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TMI Blog2005 (5) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... Court has held, in the facts of those cases, the industrial process as undertaken as not amounting to manufacture, and all in the context of some beneficial provision, and all of which would be of no avail, if the contention of the appellant company were to be accepted. The Hon'ble Supreme Court in a recent and popular case of IPCA Laboratory Ltd. v. Dy. CIT [ 2004 (3) TMI 9 - SUPREME COURT] expressed its unequivocal view in the matter The water being produced by the assessee-company, though popularly referred to as 'mineral water', is in fact, 'demineralized water', in that the excess minerals are removed from the raw tap water. It may be that further purification/treatment may lead to 'specialized water', as the 'Therapeutic Water' (not presently available in India) as referred to by the food technologist in his report, for specific application(s), as for selective patients who are forbidden intake of certain salts and which may be considered, on factual considerations, to be resulting from 'manufacture'. It would also be pertinent to state that the assessee's claim of having 'manufactured' its end product is being not acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess segment. We find the ratio of the Supreme Court decision in CIT v. Chandulal Keshavlal Co.[ 1960 (2) TMI 1 - SUPREME COURT] , wherein the Apex Court has held that the expenditure incurred for fostering the business of another or by way of distribution of profits, or gratuitously, or for some improper or oblique purpose outside the course of business is not deductible, as also of Associated Mining Industries Ltd.'s case, to be fully applicable to the facts of the case, i.e., the finding as to its dominant purpose of promoting its brand position/value and which it successfully attained. Its contention of being a revenue expenditure is, therefore, dismissed on the ground of absence of commercial expediency and the action of the lower authorities in disallowing its claim as such, upheld. In the result, we find no basis or interfering with the orders of the authorities below, which are upheld, dismissing the assessee's appeals. Unaccounted purchase of bottles - CIT(A) has not done so as gathered from his findings as listed in his order. Even more so, as the alleged lapse, i.e., the error in construing a credit for quantity discount as being against damaged/defective stock, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders for the relevant years, concluded that the assessee being engaged only in 'purification' of drinking water (for hygienic reasons), the industrial activity involved therein does not amount to 'manufacture' as contemplated under the Act, and as such, is not eligible for deduction under section 80-I of the Act. The CIT(A), before whom the matter travelled at the instance of the assessee, concurred with the findings of the Assessing Officer, again, after a detailed discussion vide his consolidated impugned order, citing case law, both to meet the arguments of the assessee, as well as to advance the Revenue's case, in the process. 3. The issue thus, as deciphered, is whether the industrial activity involved in the 'production' of demineralised water by the assessee-company amounts to manufacture within the meaning of the term as contemplated under section 80-I of the Act; there being no dispute as to the assessee's satisfaction of the other qualifying criteria as laid out in that section. 3.1 The 'manufacturing' process, as explained by the assessee, is as under:- Potable water received from Municipal Corporation is purified by Chlorine tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Law and of the Ahmedabad Bench of ITAT in the case of Asstt. CIT v. Hynoup Food Oil Industries (P.) Ltd. [1999] 63 TTJ (Ahd.) 111 as also the fact that the Excise Authorities had, in the case of one of the franchisees (Bottlers of the Bisleri packaged water), held the process as one of excisable manufacture leading to 'manufacture' of excisable goods. And which ratio, therefore, it was pleaded, would apply squarely to the assessee's case. The matter, he added, even if considered to be doubtful, should weigh in the favour of the assessee in view of the liberal construction that the provisions of beneficial deduction should merit, keeping in view the larger purpose and the object they subserve, as also the settled position in law that in case of two equally reasonable views, the one in favour of the assessee ought to be adopted. 3.3 The learned D.R., on the other hand, was equally vehement and emphatic in supporting the orders of the Assessing Officer and the learned CIT(A), which he pleaded had dealt with the subject in a very comprehensive manner, further arguing that if not so considered, every household or commercial establishment that installs a water purifier by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration, also referred to as tap water in common parlance. Indeed, millions, in fact majority, of our population consume this tap water for their drinking needs, without the deleterious affects that the learned A.R. would have us believe would befall if so done. Nevertheless, the term 'manufacture', though not mathematically precise, is also not a term of art, so that we are obliged to consider the case law as well as the other arguments cited before us by the learned A.R. before deciding the matter. Further, it would be pertinent to state, as also argued before us by the learned D.R., that the case law in respect of cognate legislation cannot have an automatic application and is to be used/relied upon with circumspection, i.e., with due regard to the object and the intent of that legislation. The Excise Law, indeed, deals with products that arise out of manufacturing or production activity. However, the whole focus there is the coming into existence of a product, which is listed under a tariff schedule, so that it becomes irrelevant whether the same arises out of manufacturing or processing or production activity, and which alone is of significance in the present case. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. 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 whether 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. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity. It is difficult to see how this decision, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess of deodorizing, held the processes undertaken as not leading to manufacture. It was only after this process (deodorizing) that the product was rendered fit for human consumption, complying with the standards laid down in its respect, and with which the buying public identified. Again, the decision, rendered in the facts of its case where a new product, distinct in its name, character and use comes into being, would not, to our mind, advance the assessee's claim. 4.4 In the case of Hynoup Food Oil Industries (P.) Ltd., wherein the process of refining of raw cotton seed oil into refined cotton seed oil was held to be a manufacturing activity, the decision was based on the factual understanding that the raw (unrefined) cotton seed oil is not at all eatable, and used, as well as sold, as washoil (being used primarily for the manufacture of soap), while the refined cotton seed oil is an edible product and used, among others, as a cooking medium, thus leading to a manufacture of a different commercial article with a different class of consumers, and which in the instant case purchased it for manufacturing of biscuits. It was these considerations that the ITAT departed from its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no specific provision in respect of this commodity unlike in some other cases, so that the product would continue to be non-excisable even under the new Tariff; (b) The Explanatory Note to HSN which reads as natural water, even if filtered, sterilized, purified or softened, is excluded (Heading 22.01) , and thus, removes the assessee's end product from the purview of Excise (Heading 22.01 covers natural or artificial mineral water and aerated waters, not containing added sugar or other sweetening matters, not flavoured ice ) nor is it covered under Chapter 22.02 which include 'sweetened or flavoured mineral water'; and (c) That if such products are to be considered as excisable, tap water for domestic use supplied by the Municipal Corporation could also get covered since 'waters' are specifically mentioned under Heading 22.01 of HSN though charging of duty is not intended. It would be profitable to reproduce the process of manufacture (of treated water) as described in the said Circular, and which we find is in agreement with the process as declared by the assessee, at para 2 thereof: ... water is treated with bleaching powder to eliminate injurious microorgani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned A.R. confirms so, but also that the report of the consultant food technologist dated 16-2-2004, filed by the assessee in support of its claim, clarifies that all such mineral salts (carbonates/bicarbonate/ sulphate, etc. of sodium, calcium, magnesium, etc.) which work up to 500 ppm or more in the raw water are reduced to 500 ppm in the treated water. Further, in the sample test report of the physical/chemical/microbiological characteristics, which forms Annexure-1 of the said report, we find that there is a reduction in the content of all such minerals from that found in raw water so that there is a removal of the minerals to that extent through the process of demineralization, rather than their addition. As such, reference to the case of M/s. Silver Springs Pvt. Ltd. does not in any manner help the assessee's case and, rather highlights the depreciable tendency on its part to conceal material facts as it would but be aware of the same, being the sole basis on which it has been able to, and for so long, successfully convince the Excise Authorities, and thus, avail exemption from the levy of excise. In fact, the Excise Authorities had, in view of a telex message found at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of doing violence to the plain and simple language used in the enactment as it was neither reasonable or permissible for the Court to rewrite the section or substitute words of its own for the actual words employed by the Legislature in the name of giving effect to the supposed underlying object, which after all, has to be covered only on the basis of reasonable interpretation of the language employed. We are in full agreement with the Assessing Officer as well as the first Appellate authority in this matter. In fact, the argument of the assessee, if given effect to, by, as prayed, construing the word 'manufacture' so as to include within its purview activity which would not otherwise qualify for the same, would be to negate the entire case law on the subject and the meaning of the term manufacture' as judicially interpreted and elucidated by the Courts. In fact, the learned D.R. has cited not less than five cases, wherein the Hon'ble Supreme Court has held, in the facts of those cases, the industrial process as undertaken as not amounting to manufacture, and all in the context of some beneficial provision (as also some High Court decisions), and all of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es tax cases i.e., Sterling Food v. State of Karnataka [1986] 63 STC 239 (SC). 9.1 It would be profitable to understand the decision of the Apex Court in the case of Kores India Ltd., which was based on the terra firma of the factual findings of the case. By way of elucidating the concept of manufacture, it extracts the fundamentals from its previous decisions, and lists them therein, as: 13. The prevalent and generally accepted test to ascertain that there is 'manufacture' is whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognized as a distinct and new article that has emerged as a result of the process, there might be borderline case where either conclusion with equal justification can be reached. Insistence on any sharp or intrinsic distinction between 'processing and manufacture' results in an oversimplification of both and tends to blur their interdependence. 14. To put differently, the test to determine whether a particular activity amounts to 'manufacture' or not is: Does new and diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic, as well as those who deal in it, regard it as such. In fact that is its USP, i.e., on the basis on which its sold and marketed - as a pure, and thus safe, water for human consumption. The water 'consumed' in the process, i.e., tap water, is also drinking water which satisfies the drinking needs of a large majority of our people, as indeed it has for the past many decades. As such, it is difficult to see how a new product has come into existence. It may be that the treated water as produced is a better or superior form of drinking water. But that would not alter the ratio afore-stated; we have, for that matter, a range of qualities for each product being sold in the market. But this would not make them, for that reason, to be recognized as separate (generic) products, so that the market strives to attract customers by building a brand name/image around it on the strength of any of its distinctive or superior attributes. 9.4 As long as the tap water, from which the treated water is churned out, is not declassified as drinking water, as being 'unsafe' for human consumption, we do not think that it shall be possible to consider the proposition, i.e., of the product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may have been deployed for the purpose, notwithstanding, as value addition, for which there could be several other contributing factors also, by itself, is not conclusive of the matter. 11.1 The only other ground in assessee's appeals (Ground No. 1 in ITA No. 2290/Ahd/1997) relates to the disallowance of advertisement expenditure amounting to Rs. 22,31,700. The assessee had, during the year under consideration, expended Rs. 35,61,628 on advertisement and publicity to promote its product/brand name, of which Rs. 22,31,700 pertained to the advertisement of the product 'MAAZA', which was neither manufactured nor marketed by it either during the relevant year or in the past. Upon inquiry, it was explained that the assessee had given possessing rights in respect of its Trade Mark 'MAAZA' for exploitation to its 100 per cent, subsidiary, namely, M/s. Golden Agro Products Limited and which manufactured and marketed the same by itself and through a network of bottlers. Further, in view of the sagging sales as well as to restore confidence among its franchisees, specially in view of the entry of a similar soft drink by the name 'MANGOLA', it had incurred this s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of its argument of maintenance of the brand value, in its capacity as its owner, it was held that, though a capital asset, expenditure on preservation of which would definitely qualify as a revenue expenditure, the same could not be held as deductible in view of the fact that it did not constitute a business asset in its hands. The learned CIT(A) thus rejected the assessee's claim. Hence this appeal. 11.3 Before us the learned A.R. reiterated the assessee's contention before the lower authorities stating that promoting its brand name as well as preserving its brand value and warding off - of competition was solely for business considerations, citing the case of R.C. Jain v. CIT [1973] 91 ITR 557 (Delhi) in its favour. The learned D.R., elaborating the arguments of the lower authorities placed full reliance on them, as also that the case law as cited is not fully applicable, while on other hand the Revenue's case stands fortified by the decision of the Hon'ble Calcutta High Court in Associated Mining Industries Ltd. v. CIT [1955] 27 ITR 429, as also of Gujarat High Court in the case of Sarabhai Sons (P.) Ltd. v. CIT [1993] 201 ITR 464. 11.4.1 We have heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orollary, as it is only with the increase in sales, or at best an arrest in its decline, that the brand value could be maintained or enhanced. 11.4.2 We are fortified in our finding by the fact that the assessee itself states that the incurrence of this expenditure would have 'crippled the resources' of M/s. Golden Agro Products Limited, its subsidiary, and the other franchisees and therefore, it had thought fit, as a strategic purpose, not to burden this special expenditure on advertisement, as doing so, apart from loosing on the tax benefit, to which we do not assign much significance (being reversible), would depress the profitability of the subsidiary, and thus the value of the related business which was under contemplation for sale, and for which it has, subsequently, been able to bargain for and fetch a fabulous price both in its hands as well as that of its subsidiary. 11.5 It has been contended by the assessee that the bottlers are its franchisees, and not of its subsidiary, and produced letters of arrangements entered into by it with them in substantiation of its claim. In our opinion, this is not relevant. For, as far as the franchisees are concerned, it would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplained to be on account of free replacement by the supplier in lieu of the broken bottles. However, this contention was not accepted by the Assessing Officer on the ground that the assessee could not furnish any details or records in respect of the broken bottles as kept by it for the purpose, as well as the fact that he observed that the assessee had, in fact, deducted a sum of Rs. 1,37,240 on account of damaged bottles from the account of the supplier, so that the question of free replacement by the latter did not arise. Before the learned CIT(A), however, the assessee contended that along with its written submissions to the Assessing Officer, it had furnished the confirmation from the supplier for the free replacement complete with the dates and challan numbers vide which the same was effected. As regards the deduction of Rs. 1,37,240 from its account, the same was stated to be on account of quantity discount allowed by the supplier and which fact was specifically mentioned in the credit note issued by the supplier so that this amount had no nexus or relevance with the breakages. The learned CIT(A) held in the assessee's favour on the basis of the foregoing, assailing also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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