Income Tax Appellate Tribunal - Cochin
Kanam Latex Industries (P.) Ltd. vs Income-Tax Officer on 9 June, 1993
Equivalent citations: [1993]46ITD418(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is a restored appeal.
2. The assessee is a closely held company deriving income from the business of centrifuging rubber latex. It claimed deduction under Sections 80J and 80HH of the Income-tax Act, 1961. The Income-tax Officer rejected the claim on the ground that the assessee was not an industrial company manufacturing or producing any article or thing. On appeal, the CIT (Appeals) followed the decision of the Tribunal dated 23-12-1983 in the assessee's own case in ITA Nos. 187 and 188 (Coch.)/1982 for the assessment years 1977-78 and 1978-79 and dismissed the appeal. Further he held that as the assessee did not employ ten persons on the average, even if it was engaged in manufacturing operations, it would not be entitled to deductions under Section 80J or 80HH of the IT Act. On second appeal, the Tribunal distinguished its earlier decision rendered for the assessment years 1977-78 and 1978-79 in the case cited supra on the ground that the notification dated 8-7-1983 (189 of 1983) which considered latex concentrate, preserved latex', etc. as manufactured goods was not brought to the notice of the Tribunal when it decided the appeal for the assessment years 1977-78 and 1978-79. According to the Tribunal, the notification made all the difference and after discussing certain decisions, it took the view that by means of centrifuging process normal latex is converted into preserved latex which is entirely a different commercial product. It thus upheld the claim of the assessee. The revenue obtained reference on the following two questions to the Hon'ble High Court of Kerala :
(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction under Section 80J of the IT Act ?
(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction under Section 80HH of the IT Act ?
The Hon'ble High Court in its judgment dated 22-2-1993 in ITR No. 167 of 1988 in RA No. 193 (Coch.)/1987 (arising out of ITA No. 465 (Coch.)/1984) held as follows :
On a perusal of the order of the Appellate Tribunal, we get the impression that it was influenced largely in taking the said view by the notification of the Government of India dated 8-7-1983 passed under the Central Excise and Salt Act and practically taking the view that the said notification concludes that preserved latex is an item produced by the manufacturer and so, the assessee will be entitled to deduction under Sections 80J and 80HH. We are of the view that the Appellate Tribunal over-emphasised the effect and impact of the notification of the Government of India (No. 189/1983) dated 8-7-1983 and completely under-rated or diluted the legal effect and impact of the earlier decision of the Tribunal in ITA Nos. 187 and 188 (Coch.)/1982 dated 23-12 -1983. The earlier decision of the Appellate Tribunal and also the notification of the Government of India under the Central Excise and Salt Act have got only relevance. Neither the one nor the other will conclude the matter. The essential question that will fall to be considered is whether when normal or natural latex is converted into preserved latex by centrifuging process, any manufacturing process is involved or a new commodity produced. Afindingon this is essential. Such a finding can be entered only on the basis of evidence. Technical and scientific evidence can be gathered from competent persons or after understanding the process from standard books or literature, one has to appreciate the facts. That has not been done by the Appellate Tribunal in the instant case, nor has any definite finding been entered that by manufacture or production, a new and different article comes into being. These defects are fatal." Moreover, the test to ascertain or find out whether there is manufacture or production has not been adverted to or applied in the instant case.
Their Lordships further referred to certain decisions of the Apex Court for the useful guidance of the Tribunal and observed that "the Tribunal over- emphasised the effect of the notification promulgated by the Government of India under the Central Excise and Salt Act and completely under- estimated and diluted the legal effect of its earlier decision in ITA Nos. 187 and 188(Coch.)/1982 dated 23-12-1983. The approach to the question is totally faulty. The resultant conclusion is tainted. We hold that the decision of the Appellate Tribunal is not in accordance with law". In the circumstances, the Hon'ble High Court declined to answer the questions and directed the Tribunal to restore the appeal to its file and decide the matter afresh in accordance with law. This is how we came in seisin of the matter.
3. Sri K.I. John, the learned Chartered Accountant for the assessee and Sri P. Balakrishnan, the learned departmental representative advanced rival contentions. The burden of Sri Balakrishnan's contentions was based on the findings of the Tribunal in the assessee's own case in the order of theTribunal dated 23-12-1983 in ITA Nos. 187 and 188 (Coch.)/1982 for the assessment years 1977-78 and 1978-79. Sri John submitted before the Tribunal samples of the following and contended that the centrifuged latex is a marketable commodity unlike the normal latex and it has a market of its own as it constituted the raw-material for manufacture of foam rubber, gloves etc. Samples are as follows :-
(1) Cup latex taken from the tree which as per the note has coagulated;
(2) The normal latex after application of ammonia ;
(3) Centrifuged latex after centrifuging in the machine;
(4) Rubber sheet which is another form of product, from latex.
(5) The scrap which is collected from the bark of the tree;
(6) The skim waste obtained by centrifuging process;
(7) Foam rubber for which the only raw material is the centrifuged latex and no other materials can be used;
(8) Gloves for which the only raw material is the centrifuged latex.
Sri John also relied on the statement of the Rubber Board, (Department of Processing and Product Development) to buttress the point that the centrifuged latex has got different specifications and standards and is totally different from normal field latex. Further, he relied on the following decisions:-
(1) CIT v. J.B. Kharwar & Sons [1987] 163 ITR 394 (Guj.);
(2) Empire Industries Ltd. v. Union of India [1986] 162 ITR 846 (SC);
(3) CIT v. Union Carbide India Ltd. [1987] 165 ITR 550 (Cal.);
(4) CIT v. Sri Venkateswara Hatcheries (P.) Ltd. [1988] 174 ITR 231 (AP);
(5) CIT v. R. Narayanaswami Naicker& Sons [1984] 149 ITR 283 (Mad.);
(6) CIT v. Cellulose Products of India Ltd. [1991] 192 ITR 155 (SC);
(7) CIT v. Poyilakkada Fisheries (P.) Ltd. [1992] 197 ITR 85 (Ker.); and (8) CIT v. Baraka Overseas Traders 1993 Tax. LR. 260 (Kar.).
He also relied on certain observations on pages 347 and 348 of the book titled "Handbook of Natural Rubber Production in India", published by the Rubber Research Institute of India, Rubber Board, Kottayam and the learned departmental representative had the advantage of going through the said book before making his submissions.
4. We have gone through the publication, the decisions and other materials on record. It is seen that natural rubber is negatively charged colloidal dispersion of rubber particles in an aqueous serum. The presence of non- rubber constituents like proteins, carbohydrates etc., in latex makes it a suitable medium for growth of micro-organisms. Because of the proliferation of mico-organisms, organic acids are produced and these decreases the stability of latex and eventually coagulate it. This is called spontaneous coagulation which takes place within a period of 6-12 hours. Hence, if latex is to be kept for longer periods, bacterial activity should be suppressed. This is accomplished by the addition of preservatives. Centrifuged latex is used for the production of foam, carpet, backings, dipped goods, rubber thread, adhesives, etc. (page 399) Processing into preserved field latex: That is natural latex with ammonia application. Although preserved field latex is not used as such in any manufacturing industry, there is good demand for this form of latex. It is a raw-material for latex concentration units. Many such units buy preserved field latex from small-holders. Also a large number of smallscale units producing latex products, for economic reasons, buy preserved field latex and concentrate it by creaming. For the preparation of preserved field latex, latex from the field is sieved and bulked and ammonia bubbled through it so as to get a concentration of 0.7-1.0 per cent on volume of latex. After ammoniation, latex is left undisturbed for about 15-20 minutes to allow separation of sedimentable impurities and reaction product. It is then transferred to drums, sealed and marketed. (page 403) Preserved latex concentrate : The process of latex concentration involves the removal of a substantial quantity of serum field latex, thus making latex richer in rubber content. The concentration of latex is necessary because of the following four reasons :
(i) Economy in transportation;
(ii) Preference for high DRC by the consuming industry;
(iii) Better uniformity in quality; and
(iv) Higher degree of purity. (page 405) Centrifuging : Although Biffin observed in 1898 that latex could be concentrated by centrifuging, no commercial development of the process took place until 1923 when the process was apparently rediscovered by Utermark. The process,was further developed by the Dunlop Rubber Company on a large scale in the Far East. Over 90 per cent of the concentrated latex is produced by centrifuging.
Principle of centrifuging : The theory of centrifugal concentration of latex is basically the same as that of creaming. In centrifuging, centrifugal force replaces gravitational force which brings about separation of rubber particles in creaming. Latex is subjected to strong centrifugal force, several thousand times the gravitational force, in a bowl rotating at high speeds whereby the individual rubber particles tend to separate into a layer surrounding the axis of rotation leaving an outer serum layer having a comparatively low rubber content. Each layer is removed through annular spacings around the axis of rotation. By controlling the time to which latex is subjected to such forces and by controlling the conditions of operation, latex having an original DRC of 30-38 per cent can be concentrated to DRC of 60 or more. Usually, the speed of the machine is fixed, so that the variables for the purpose of control, are: (i) the rate of passage of the latex through the machine and (ii) certain mechanical adjustments on the machine. It should also be noted that with increasing temperatures up to 50°C an increasing proportion of the total rubber is obtained in the concentrate. (page 411) Centrifuging process : The most widely used type of machine is the de Laval. Photograph of the said machine is at page 61 of the paper book and its details are shown at pages 62 and 63 of the paper book. The rotating mass of latex is broken into a number of thin conical shells within the bowl which rotates at speeds around 6000 rpm. The maximum distance which a particle has to traverse in order to pass from the skim to the cream is very small. Latex is fed to the centrifuge from a constant head device so as to ensure a constant flow through the machine. It enters the bowl through a central feed tube and then passes through a distributor to the bottom of the bowl where it flows through a series of holes into the interior of the bowl. The cream centrifuges inwards towards the axis of rotation and then empties from the bowl through holes into a stationary gully. The skim flows outwards away from the axis of rotation and leaves the bowl through orifices which are formed by regulating screws. It passes out of the centrifuge through a second stationary gully. The parts of the machine which comes into contact with latex should be constructed preferably out of stainless steel for avoiding contamination and preventing corrosion. The cream is separately collected in a bulking bank, it is ammonia content estimated and made up to 0.7 per cent or latex and packed in drums.
Efficiency of the process : The efficiency of the centrifuging process is defined as that fraction of the total rubber entering the machine, which effluxes in the form of concentrate. The important factors are the feed rate, angular velocity of the machine and length of the regulating screws. (pages 412 and 413) Skim latex and production of skim rubber: When field latex is centrifuged, in addition to the concentrate containing most of the rubber, an equal fraction in volume, containing a very small proportion of rubber is also obtained. This is known as skim latex. As the normal efficiency of centrifuging process is only 85-90 per cent, about 10-15 per cent of the incoming rubber, goes in the skim. The rubber content of skim latex lies between 2.5 and 10 per cent. (page 413) Recovery of skim rubber: This is by spontaneous coagulation or by acid coagulation. The coagulum obtained is processed into crepe or sheet by conventional means, taking special care to give thorough washing. (page 414) Use of skim rubber: The main application of skim rubber is in compounds requiring high hardness such as solings. The proportion of high styrene resins used in soling compounds may be reduced to a certain extent by using skim rubber.
23.3.3.5 Factory design : The important factors to be considered while designing a latex centrifuging plant are described below:
The plant shall preferably be located in a place which permits gravity flow of latex from one stage to the next. This will help to run the factory at a cheaper operating cost. When the factory is situated in level ground, flow of field latex from storage tanks is effected either by air pressure or by pumping. The factory floors should be in different levels. Field latex storage tanks are placed at the top most floor. These tanks should have sufficient capacity to hold at least two to three days' requirement of field latex. Just near the top level of these tanks there should be provision for parking tankers. The centrifuge machines are erected on the floor just below the field latex storage tanks. The field latex from each tank enters a header from which it is continuously flowing into the machines. There should be a chain block arrangement near the machines, which can move in two directions for lifting/replacing the bowls. Also facilities should be provided near the machines for washing the bowls. The concentrate storage tanks are placed on the floor next to the machine floor. The concentrate from the machines flows into a chute leading to these tanks. The skim which effluxes from the machine enters another chute leading to the skim collection tanks. The skim collection tanks should be situated a little away from the main factory floor so as to minimise the chances for bacterial contamination of latex. From the storage tanks, the concentrate enters a header having a number of stop-cocks. The drums are filled by opening these stop-cocks. There should be facilities for weighing and marking of the filled drums. Skim latex is coagulated in batches in shallow coagulation tanks, using dilute sulphuric acid which is stored in another tank. Creping machines are placed adjacent to the coagulation tanks. Suitable drying shed and packing shed/store are also necessary. The serum from the skim coagulation tank and the wash water from the creping unit flow into the effluent treatment plant, along with wash water from the main factory floor. The effluent treatment plant also should be situated a little away from the factory to minimise foul odour in the factory. The factory building should have good ventilation. A reliable water supply also should be provided. The factory should be located at a central place in the estate and there should be roads leading to it from various parts of the estate. While designing the factory, the full crop of the estate should be estimated and a complete plan prepared. The latex and skim storage tanks are made of either mild steel or concrete. In either case, the inside of the tanks should be provided with a protective coating of an alkaliresistant material like wax or bituminous paint.
23.3.3.6 Water and power requirements : Power requirement in latex concentration is low. A latex centrifuge of the type described above can be worked using a 15 hp. motor. In addition to this, electrical power is needed only in the operation of some stirrers which are used for blending or for de-ammoniation purpose. Some latex centrifuge factories also install crepe mills for processing the skim latex coagula. In such cases, the unit requires additional power.
5. The machines used in typical centrifuging plant are as follows :
1. Tanker.
2. Field latex storage tanks.
3. Centrifuging machines.
4. Concentrate storage tanks.
5. Drum filling.
6. Store.
7. Skim latex collection tanks.
8. Cone. Sulphuric acid storage tank.
9. Sulphuric acid dilution tank.
10. Skim coagulation tank.
11. Creping unit.
12. Crepe drying shed.
13. Skim crepe packing/storage.
14. Effluent treatment plant.
Wash water line. (The assessee has furnished the floor diagram also - page 63 of paper book).
6. The Department of Processing and Product Development, Rubber Board, (Ministry of Commerce, Government of India) had issued the following clarification to the assessee in its letter dated 4-5-1993 :-
Ref. No. 3/1/Adv/93/P&PD Dated: 4-5-1993.
To whom it may concern M/s. Kanam Latex Industries (P.) Ltd., Ooppoo til Buildings, Kottayamhad approached Rubber Board vide their letter No. KL/JT.80-81/93-94/174 dated 4th May. 1993 for issue of a certificate to them regarding the nature of centrifuged latex and the extent of its difference from normal latex collected from rubber plantations. Since the clarifications required by them are only of an explanatory nature, the following details are furnished to the party.
Centrifuged latex is produced by subjecting normal field latex collected from Rubber Plantations to centrifugal forces. As a result of the centrifugal action on the field latex that is passing through the latex centrifuging machine, it gets separated into two layers, one containing 60 to 62 per cent rubber content and the other containing 5 to 10 per cent rubber content. The layer which contains 60 to 62 per cent of rubber content is called centrifugally concentrated latex or simply centrifuged latex. The other portion which contains 5 to 10 per cent rubber is called the skim latex. Centrifugally concentrated latex is different from normal field latex in following respects :
(1) Rubber content in the centrifuged latex is in the range of 60 to 61 per cent whereas in normal field latex, rubber content is in the range of 30 to 40 per cent. (2) Non-rubber content in centrifuged latex is in the range of 1.5 to 2 per cent whereas in normal field latex non-rubber content is in the range of 2 to 3.5 per cent. (3) In centrifuged latex the particle size of the dispersed rubber phase is much larger than the particle size of the dispersed rubber phase in normal field latex.
Normal field latex as such cannot be used in the production of high quality rubber products like condoms, surgical gloves, examination gloves, catheters and rubber thread whereas for these products ideal raw material for manufacturing is centrifugally concentrated latex.
Although chemically both the latices contain the same rubber hydrocarbon there is a lot of difference in their physical nature. There is a set of specification also prescribed by Bureau of Indian Standards for centrifugally concentrated latex and these are given under IS 5430. For normal field latex there is no such specifications.
7. From the facts narrated above, we hold that although chemically both the centrifuged latex and the normal field latex contain the same hydro- carbon, yet there is a lot of difference in their physical nature. Qualitative changes make the centrifuged latex distinct from the normal field latex. The properties highlighted by the Rubber Board as between the centrifuged latex and the normal field latex cannot be dismissed as constituting a distinction without difference. The qualitative changes that come over the normal field latex when centrifuged make it a marketable commodity especially for products like, condoms, surgical gloves, catheters etc. Natural field rubber cannot be straightway used for such manufacture. Therefore, we hold that centrifuging is a process resulting in the production of an intermediary product known as centrifuged latex. The mere suffix "latex" cannot rob the centrifuged latex of the qualitative and the chemical changes which it had undergone from the natural field latex making it fit to be a marketable intermediate product. Prawns are prawns whether caught in the sea or exported in tins after processing, but the processing of the prawns by cutting the heads, deveining, peeling, freezing etc., have made them fit for export market unlike raw prawns and as a result it was held that the processing of prawns amounted to production or manufacture by the jurisdictional High Court in a number of cases in CIT v. Marwell Sea Foods [1987] 166 ITR 624 (Ker), Poyilakkada Fisheries (P.) Ltd. (supra) etc. In the case of centrifuged latex also the natural latex undergoes certain chemical and qualitative and physical changes and there is a ready market for centrifuged latex for industries manufacturing surgical gloves, condoms, tyres etc. Thus, the centrifuged latex has got a distinct market of its own unlike the natural latex. Therefore, we hold that the centrifuging process resulted in manufacture or production of a marketable commodity. Their Lordships of the Supreme Court in the case of Ujagar Prints v. Union of India [1989] 179 ITR 317 have observed as follows:
The prevalent and generally accepted test to ascertain whether there is 'manufacture' is to find 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, recognised as a distinct and new article that has emerged as a result of the processes. The principles are clear. But difficulties arise in their application in individual cases. There might be borderline cases where either conclusion with equal justification may be reached. Insistence on any sharp or intrinsic distinction between 'processing' and 'manufacture', we are afraid, results in an over simplification of both and tends to blur their interdependence in cases such as the present one...
In the case of the assessee, having regard to the differentiation between the normal field latex and the centrifuged latex, in rubber content, non- rubber content, particle size and the ineligibility of the normal field latex for use in the production of high quality products such as surgical gloves, condoms etc. and their difference in physical nature, we hold that by the process of centrifuging a different commodity that is capable of being to a totally different use as that from the natural latex had emerged and in the light of the decision of the Apex Court cited supra, the process can be said to have resulted in manufacture or production. The other cases relied on by the assessee do support its stand.
8. The Tribunal in its order dated 26-5-1987 has, on the basis of the materials filed before it, concluded that the assessee had employed more than ten persons in its undertaking and there was substantial compliance with the provisions of Section 80J(4)(iv) of the IT Act. These findings were not assailed in the reference application, obtained by the revenue and as such remain concluded in favour of the assessee.
9. In the result, we hold that the assessee is engaged in manufacture or production of an article or thing and, therefore, entitled to the deductions under Sections 80J and 80HH of the IT Act, 1961.
10. In the result, the appeal is allowed.