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TMI Blog2021 (7) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms of Section 80IA of the Income Tax Act, 1961. Also If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, Shri Sanjeev Kumar Agarwal, wherein, the concerned employee, on query being raised regarding the manufacturing process adopted by the assessee, stated that the manufacturing activity involves mixing of certain raw materials at a time in a tank and manual stirring is done. Based on such statements recorded from the concerned employee, the AO called upon the assessee to explain why the deduction claimed under section 80IC of the Act should not be disallowed, as there is no manufacturing activity. 3. In response to the query raised, though, the assessee furnished a detailed reply with supporting evidences, including a flow chart explaining the manufacturing process, however, the AO was not convinced. He held that the assessee is actually re-mixing certain chemicals and preparing some products. Thus, he held that the assessee has not undertaken any manufacturing activity. Further, he held that the finished product manufactured by the assessee is organic/inorganic chemicals as classified under scheduled XII part B read with Chapter 28 and 29 of Central Excise Tariff. Thus, he held that as per section 80IC(2) of the Act, the products manufactured by the assessee are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years has allowed assessee s claim of deduction under section 80IC of the Act, however, he relied upon the observations of the AO. 7. We have considered rival submissions and perused the material on record. As could be seen from the facts on record, the assessee is engaged in manufacturing of odoriferous compounds. Undisputedly, on the profit derived from sale of manufactured products, the assessee has claimed deduction under section 80IC of the Act. The AO has disallowed assessee s claim of deduction primarily on the following two reasons; firstly, the process undertaken by the assessee does not amount to manufacturing activity and secondly, the finished products are classified as organic/inorganic chemicals on which deduction under section 80IC of the Act is unavailable. However, on a careful perusal the impugned order of learned Commissioner (Appeals), it is clearly revealed that he has gone through the entire facts and material relating to the manufacturing process undertaken by the assessee and has analyzed the entire process of converting the raw materials into finished products. This factual analysis has been enumerated in paragraph 7.8 to 7.15 of his order. After g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities 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 claiming as if he is engaged in manufacturing or production of an article. 5.1 On the other hand, the Learned counsel for the assessee vehemently relying on the order of the CIT(A) contended before us that the assessee is very much engaged in manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was submitted that all the finished goods are totally distinct, as is evident from the price list and all the raw materials are also totally different. 5.2 The assessee has also pointed out that the assessee is paying VAT depend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... micals 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 2. Aldehyde C 8 3. Aldehyde C 9 0.02 0.1 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 0.16 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 Benzophenone and rose crystals being solid were put in a jar and he applied heating process so that they can be converted into liquid form. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputer 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 amended by the Finance Act, 2003 w.e.f. 01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1959) 10 STC 500 (Bom.), clearly observed on the question whether the blending of ore, whilst loading it in the ship by means of the mechanical ore handling plant, constituted manufacture or processing or ore for sale within the meaning of section 8(3)(b) and Rule 13 of the Central Sales Tax Act, 1956. Dealing with this question, their lordships held and observed at pages 659 and 660 of the reports as under:- It still remains to consider whether the ore blended in the course of loading through the mechanical ore handling plant can be said to undergo processing when it is blended. The answer to this question depends upon what is the true meaning and connotation of the word processing in Section 8(3)(b) and Rule 13. This word has not been defined in the Act and it must therefore be interpreted according to its plain natural meaning. Webster‟s Dictionary gives the following meaning of the word process‟: to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, development of preparation for the market etc.; to convert into marketable form as livestock by slaughtering grain by milling, cotton by spinning, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng is done and what process is utilized for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical composition is a result of blending and so far as this aspect of the question is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and physical compositions. 5.12 Thus, the Hon'ble Supreme Court accepted that there is change in chemical compositions after processing of the iron ore. From the said decision of the Apex Court, it is apparent that Hon‟ble Apex Court held even blending of iron ore for the purpose of export involves change in the chemical and physical composition of iron ore. If we look to the facts of the impugned case of the assessee, we find that the assessee is mixing various chemicals either in liquid or solid form by applying a predetermined process and mixing them in a predetermined manner so that out of the mixing, entirely a new product come and its finished product technically after having the process of mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and residual products which emerge in the course of manufacture of goods. 5.14 In Christian Mica Industries Ltd. Vs. State of Bihar (1961) 12 STC 150 (SC), Hon‟ble Supreme Court defined the word production‟, albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word production in the Oxford English Dictionary, as meaning amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort . For the wide definition of the word production‟, it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word production‟ since ore is a thing‟, which is the result of human activity or effort. 5.15 According to Webster International English Dictionary, the verb produce means to bring forward, beget, etc. The juxtaposition of the word manufacture with agriculture‟ and horticulture‟ is significant and cannot be lost sight of. The intention in employing the word produced obviously was to introduce an element of volition and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parity of reasoning, blending of ore of different chemical and physical compositions could not be held to constitute processing‟ of the ore. Now undoubtedly there is a close analogy between the facts of Nilgiri Tea Company case [10 STC 500 (Bom HC)] and the facts of the present case, but we do not think we can accept the decision of the Bombay High Court in the Nilgiri Tea Company case [10 STC 500 (Bom HC)] as laying down the correct law. When different brands of tea were mixed by the assessee in Nilgiri Tea Company case [10 STC 500 (Bom HC)] for the purpose of producing a tea 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 mixing, qualitative change, in that the tea mixture which came into existence was of different quality and flavor than the different brands of tea which went into the mixture. There are, it is true, some observations in the judgment of the Bombay High Court which seem to suggest that if instead of manual application of energy in mixing the different brands of tea, there had been applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to be applied forthe purpose of determining whether the operation constitutes is processing‟. (iii) The question is not whether there is any 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 . 5.18 Therefore, Hon‟ble Supreme Court, in construing the expression processing allowed the appeal of the assessee, in Chowgule Co. Pvt. Ltd. (supra), holding, inter alia, that where any commodity is subjected to a process or treatment with a view to its development or preparation for the market it would amount to processing of the commodity within the meaning of Central Sales Tax Act, 1956. Hon‟ble Supreme Court, in the said judgment, did not consider the expression manufacture since the question was decided only on the expression processing . However, considering the judgment of the Bombay High Court in the case of Nilgiri Tea Co. [1959] 10 STC 500, Hon‟ble Supreme Court observed that, for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it would defeat the very object of section 10B of the Act. (similar to assessee‟s case). Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, would continue to enjoy tax exemption under section 10A of the Act and section 10AA of the Act respectively. The assessee was allowed exemption on the profit derived by its 100% EOU engaged in blending, packing and export of tea bags and tea packets. Hon‟ble High Court held as under: The finding of this court is that the purpose of incorporation of section 2(r) of the Special Economic Zones Act, 2005, into section 10AA of the Income-tax Act is to provide a liberal meaning to the word manufacture which takes in even blending, refrigeration, etc. It was noticed by this court that the definitions of manufacture contained in the above definition clauses are very liberal which takes in even processing like blending. The contention of the counsel for the assessee is that the purpose of removal of the definition of manufacture from section 10B was not to provide a restricted meaning for that term contained in the main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and tea packets. Consequently, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders of the first appellate authority declaring the appellant‟s entitlement for exemption. 5.20 Hon‟ble high court in this case, in our opinion, has clearly laid down that once the assessee is recognized as a 100% EOU for engaging in an activity and assessee is engaged in the same very activity, if the exemption is denied to the assessee on the ground that there is no production or manufacturing but only processing of the products exported in the 100% export oriented unit, the same would defeat the very object of section 10B. The Hon‟ble high court took the view that the decision of the Hon‟ble Supreme Court in Tara Agency‟s case 292 ITR 444 will not apply even though Hon‟ble Supreme Court in that case has held that blending of tea does not amount to manufacture or production of an article but is only processing. Thus, the Hon‟ble Kerala high court in the case of Tata Tea Ltd. (supra) gave the clear cut finding impliedly that even if the assessee is engaged in processing and is recognized as 100% EOU, it will be entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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:- 32. 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 Existing Special Economic Zone to mean every Special Economic Zone which is in existence on or before the commencement of the said Act. Section 2(e) defines the expression existing unit to mean every unit which has been set up on or before the commencement of the said Act in an existing Special Economic Zone. In other words, admittedly all Special Economic Zones were also being governed by the Exim Policy prior to the enactment of SEZ Act, 2005. Clause (iii) of Explanation 1 to section 1OAA lays down that the expression manufacture shall have the same meaning as assigned to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 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; The aforesaid definition of the expression manufacture , although brought into the statute book w.e.f. 01.04.2009, was applied by the Hon'ble Supreme Court even for the assessment year 2001-02 in ITO v. Arihant Tiles and Marbles Pvt. Ltd. (2010) 320 ITR 79, 82 (SC) on the ground that Parliament had taken note of ground reality in inserting section 2(29BA) in the Income Tax Law. The said definition was again applied by the Hon'ble Supreme Court in CIT V. Emptee Poly-Yarn Pvt. Ltd. (2010) Green Tea means the variety of manufactured tea commercially known as green tea; 320 ITR 665,667 (SC). 33. The As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 2004-05, exemption was declined for the reasons that by the Finance Act, 2000, the definition of `manufacture‟ which included 'processing' contained in section 1OB of the Act was deleted w.e.f. 01.04.2001. The argument of the department 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. We are of the considered view that the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. TOA of the Act and units in the free trade zone provided u/s, 10AA of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old 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. 37. Accordingly, we answer the question referred in favour of the assessee by holding that the assessees who are in the business of blending and processing of tea and export thereof, in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemption u/s.10B of the Act. Further, assessees who are in the business of blending and processing of tea hi respect of undertakings in free trade zones are manufacturer/producer of tea for the purpose of claiming exemption u/s. 10A of the Act. We have examined and discussed the facts in the case of Madhu Jayanti International Ltd. and found that there is blending of tea and consequently the assessee is eligible for exemption u/s. 10B of the Act as prayed for. Their appeal for the AY 2004-05 is allowed. As regards other appeals and that of the interveners, the matters are restored back to the Divis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities 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: 22. Applying the above tests laid down by this Court in CIT Vs. N.C. Budharaja and Co. 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only there is manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been termed as production is just mixing up of products and repacking the same. In support of this contention, he relies upon the statement given by an employee during the course of search proceedings. None of these submissions, however, impress us. Even though the order of the coordinate bench is confirmed by Hon‟ble High Court on technical ground, that does not mean, or even imply, that the binding nature of the decision, on merits, is affected. The decision of the coordinate bench binds us nevertheless. In any case, we have carefully perused the order of the coordinate bench and we are in considered agreement with the views so taken by the coordinate bench. As for the statement of an employee recorded during the search operation, it is not in dispute that, even going by that statement, the ingredients are mixed and it is this mixing of ingredients, as analysed in detail by the coordinate bench, constitutes manufacturing‟ in the light of the law laid down by Hon‟ble Courts above. Following the stand so taken by the coordinate bench, learned CIT(A), for the detailed reasons set out in his order, has held that the claim of deduction under section 80IC is adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that the assessee is engaged in trading in shares and securities. Hence, they are stock in trade of the assessee. It was submitted, since dividend income was earned out of such trading activity and not as a result of any investment activity, no disallowance of expenditure under section 14A can be made. The AO, however, was not convinced with the submissions of the assessee and proceeded to compute disallowance under section 14A by applying rule 8D. In the process, he disallowed an amount of ₹ 2,58,24,377/-. Assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee in the context of facts and material on record and relying upon certain judicial precedents, learned Commissioner (Appeals) deleted the disallowance on the reasoning that since the share/securities are held as stock in trade, they cannot be considered for computing disallowance under section 14A r.w.r. 8D. 12. The learned Departmental Representative submitted, learned Commissioner (Appeals) grossly erred in deleting the disallowance by holding that shares/securities are held as stock in trade. In support of such contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e securities are held as stock in trade. Learned Commissioner (Appeals) has accepted the aforesaid contention of the assessee while granting relief. However, the legal position has completely changed after the decision of the Hon ble Supreme Court in case of Maxopp Investments vs. CIT (supra), wherein, the Hon ble Supreme Court has very clearly held that no distinction can be made between investment and trading activity while applying provisions of section 14A r.w.r. 8D. In other words, the Hon ble Supreme court has held that the disallowance of expenditure under section 14A has to be made even on shares and securities held as stock in trade. As per Article 141 of Constitution of India, the law declared by Hon ble Supreme Court is the law of the land. Therefore, the law so declared by the Hon ble Supreme Court would override all other decisions of subordinate courts/Tribunals. That being the case, the decision of the Tribunal in preceding assessment years would be of no help to the assessee as by the effect of law declared by the Hon ble Supreme court, the decision of the Tribunal on the issue have become redundant. Moreover, while deciding the issue, as a judicial body, we cann ..... X X X X Extracts X X X X X X X X Extracts X X X X
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