Income Tax Appellate Tribunal - Chennai
Income Tax Officer (Osd) vs Shri Swasan Chemicals (M) Pvt. Ltd. on 6 July, 2007
Equivalent citations: [2008]300ITR171(CHENNAI), MIPR2008(2)240
ORDER
Shamim Yahya, Accountant Member
1. This appeal by the Revenue and Cross Objection by the assessee are directed against the order of Commissioner of Income Tax (Appeals)-V, Chennai dated 26.3.2005 and pertain to assessment year 2002-03.
Revenue's appeal:- I.T.A. No. 2511/Mds/05 A.Y. 2002 03:
2. The issue raised in the appeal is that the Commissioner of Income Tax (Appeals) erred in holding that the assessee is engaged in manufacture of specialized polymer alloys in powder form and is entitled to deduction Under Section 80IB of the Act.
3. In this case the assessee company is an SSI Unit engaged in manufacturing of plastic powder and claims deduction Under Section 80IB. During the course of assessment Assessing Officer noted that assessee company purchases plastic granules and crushes them to plastic powder which is sold. This, according to the Assessing Officer did not qualify for deduction Under Section 80IB.
4. The Assessing Officer reasoned that, there is a difference in "manufacturing" and "processing". The processing is one of the stages of manufacturing activity. 'Manufacturing' means, producing articles from raw materials. Here, the nature and character of finished product is entirely different from raw materials, i.e., the identity of the goods changes completely. But in processing the article or thing only passed to a different physical form and identity of the raw material is partly or fully restored in the finished product. In the instant case, the plastic granules are pulverized to produce plastic powder. Hence, there is only a change in physical form and nature and character of raw material remains in the finished product. Accordingly, the Assessing Officer disallowed the claim of deduction Under Section 80IB.
5. Upon assessee's appeal the learned Commissioner of Income Tax (Appeals) elaborately discussed the issue and held that he was convinced that the assessee was engaged in manufacture/production of various polymer powders for the following reasons:
i) The assessee company manufactures various polymer powders (Fusing Powders) by using the combination of various polymers like LDPE, LLDPE, HDPE, EVA (of different technical parameters viz. Melting Point, M F I, (Specific gravity etc.) along with speciality chemicals. The finished products manufactured are in powder form. The products manufactured by the assessee are not merely plastic powders but they are specialized polymer alloys in powder form, the products manufactured find application in different industries depending on its character and use. Each product is distinct and finds specific application as per details furnished by the assessee.
ii) The assessee employs different types of machines involving number of steps. It is not pulverizing alone that is carried out, as observed by the Assessing Officer.
Even in pulverizing, different mills, viz. Rotor type and Disk type with calibrated air blowers, cyclones, rotary air-lock valves, etc. are used. The pulverizing machines are specially designed to achieve hi-precision control on temperature, speed and other manufacture parameters.
The process involves simple chilling plant used where critical and heat sensitive products are manufactured. It also involves use of seivers (Rotary & Vibro) which can produce specific micron size of powders. The processing involves mixing and blending for proper alloying and specific formulations of the powders manufactured. Ultimately, the finished powders are tested for their specific gravity/bulk density, micron size, moisture content etc. These tests are carried out in the in- house laboratory with the use of various testing equipments.
iii) In the process of manufacturing the raw materials would undergo complete change and a new distinct product emerges which is marketed with specific uses in industry-wise. It is relevant to mention that the raw materials cannot be used as substitute for the finished products and hence to equate finished products with raw material is incorrect.
6. The learned Commissioner of Income Tax (Appeals) further held that the case laws further relied upon by the Assessing Officer were on a different context and distinguishable. According to the learned Commissioner of Income Tax (Appeals), assessee's case was supported by the following case laws:
• Kailash Nath v. State of UP.
• Badri Prasad Prabha Shanker v. CST 14 STC 208 (Allahabad) • CIT v. Oswal Woollen Mills Ltd. 257 ITR 737, Rajasthan • Asphinwall and Co. Ltd. v. CIT 251 ITR 323 (SC) • CIT v. Tamilnadu Heat Treatment and Fetting Services (P) Ltd. 238 ITR 529.
Accordingly, learned Commissioner of Income Tax (Appeals) allowed the assessee's appeal.
7. We have heard the rival contentions and perused the relevant records. Before us, the assessee's submissions are as under:
The assessee is manufacturing various products of Polymer Alloys. These Polymer Alloys are manufactured using a combination of various polymers like LDPE, LLDPE, HDPE, EVA (of different technical parameters viz., Melting Point, M F I, Specific gravity etc.) along with specialty chemicals. The finished products manufactured are in powder form. The products manufactured by the assessee are not mere plastic powders but they are specialized polymer alloys in powder form.
The assessee manufactures various polymer alloys which find application in different industries. Each product is different in nature, character and use and technically different and can be used only for the specific application.
The raw material used for the above products are of different grades, specifications, melting point, specific gravity, etc. The raw materials used cannot be characterized as a single product as plastic granules. Plastic granules are a generic term and only imply the form of the material. The assessee uses various polymers as their raw material viz., low or high density polyethylene (LDPE or HDPE), ethylene vinyl acetate (EVA) and liner low density polyethylene (LLDPE) etc. Speciality chemicals are used in the manufacturing process. The raw materials are purchased Indigenously and also imported.
The manufacturing is done using expensive specialized equipments costing more than Rs. 50 lakhs which include special filters, rotors (different for each class of product), air blowers, cyclones, chilling plants, high speed mixers, rotary seivers, vibro seivers, automatic control panels, etc. In the manufacturing process, different materials in different ratios and proportions, based on the scientific formulations and specifications, requirement, usage and application, are put to manufacture along with special chemicals. The manufacturing process of each product is designed to avoid agglomeration and to also maintain technical parameters required for the finished product viz., bulk density, moisture content, micron size, etc. Pulverising is only one of the many processes of manufacture. The products pass through mechanical meshes and seivers which are provided based on the end use for which the product is required.
The product is subjected to various tests viz., micron analysis, bulk density test, melting point test and moisture content test etc., before the finished goods are approved for dispatch.
The finished products are completely different from the raw materials not just in mere form BUT also in nature, character and use. The technical aspects viz., basic polymer, melting point, MFI, Specific Gravity, etc. of the finished products are different from the raw material.
Apart from the highly sophisticated machineries, skilled labour (Diploma holders and in Certificate holders) are engaged to operate these special purpose machinery and also to carry out the various technical tests.
The product range itself is wide and the products carry different technical nomenclature and even in common parlance, they bear different names like fusing powder, micro dot powder, scatter powder, low profile additives, upfilter filtration media, etc. The supplies are made to reputed companies for different use. The assessee is one of the major manufacturers of such type of powders in the country.
The process employed is a complex one and not merely limited to pulverization or crushing as wrongly understood by the Assessing Officer, who was also invited to visit the factory and satisfy himself as to the processes. But the learned Assessing Officer has totally ignored the submissions of facts made during the assessment and has come to an incorrect conclusion on facts and has based his interpretation of law as to what is meant by manufacture with reference to such incorrect understanding of the fact.
8. The learned counsel of the assessee further submitted that the granules can be used for making other products also. The final product in this case is recognised in the trade as distinct commodity from the raw material. The learned counsel further placed reliance upon CEGAT decision in the case of Rotomould (India) Pvt. Ltd. v. Collector of Central Excise, Baroda for the proposition that pulverizing plastic granules into plastic moulding powder is a process of manufacture and the moulding powder is an excisable commodity falling for classification under Central Excise Tariff Act, 1985.
9. The learned counsel of the assessee further placed reliance upon following case laws:
i) 251 ITR 323 Asphinwall and Co. Ltd. v. CIT (SC)
ii) 287 ITR 620 CIT v. Jamal Photo India (Mad)
iii) 284 ITR 222 CIT v. Premier Tobacco Packers P Ltd. (Mad)
iv) 241 ITR 262 CIT v. Sree Krishna Pulverising Mills (A.P.)
10. The learned Departmental Representative, on the other hand, supported the order of the Assessing Officer and further placed reliance upon Hon'ble Apex Court decision in CIT v. Gem India Manufacturing Co. 249 ITR 307 and Sacs Eagles Chicory v. CIT in 255 ITR 178 and Special Bench decision of the Tribunal in the case of Shaw Scott Distilleries (P) Ltd. 255 ITR 15 (AT).
11. We have carefully considered the rival contentions and perused the relevant records. Section 80IB of the Income-tax Act provides deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. In Sub-section (2) briefly following conditions have to be satisfied for application of this section to any industrial undertaking:
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence,
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India;
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.
12. Upon a careful reading of the above, in our opinion, in this case for claiming relief under the aforesaid section the assessee has to satisfy two broad conditions:
i) Firstly, the assessee has to produce evidence to establish that it is a new undertaking as envisaged under the Act; and
ii) Secondly, that it manufactures or produces any article or thing not being any article or thing specified in the Eleventh Schedule.
Admittedly, in this case, there is no dispute that there is a new industrial undertaking as envisaged in the Act. The matter requiring adjudication is whether the undertaking can be said to be manufacturing or producing any article or thing.
13. We also find in this case that the Assessing Officer has proceeded on a premise that assessee is not entitled to deduction Under Section 80IB as according to the Assessing Officer, assessee is engaged in processing and not manufacturing. In our opinion, this is an erroneous approach and the distinction made is an extraneous interpolation in the sanguine provisions of Section 80IB.
14. We may also mention that amongst other conditions for claiming deduction, under Section 80IB(2) in Clause (iii) has been stated as under:
It manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule or, operates one or more cold storage plant or plants, in any part of India.
The word "produce" tantamounts to processing of goods. In fact, the word "manufacture" or "produce" in this section shall have to be read independently and separately, otherwise only the word "manufacture" could have been stated in Section 80IB(2)(iii) and not "produce.
15. For our aforesaid proposition, we draw support from Hon'ble Apex Court decision in N.C. Budharaja's case. Hon'ble Apex Court in the case of CIT v. N.C. Budharaja and Co. and Anr. 204 ITR 412 has expounded the word 'production' as under:
The word "Production" has a wider connotation than the word "manufacture". While every manufacture can be characterised as production, every production need not amount to manufacture. The word "production" or "produce", when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods.
Similarly in the case of CU Gem India Manufacturing Co. 249 ITR 307 the Hon'ble Apex Court has recognised that manufacture or production can result in new article or thing.
16. Now, we deal with the case laws relied upon by the learned Departmental Representative:
1) CIT v. Gem India Manufacturing Co. 249 ITR 307:
In this case, the Hon'ble Apex Court had held that in absence of any material on record, it cannot be held that polished diamond is a new article or thing which is the result of manufacture or production.
2) Sacs Eagles Chicory v. Commissioner of Income Tax 255 ITR 178:
In this case, Hon'ble Apex Court had held that no manufacture or production is involved in preparation of chicory powder. This was so held on the fact that, for making the powder from chicory roots, the roots are roasted and then powdered and there was nothing else describing the process.
3) Shaw Scott Distilleries (P) Ltd. 255 ITR 15 (AT):
In this case, the Special Bench of the Tribunal had noted that assessee had purchased 'potable' spirit and 'potable' spirit is already manufactured and does not require any manufacturing and some processing was required to produce IMFL like brandy, whisky, rum by adding certain percentage of water, colour and essence for marketing. On these facts, the Tribunal had held that there was no manufacturing process involved.
17. In our opinion, the above case laws are not applicable on the facts of the present case. Now, we deal with the decisions of the Hon'ble Apex Court and Hon'ble High Courts in support of assessee's case:
1) Bongaiaaon Refinery and Petrochemicals v. CIT 251ITR 323:
In this case, the Hon'ble Apex Court, while determining what would amount to 'manufacture' has expounded as under:
This court while determining as to what would amount to a manufacturing activity held in Deputy CST v. Pio Food Packers [1980] 46 STC 63 : [1980] Supp. SCC 174; that the test for determination whether manufacture can be said to have taken place is whether commodity which is subject to the process of manufacture can no longer be regarded as the original commodity, but is recognized in the trade as a new and distinct commodity. It was observed (page 65):
Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place.
2) CIT v. Taj Fire Works Industries :
In this case, Hon'ble Jurisdictional High Court had held that, That apart, it is also relevant to rely on the decision of the Apex Court in Hindustan Poles Corporation v. Commissioner of Central Excise , wherein it is held as follows (page 413 of (2006) 6 RC):
27. A Constitution Bench of this Court in Union of India v. Delhi Cloth and General Mills Co. Ltd. , had attempted to decide the meaning of expression 'manufacture'. The court held that 'manufacture' which is liable to excise duty under the Central Excise and Salt Act, 1944, must therefore be the bringing into existence of a new substance known to the market'.
In this case, the Hon'ble Supreme Court had held that the cutting of jumbo rolls of typewriter/telex paper into smaller rolls amounts to 'manufacture' since distinct identifiable article having distinct name, function and use has arisen.
4) Aspinwall and Co. Ltd. v. CIT :
In this case, the Hon'ble Apex Court had held that, The word "manufacture" has not been defined in the Income Tax Act. In the absence of a definition, the word "manufacture" has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity.
The Supreme Court in the decision cited supra, held that the assessee after plucking or receiving the raw coffee berries made them undergo nine processes to give them the shape of coffee beans. The final produce was absolutely different and separate from the input. The change made in the article resulted in a new and different article which was recognised in the trade as a new and distinct commodity.
The coffee beans had an independent identity from the raw material from which they were produced. Conversion of the raw berry into coffee beans was a manufacturing activity. The assessee was, therefore, entitled to the investment allowance under Section 32A.
5) CIT v. Premier Tobacco Packers P. Ltd. 284 ITR 222:
In this case, Hon'ble Jurisdictional High Court has held that, Though the assessee was doing only processing work and was not involved in manufacture, the process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which results in the production of a commercially different article. If a commercially different article or commodity results after processing then it would be a manufacturing activity. The assessee after thrashing and redrying, which is called as Virginia flue-cured tobacco (VFT) in commercial parlance, converts them into lamina and N.R. Stems, etc. The end product is used in the manufacture of cigarettes and the raw materials, namely, Virginia flue-cured tobacco (VFT) could not be used directly in the manufacture of cigarettes. The assessee after processing the raw Virginia flue-cured tobacco converts them into tobacco which is a commercially different commodity. Conversion of the Virginia flue-cured tobacco into tobacco would be a manufacturing activity.
6) CIT v. Jamal Photo Industries (I) P. Ltd. :
In this case, Hon'ble Jurisdictional High Court has held that, The expression 'manufacture' involves the concept of changes effected to a basic raw material resulting in the emergence of, or transformation into, a new commercial commodity. But it is not necessary that the original article or material should have lost its identity completely. All that is required is to find out whether as a result of the operation in question, a totally different commodity had been produced.
7) CIT v. Sree Krishna Pulverising Mills 241 ITR 262 (A.P.):
In this case, Hon'ble Andhra Pradesh High Court had held that crushing barytes into powder is production of article as the barytes powder is a distinct and separate article from barytes, not only in form and name but also in use and hence the assessee was entitled to deduction Under Section 80HH and 801.
18. Now, adverting to the facts of the present case, we find that here the assessee is involved in production of specialized polymer alloys in powder form that are commercially different from the polymer granules. The process of production itself involves a number of steps and processes. The result is that final polymer alloys in powder form are not the same as original product. The final product has application in various industries. The raw material cannot be substituted for the final product. The production process results in not only qualitative change, but also gives the product distinct appearance and character which is so recognised in the trade. Hence, it can be concluded that the production process in this case results in a commercially different product having specific characteristics and qualities acquired through a series of steps and processes.
19. Hence, on the basis of aforesaid discussion and case laws, in our considered opinion, it has to be concluded that the assessee in this case satisfies the requirement, that it manufactures or produces an article or thing for the purposes of Section 80IB of the Act.
19.1. However, it will not be out of place to refer to the Hon'ble Apex Court decision (226 ITR 625 CIT v. Podar Cements Ltd. and Anr.) that construction beneficial to the assessee should be adopted in case of ambiguity and (233 ITR 775 Mysore Minerals Ltd. v. CIT) that in interpretation of taxing statute interpretation beneficial to the assessee should be adopted. Hence we affirm the order of learned Commissioner of Income Tax (Appeals) and decide this issue in favour of assessee.
20. CO. No. 23/Mds/06 A.Y. 2002-03:
The Cross Objection by the assessee is supportive of Commissioner of Income Tax (Appeals)'s order. Since we have already upheld the order of the learned Commissioner of Income Tax (Appeals) in Revenue's appeal above, this Cross Objection by the assessee becomes in fructuous.
21. In the result, the Revenue's appeal in I.T.A. No. 2511/Mds/05 is dismissed and Cross Objection by the assessee stands dismissed as in fructuous.