64,40,955/- relating to pan masala manufacturing. We therefore adopt judicial consistency to revive the impugned section 80IC disallowance under this said particular in tune with the learned co-ordinate bench's decision. The Revenue succeeds in its grievance to this extent. 5. We proceed further to notice that the assessee had also claimed u/s 80IC deduction from profits derived from sale of 7190 wrist watches. Learned D/R fails to dispute during the course of hearing that the Revenue's statement of facts in the instant case file makes it clear that the said watches formed part of assessee's brought forward stock worth ₹ 3,55,72,579/-. It therefore emerges that the assessee had very well manufactured the said wrist wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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