Income Tax Appellate Tribunal - Chandigarh
M/S J.B. Conductors & Cables,, Baddi vs Department Of Income Tax on 16 February, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'A' CHANDIGARH
BEFORE SHRI H.L.KARWA, HON'BLE, VICE PRESIDENT
AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA No. 18/Chd/2012
Assessment Year: 2008-09
The ITO, Vs M/s J.B. Conductors & Cables,
Baddi Distt. Solan
PAN No. AABFJ0572D
(Appellant) (Respondent)
Appellant By : Shri N.K. Saini
Respondent By : S/Shri Ashwani Kumar/Aditya Kumar
Date of hearing : 16.2.2012
Date of Pronouncement : 21.2.2012
ORDER
PER H.L.KARWA, VP This appeal filed by the Revenue is directed against the order of CIT(A), Shimla dated 21.10.2011 relating to assessment year 2008-09.
2. Ground No.1 of the appeal reads as under:-
1 On the facts and in the circumstances, the ld. CIT(A) has erred in allowing the deduction claimed u/s 80IC amounting to Rs. 90,35,729/-.
3. Briefly stated the facts of the case are that the assessee is carrying on the business of drawing of Copper and Aluminum Wires since 7.3.1990. The assessee claimed deduction u/s 80IC of the Income Tax Act, 1961 (in short 2 'the Act'). In the case of the assessee for assessment years 2004-05 to 2007- 08, it was held that activities of drawing wires of thinner gauges from wires and rods of thicker gauges did not amount to manufacture or production, as the original commodity i.e. wire did not undergo any change in the process and the resultant commodity was also wire, albeit of different dimensions.
The plea of the assessee was that it was manufacturing insulation wires and strips of copper and aluminum which is a different product form its original raw material termed as 'wire rods', therefore, the assessee contended that it fulfills all the three conditions required for qualifying as a manufacturer.
The assessee also contended before the Assessing Officer that ITAT Chandigarh Bench vide order dated 13.11.2009 passed in ITA No. 215/Chandi/2009 in the case of assessee for assessment year 2005-06 has decided the issue in favour of the assessee. However, the Assessing Officer observed that the Revenue has not accepted this decision of the Tribunal and filed an appeal before the Hon'ble High Court of Himachal Pradesh. The Hon'ble High Court vide order dated 1.7.2010 passed in ITA No. 20 of 2010 has admitted the appeal on following s ubstantial questions of law:-
(i) Whether the process of drawing wire of thinner gauge from wire or rods of thicker gauge, followed by finishing process like annealing would amount of manufacture or production and consequently whether the assessee was eligible for deduction u/s 80IC of the Income-tax Act.
(ii) Whether the impugned judgment is contrary to the ratio of the judgment of the Hon'ble Supreme Court in Collector Central Excise v. Technoweld Industries?"
In view of the above, the Assess ing Officer held that the deduction u/s 80IC of the Act on the income drawn f rom the activity of drawing wire cannot be 3 held to be eligible for deduction u/s 80IC of the Act. Therefore, the deduction claimed u/s 80IC of the Act amounting to Rs. 90,35,729/- was disallowed by the Assessing Officer. On appeal, the CIT(A) following the decision of the ITAT Chandigarh Bench of the Tribunal dated 30.11.2009 in assessee's own case for ITA No. 215/Chandi/2009 allowed the claim of the assessee and hence the Revenue is in appeal before the Tribunal.
4. We have heard the rival submissions and have also perused the materials available on record. We find that the issue in hand is squarely covered in favour of the assessee and against the Revenue by the decision of ITAT Chandigarh Bench 'B' dated 30.11.2009 in assessee's case in ITA No. 215/Chandi/2009 relating to assessment year 2005-06. The issue before the Tribunal was whether process of drawing of wires form wire rods constitute manufacture or production as to entitle the assessee for deduction u/s 80IC(1) read with section 80IC(2) of the Income Tax Act, 1961 (in short 'the Act').
The Tribunal decided the issue in favour of the assessee observing as under:-
"6. We have considered the rival submissions, perused the material on record, orders of the authorities below and, various judicial pronouncements relied upon by both the sides at the Bar. The short c ontro ve rsy befo re u s relate s to the provisions of Section 80IC, which have been introduced by the Finance Act 2003 and, were made effective from 01.04.2004 i.e. from assessment yea r 2004-05 onwards. Section 80IC(1) provides for de duc tion in respec t of profits and ga ins de rived by an undertaking or enterprise referred to in sub-section 80IC(2), in computing the total income of an assessee. The provisions of Section 80IC(1) are as follows:
"(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this 4 section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3)."
6.1. Sub-section (2) of Section 80IC enumerates down the undertakings and, enterprises to which the said section applies ("hereinafter referred to as the Eligible Undertakings"), in the following words:
"(2) This section applies to any undertaking or enterprise,-
(a) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any artic le or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning-
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Techno-logy Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in any of the North- Eastern States;
(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation 5 specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning-
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of the North-
Eastern States."
6.2. The provisions of Section 80IC(2) of the Act thus provide for two types of Eligible Undertakings. Clause (a) provides for deduction in case of industrial undertakings, which are:
i) Situated in an y notif ie d E xp ort Processing Zo ne or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park ("Notified Areas") in Sikkim, Himachal Pradesh, Uttaranchal, or any North Eastern State, as defined u/s 80IC(8)(vii); (hereinafter referred as 'Eligible States'); and
ii) are not engaged in the manufacture or production of any article or thing specified in thirteenth schedule of the Act.
Clause (b), on the other hand, deals with industrial undertakings, which are:
i) situated in any of the Eligible States, but not in any Notified Areas; and
ii) are engaged in the manufacture or production of any article or thing specified in the fourteenth schedule of the Act.
6.3. A careful perusal of the above would show that, clause (a) of sub-section (2) of section 80IC of the Act provides that, this section applies to any undertaking or enterprise which has begun or begins to manufacture or produce any article or thing and, which is not engage d in the manufacture or production of any article or thing specified in thirteenth schedule of the Act Thus, an Eligible Undertaking is required to manufacture or produce any article or thing before it becomes entitled to deduction u/s 80IC of the Act. The claim of the respondent Revenue is that the process undertaken by the appellants do not constitute 'manufacture' or 'production' and accordingly the profits and 6 gains derived by them from such activity have been denied the deduction u/s 80IC of the Act.
7. According to the appellants, the process of drawing wire from wires-rods constitute manufacture or production of article or thing in terms of clause (a) of sub section (2) read with section 80IC(1) of the Act and therefore , the profits and ga ins de rived from such activity are e ligible for deduction under section 80IC of the Act. All the captioned appellants before us have filed written submissions, apart from extensive oral arguments. The material placed by the appellants in the respective Paper Books also contain reference to the various processe s undertaken by them. The va rious proce sses undertaken by the captioned appellants have also been succinctly noted by the Assessing Officer in the respective orders. On the basis of the material on record, the processes undertaken by the appellants can be appreciated as follows. It is stated that, in the process of drawing of wires from wire rods, the input is firstly reduced in size through carbide dies i.e. wire-rod is drawn to smaller sizes such as intermediate wire, fine wire and, ultra fine wire. These wire rods, which constitute raw material, could either be steel rods or copper rods or aluminum rods. It has been further stated that, to facilitate the drawing of wire at high speeds, the wire is passed through a dry powered lubricant so as avoid sticking of the wire to the die surface and, this process done at high speeds, results in tensile pulling of the wire, which produces residual stresses and, increases its temperature. These stresses can cause distortions in the wire, cracking and embrittlement of the wire, which could result in prema ture brea king in service. To ove rcome these deficiencies, the wire is heated above its re-crystallization tempe rature to allow the meta l gra ins to reform and relie ve the stress. This process is called annealing. Further, to protect from oxidation, which would effect the mechanical and physical prope rties, the wire is galva nized. In othe r words, the process of d r a w i n g o f w i r e i n v o l v e s f o l l o w i n g s t e ps - an nea l i ng, p i c k l i n g and, galvanizing, which can be briefly described as hereunder:
a) Annealing: Annealing is a heat treatment in which a material is exposed to an elevated temperature for an extended time period and then slowly cooled. It is the process by which metals and other material are treated to render them less brittle and more workable. Any annealing process consists of three sta ge s, firstly, heating to the desired temperature, secondly, holding or soaking at that temperature and, cooling, usually to room temperature. This provides the following benefits to the mate rial; Re lie ves stresses; increases softness, ductility and toughness; produces a specific microstructure or homogenizes the exiting microstructure; Improves machinability, 7 electrical properties, dimensional stability and formability for cold working, such as cold heading and stamping.
b) Quenching, Acid Pickling and Flux Application: After the annealing process,
the wire is quenched in a water bath. This step is necessary to prevent overheating of the acid, the next step in the process. In the acid pickling step, the wire is passed through a hydrochloric acid solution. Pickling removes oxides resulting from the hot wire being exposed to oxygen and, it remove any remaining lead coating on the wire from the molten lead bath. These contaminants must be removed or they will interfere with the zinc galvanizing process.On passing the wire through the hydrochloric acid bath, the acid reacts with any remaining lead to form lead chloride. The lead chloride is a byproduct from the process. In addition, the hydrochloric acid baths are discarded pe riodically when they ha ve bec ome contaminate d.
Any remaining traces of acid are then removed by rising the wire with hot water. The rinsing process is a multitank, counter-flow, hot water rinse system. The counter flow is necessary to ensure that the water is the last tank remains relatively clean and free of contaminants. The water is hot to minimize both the process time and the potential for surface oxide formation. The rinsing process results in acidic wastewater that is neutralized prior to disposal. Subsequently, the wire is dipped in a flux bath, usually a zinc ammonium chloride solution flux is an anti-oxidant, dissolving a ny residual oxides and preventing further oxidation of the surface prior to galva nizing. Any oxidized or contaminated area on the wire can cause poor adhesion of the zinc coating the galvanizing process, leading to black spots and flaking. The flux does not cause adhesion of zinc and steel but only compensates for inadequate cleaning.
c) Galvanizing: Galva nizing is the practice of immersing clean, oxide-free iron or steel into molten zinc at about 860ºF(above the melting temperature of 780ºF) in order to form a zinc coating that is metallurgically bonded to the iron or steel surface. The zinc coating protects the surface a gainst c orrosion, oxidation and moisture. It shields the base metal from the atmosphere and, further the zinc provides anodic (or sacrificial) 8 protection. The zinc protects the steel "Galva nizing", thus giving the process its name. When the steel is dipped in the zinc bath, it heats up to above the melting temperature and a zinc iron reaction occurs, creating several layers of inter- metallic alloys that bond the oute r la ye r of pure zinc to the steel. The reaction can only occur if the iron in the steel is in intimate contact with the liquid zinc and any surface contamination will impair this reaction.
d) Following the zinc hot dip, the wire is quenc hed in water to "freeze" the zinc la ye r and is then coiled or spooled, which is marketed as galvanized wire.
8. Notably, the Revenue has not dispute d the above stated processes, yet contends that, such processes do not constitute manufacture or production of any article or thing within the mea ning of Section 80IC of the Act. The sta nd of the Re ve nue is essentially based on the judgment of the Hon'ble Supreme Court in the case of M/s Technoweld Industries Ltd. (supra).
9. The controversy squa rely involves inte rpretation and, construction of the words "manufacture" and, "production." The word 'manufacture' was not defined under the Act, uptill the insertion of Section 2(29BA) by the Finance (No.2) Act, 2009, w.r.e.f. 1.4.2009, which reads as under:-
"29BA - "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 above inse rtion has been made effective from 1.4.2009, while we a re dealing with a ssessment yea rs prior to 1.4.2009. Hitherto, the expressions 'manufacture' and 'production' have been understood in terms of the judge made law. The various courts of the country ha ve rendered nume rous judgements elucida ting va rious principles or tests to e va luate whethe r a particular process can be understood as 'manufacture' or 'production'. The expression "manufacture" in its ordinary acceptance has a wider connotation, it means making of articles, 9 or material commercially different from the basic components, by physical labour or mechanical process, and a manufacturer is a person by whom, or under whose direction or control the articles or materials are made. The word 'manufacture' used as verb is generally understood to mean as bringing into existence a new substance and does not mean merely to produce some change in a substa nce. As is gene rally understood and a lso state d in Section 2(29BA) of the Act, 'manufacture' implies a change, and such change must entail a transforma tion; a new and different a rticle must e merge having a distinctive name , character or use . Thus, 'manufacture ', ordina rily signifie s emerge nce of ne w a nd different goods as understood in relevant commercial circles. The Corpus Juris Secundum defines it as "the production of articles for use from raw or prepared materials by giving these materials new forms, qualities, properties, or combinations, whether by hand labour or machinery; also anything made for use from raw or prepared materials". According to Webster's Dictionary, manufacture means to work, raw or partly wrought materials, into suitable forms for use, as, to manufacture wool, iron, etc., to make (wares or other products) by hand, by machinery or other agency. Thus, literally speaking, the process of manufacture involve s some transf ormation or change in the mate rial as a result of application of art or a mechanical manipulation. The material, which is thus fashioned into a new product, may be distinct in form or in use.
9.1. Now, we may refer to some of the judicial precedents on the issue. The Hon'ble J & K High Court in the matter of CIT v. Abdul Ahad Najar, 248 ITR 744 (J&K) considered the question, whether the unde rtaking of a n assessee enga ge d in extraction of timber from forest and conversion of same into logs, planks, etc. constituted an industrial undertaking within the meaning of section 80J(4) of the Act or not ? In this case, the assessee claimed that it was enga ged in the manufacture and production of articles. The case of the assessee was that the planks sawn out of logs and, articles produced therefrom were different in shape from the logs and the tree s. Howe ve r, the Assessing Office r did not accept the contention of the assessee as according to him the assessee did not manufacture or produce any article. According to the Asse ssing Office r, the process of conve rting trees into logs did not involve much sa wing ope rations as afte r felling the trees, it had been cut into logs and sold as such. The Revenue also contended that the process of sawing of logs into planks also did not involve any manufacture of articles and that manufacturing process could not be carried out by bare hands without the aid of mac hine ry. The claim of the asse ssee wa s, howe ve r accepted by the Appellate Commissioner, who held that the use of machinery was not indispe nsible to a manufacturing process and e ven for the conve rsion of the sta nding trees into logs, labour wa s required as something is converted into something e lse viz. logs. He was of 10 the view that the logs could be said to be a new product emerging out of manufacturing process. He accordingly held that the assessee was entitled to deduction under section 80J of the Income-tax Act, which was confirmed by the Tribunal. The matter was conside red by the Hon'ble High Court on the above facts. The Hon'ble High Court was of the view that in order to claim relief under section 80J, an industrial undertaking must manufacture or produce articles and it was a condition precedent. The Hon'ble High Court observed that the assessee cut trees in the forest, conve rte d them not only into logs but also into planks and other articles for the purpose of sale. As a forest lessee, the assessee's business was to cut standing trees and to extract timber and conve rt the sa me into form of logs, planks, etc. f or the purpose of sale. It was observed that the logs and planks could never be known as trees ; that the two are undoubtedly different from the standing trees. The Hon'ble High Court accordingly upheld the stand of the assessee. It is clear from the above that the activity of the forest lessees of extraction of timber f rom the forest and conve rsion of the same into logs, planks, etc. is understood to be a manufacturing process. The Hon'ble High Court on the question of manufacturing further held as under:-
"Otherwise also, it is clear that the activity undertaken by the assessee clearly amounts to manufacture and production of articles. The expressions 'manufacture' and 'produce' have not been defined in the Income-tax Act. The dictionary meaning of 'manufacture' is 'transform or fashion new materials into a changed form for use'. In common parlance, manufacture means production of articles from raw or prepared materials by giving these materials new forms, qualities, properties or combinations, whether by hand labour-or by mechanical process. In other words, it means making of articles or materials commercially different from the basic components by physical labour or mechanical process, In its ordinary connotation, manufacture signifies emergence of new and different goods as understood in relevant commercial circles. So far as the meaning of the word 'produce' is concerned, though the word 'produce' has a wider connotation than the word 'manufacture', when used in juxtaposition with the word 'manufacture', it takes in bringing into existence new goods by a process which may not amount to manufacture. The activity of extraction of wood by the assessee from the forest by felling the trees and converting the same into logs, planks, sleepers and other articles, undoubtedly, falls within the definition of 'manufacture'."11
9.2. The Hon'ble Supreme Court in the matter of CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412 (S.C) considering a similar point of law held, "The test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity."
9.3. The Hon'ble Supreme Court in the case of CIT v. Sesa Goa Lt d. reported i n 27 1 IT R 331 whi le c onsidering the q ue sti on under section 32A(2)(b)(iii) for grant of investment allowance dealt with the question of 'production' in a case where the assessee's industrial undertaking was engaged in the business of excavating, mining and processing mineral ore. Mineral ore was not excluded by the Eleventh Schedule. The only question was whether such business was one of manufacture or production of ore. The Hon'ble Supreme Court noted that the issue was dealt with by different High Courts over a period of time, and it was held that the activity amounted to "production" and answered the issue in question in favour of the assessee. The Hon'ble Supreme Court held as under :-
"The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This court had, as early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150, 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 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'. From 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 ...
It is, therefore, not necessary, as has been sought to be contended by learned counsel for the Revenue, that the mined ore must be a commercially new product ...
Learned counsel appearing on behalf of the assessee, correctly submitted that the other provisions of the Act, particularly section 33(1)(b)(B) read with Item No. 3 of the Fifth Schedule to the Act, would show that mining of ore is treated as 'production'. Section 35E also speaks of production in the context of mining activity. The language of these sections is similar to the language of section 32A(2). There is no reason for 12 us to assume that the word 'production' was used in a diffe rent sense in section 32A." [ underline d for emphasis by us] 9.4. Thus, having regard to the proposition as discussed above, particularly in view of the decision in Sesa Goa Ltd (supra) it is evident that, that the word "production" has been used in a very wide sense to mean-to bring out a new product, albeit not a commercially new product. Infact, it may be relevant to state here that, in the af oresa id judgement, The Hon'ble Supreme Court affirmed the judgement of the Hon'ble Karnataka High Court in the case of CIT v. Mysore Minerals Ltd. 250 ITR 725 (Kar.) wherein activity of cutting granite blocks into slabs and sizes and polishing them was held to be manufacturing or production of goods. It was held therein as under:
" Section 80-I also refers to profits and gains in respect of an industrial undertaking. In view of the decision given in the case of the assessee, we are of the view that the Appellate Tribunal is right in law in coming to the conclusion that the original assessment which granted the relief under sections 32A and 80-I to the assessee was not erroneous and the inference of the Commissioner of Income-tax under section 263 was not proper. The Tribunal is also right in law in holding that extracting granite from quarry and cutting it to various sizes and polishing should be considered as manufacture or production of any article or thing and the assessee's business activity must be considered as an industrial undertaking for the purpose of granting reliefs under sections 32A and 80-I of the Income-tax Act, 1961."
9.5. Further, following the judgements in the case of Sesa Goa Lt d. (supra ), Mysor e Mine ral s Lt d (sup ra ) and, anot he r ju dge ment of the Hon'ble Sup reme Co urt in the case of Ko re s Ind ia Lt d v CCE reported in 174 ELT 7 (2004), the Hon'ble Rajasthan High Court in the case of Arihant Tiles and Marbles Ltd v ITO 295 ITR 148 (Raj) held as under:
"Apparently, the principle applied by the Supreme Court was that if without applying the process a thing in its raw form cannot be usable and it is made usable for particular purpose, it amounts to manufacture.
The court approved the principle enunciated in S a r a s w a t i S u g a r M i l l s v . H a r y a n a S t a t e B o a r d [ 1 9 9 2] 1 SCC 418 that essence of manufacture is a change of one object to another for the purpose of making it marketable.13
On this principle, the court accepted the contention that by cutting jumbo rolls into smaller sizes, a different commodity has come into existence and the commodity which was already in existence serves no purpose and no commercial use, after the process. A new name and character has come into existence. The original commodity after processing does not possess original identity. Obviously, so far as physical characteristic of jumbo rolls and its shorter version in the form of typewriter and telex roll may have the same physical properties, none the less on the basis of their different use as a marketable commodity and after being cut, the same cannot be used for the purpose for which it could be used in original shape, the activity was held to be manufacture.
The principle aptly applies to the present case. Here also, the original commodity, namely, marble block could not be used for building purposes as such until it is cut into different sizes to be used as building material. It is only by the process of cutting the marble block into slabs and tiles that it is made marketable. The marble block cannot be used for the same purpose as the marble slab or tile can be used and after the marble block has been cut into different sizes, the end product by putting it simultaneously cannot be used as a block. The principle in Kores India Ltd.'s case [2004] 3 RC 613 (SC) supports the contention of appellant."
[underlined for Emphasis by us] 9.6. Also, the aforesaid view has been followed by the Hon'ble Bombay High Court in the case of CIT v Fateh Granite (P) Ltd 314 ITR 32 (Bom.) and, the Hon'ble Delhi High Court in the case of CIT v Sophisticated Granite Marble Industries reported 225 CTR 410 (Del) and, it was held that, process of purchasing marble slabs and then converting these into tiles by applying various processes like cutting, sizing, polishing so as to produce marketable tiles constitutes "manufacturing" an article.
10. Now, we may revert back to the facts of the captioned appeals. On consideration of the principles stated above and, the different steps of manufacturing through which the raw materials i.e. wire rods are processed, we are of the considered opinion that, wire so manufactured can no longer be regarded as the original commodity. Infact, the fina l product is recognized in the trade as a new and distinct commodity. Ostensibly, the wire rod having undergone various mechanized and chemical based processes like annealing, galvanizing etc. results into manufacture of wire with distinct name, character and use. The 14 name of the raw material, originally is wire rod before processing and after processing, it becomes wire of different types, say paper/enamel insulated wires or strips or barbed wire, GSS/Stay Earth wire, chainlink, etc. Therefore, it is commercially distinct commodity with a distinct name. The wires so produced are used for power cables, industrial control cables, electric motors, transformers, etc. but wire rod as a raw material cannot be used as such. Therefore, a new and distinct commodity is manufactured and produced by the assessee namely wire. Infact, in Union of India and Others v. J.G. Glass Industries Ltd. and Others (1998) 2 SCC 32, the Hon'ble Supreme Court had laid down a two-fold test for determining whether a particular process amounts to 'manufacture' or not ? First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist. Secondly, whether the commodity which was already in existence would not serve the desired purpose but for the said process. Applying this two-fold test to the fact situation of the appellants, it is irresistible to hold that the process undertaken by the appellants amount to manufacture.
11. Infact, Hon'ble Madras High Court's decision in the case of Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. (supra) supports the case of the appellant. In this case, the assessee was receiving un-treated crankshafts, forgings and castings from its clients and wa s subjecting them to heat trea tment to toughe n them up for being used as automobile spare parts. The said activity was held to be a ma nufacturing activity by the Hon'ble High Court. The Hon'ble Madras High Court held as under:
"12.In the backdrop and setting of the principles, as enunciated by the Supreme Court and various High Courts as relatable to the activity of "manufacture" of "processing of goods" and in the light of the various literature and books of foreign authors, relatable to the qualitative change having been brought about by well termed process, as referred to above, we may now proceed to consider and decide the moot question as to whether the activities carried on by the assessee namely, receiving untreated crankshafts and forgings and castings from its clients and subjecting them to heat treatment to toughen them up for being used as automobile spare parts can ever the construed as activities relatable to manufacture and, consequently enable it to claim investment allowance under s. 32A of the IT Act."
"13.We have to take note of the fact that the process of heat treatment to crankshaft, etc. were absolutely 15 essential for rendering in marketable. Automobile parts as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increase tensile strength. The raw untreated crankshafts and the like can never by used in an automobile industry. Thus, in the crankshafts subjected to the process of heat treatment etc., a qualitative change is effected, to be fit for use in automobiles, although there is no physical change in them. In such state of affairs, it cannot at all the stated that the crankshafts, subjected to heat treatment, etc. cannot at all change the status of new products of different quality for a different quality for a different purpose altogether. In this view of the matter, we are of the view that the activities of the assessee in relation to raw or untreated crankshafts being subjected to heat treatment, etc., is definitely a "manufacturing activity" entitling it to claim "investment allowance" under s. 32A of the I. T. Act. We answer questions No. 2 and 3 according." [underlined for emphasis by us]
12. From perusal of the said judgement, it is evident that even qualitative changes effected in the raw material through heating, also amounts to a 'manufacturing activity'. The aforesaid view has also been followed by the Ahmedabad Bench of the Tribunal in the case of Anil Steel Traders (supra) to hold that the activity of annealing of steel rods and coils as per the customer specifications, amounts to 'manufacture'. Thus, in light of the aforesaid judgements alone, we do not find any justification in the stand of the Revenue that the assessee did not carry out any activity of manufacturing. Undoubtedly, the process undertaken by the assessee results in qualitative cha nge in the inputs initially use d in the process of manufacturing. The argume nt of the Revenue, as manifested in the assessment orders, is that, the activity does not bestow any physical change in the article to which the heat treatment was given by the assessee. In our vie w, considered in the light of the judgement of the Hon'ble Madras High C ourt, which a ga in has refe rre d to various case laws on the issue, the aforesaid argument of the Revenue is not sustained.
13. Further, even if the test of marketability is applied to the facts of the case of the appellants, the process carried out by them constitutes manufacture, as enunciated by the Hon'ble Rajasthan High Court in the case of Arihant Tiles and Marbles (P) Lt d v I TO (sup ra ) f ollo wing the ju dge ment of the Hon 'ble Supreme Court i n t he case of Se sa Goa Lt d. ( supra) and, Ko re s India (supra), since the original commodity, namely, wire rod could not be used for transformers, power cables, etc. as such, until it is drawn into enameled/insulated wires. It is only by this process that, input is made marketable as a distinct commodity 16 and, therefore we hold, in the facts and, circumstances of the case, the process undertaken by the appellants amounts to manufacture of thing or article within the meaning of section 80IC of the Act.
14. In any case, the process amounts to production, as interpreted by the Hon'ble Supreme Court in the case of Sesa Goa Lt d. ( supra) wherein it ha s been he ld t hat, the word " p rod ucti on"
has been used in a very wide sense to mean to bring out a new product, may be not a commercially new product. In this case, undisputedly and, irrefutably new product has been produced as a result of the various processes undertaken by the appellant and, as such, even on this ground, the appellants are eligible for claim of deduction u/s 80IC of the Act.
15. Now, so fa r as the judgment of the Hon'ble Supreme Court in the case of Technoweld Industries (supra), which has been heavily relied upon Revenue, the same, in our considered opinion, is fully inapplicable to the facts of the captioned instant cases. It is evident from the aforesaid judgement that, assessee in that case , was enga ge d in the business of wire dra wing from thicker ga uge to thinne r gauge by cold dra wing process and, not in the manufacture of wire with different chemical/electrical/mechanical properties/ end use and, that too after undergoing various processe s, whic h ha ve already been elaboratedly culled out a bove and such processes are not shown to have been carried out in the case of Technoweld Industries (supra). It is thus evident that, said judgement has no semblance of resemblance to the facts of the instant case. It is settled law that, a judgment is a proposition for what it actually decides and not what can be logically or remotely deduced there-from, as has been held in the following judgments:
(a) Goodyear India Ltd. v. State of Ha ryana (SC) 188 ITR 402 (SC)
(b) Padmasundara Rao v. State of Tamil Nadu 255 ITR 153 (SC)
(c) CIT v. Su n En gineerin g Works P. Lt d. 198 ITR 297 (S.C).
Infact, the following obse rvation in the case of Padma sunda ra Rao (supra) are worthy of notice :-
"Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always pe ril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord 17 Morrin in Herrington v. British Railways Board [1972] 2 WLR 537 (HL). C ircumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases."
15.1 In fact, the Hon'ble Supreme Court in Technoweld Industries (supra) case, has referred to the decision of the Excise Tribunal in the case of Jyoti Engineering Corporation vs. Collector of Central Excise, (1989) 42 ELT100 (Tribunal).In the case of Jyoti Engineering Corporation (supra) also the issue before the Tribunal was also in respect of wire drawn from thicke r gauge to thinne r gauge. The process of 'Annealing' a nd the other processes undertaken by the appellants are not shown to have been involved even in the case of Jyoti Engineering Corporation (Supra). In the case of captioned appellants, after drawing of wire, the drawn wire is subjected to various other mechanized, chemical and other processes which brings into existence a totally new product, having different properties and different integral structure. In the case of Technoweld Industries (supra) only process undertaken was drawing of wire, whereas in the present cases, other processes are also carried out after dra wing of wire. It is only after c onsidering the entire set of processes undertaken by the appellants, it can be said that a new product comes into existence and the same amounts to manufacturing. Thus, factually speaking, the process and the product considered in the case of Technoweld Industries (supra) stand on a different footing than those in the present cases.
15.2. Placed in the factual scenario that has emerged, in our humble opinion, the decision in the case of Technoweld Industries (supra) relied upon by the Revenue, does not support its stand, wherein the test of marketability was neither contended and, nor decided. Infact, even the expression 'production' was ne ve r a subject mat ter of co nsi dera tion . Li ke wi se, i n the ca se of La l Kunwa Stone Crushe r (P) Ltd ( supra) relie d upon b y the Re ve nue , the activities of the assessee therein c onsisted of conve rsion of boulde r stone into gitty afte r cutting the boulders. It was in this backdrop that the Hon'ble Court came to the conclusion that cutting of boulders might have been with the aid of machinery but the original commodity retained a substantial identity inspite of processing carried out by the assessee and was, as such, not regarded as manufacturing or producing any article or thing. As against this, in the captioned cases, the raw wire rod ha s unde rgone distinc t c hange as a re sult of the va rious proce sses undertaken and, has thus not retained its original substantial identity. On the other hand, recently the Hon'ble Supreme Court in the case of India n Cine Age ncies (supra ) has held that, conve rsion of jumbo rolls of photographic films into small flats and, rolls in desired sizes is manufacture. It was also observed therein as under:
18"12. The matter can yet be looked from another angle. If there was no manufacturing activity, then the question of referring to item 10 of the Eleventh Schedule for the purpose of exclusion does not arise. The Eleventh Schedule, which was inserted by Finance (No. 2) Act, 1977 with effect from 1-4-1978 has reference to sections 32A, 32AB, 80CC(3)(a)(i), 80- 1(2), 80J(4) and 88A(3)(a)(i) of the Act."
15.3. Applying the aforesaid parity of reasoning, it is noteworthy that wire and wire rods come under chapter 74-76 under the Central Excise classification whereas insulated wires and, paper coated insulated wires come under chapter 85 and, therefore classification under different chapters also support the stand that, the industrial undertakings of the appellants are manufacturing units.
15.4. In the light of the foregoing discussion we are of the view that the appellants, in the given set of facts, are eligible for deduction under section 80-IC of the Act, as their industrial undertakings can be said to have manufactured or produced an article or a thing.
16. The Hon'ble Supreme Court has consistently held that incentive granting provisions, which confer concession, should be interpreted in a liberal manner, so as to subserve the purpose for which they are intended. In the case of Bajaj Tempo Ltd. v CIT 196 ITR 188 (S.C), the Hon'ble Supreme Court held that a tax provision, granting incentive s for promoting growth and de velopment should be construed libe rally. Infact, e ve n in Mysore Mine ral s Lt d. v. CIT 239 I TR 775 (S.C), wh ile considering section 32, it has been laid down that the provisions that confer benefit on the assessee should be so interpreted and the words used therein should be assigned such meaning as would enable the assessee to secure the benefit intended to be given by the Legislature to the tax-payers. It is also well-settled that where there are two possible interpretations of a taxing provision the one which is favourable to the assessee should be preferred
17. Further, the CIT(Appeals) has referred to certain judicial decisions in the impugne d orders though not bringing out a ny reasons and the manner in which they are applicable to the facts and circumstances of the case of the captioned appellants. We have referred to various judicial pronouncements, including those of the Hon'ble Supreme Court of India and thereupon, culled out rele va nt principles, on the ba sis of which the controve rsy has been determined. The decisions referred to by the CIT(Appeals), in our considered opinion, do not operate in conflict with the principles referred to by us in this order, though we have not discussed each of the case for the sake of brevity.
1918. In final analysis and, after applying the judicial interpretation of the terms 'manufacture' and 'production' to the facts and circumstances of the captioned appellants, it is not possible to come to the conclusion that any legal infirmity exists in the claim of the appellants for deduction under Section 80IC of the Act. In such circumstances, we are of the view that both the lower authorities have failed to appreciate the facts and circumstances, as well as, the position of the law in a correct perspective and, it is thus held that, the appellants are entitled to claim of deduction u/s 80IC of the Act on the incomes derived from their industrial undertakings. Thus, the respective orders of the Commissioner of Income-tax (A) are set aside and the Assessing Officer is directed to allow the claim of deduction u/s 80IC of the Act as per law."
5. It is also observed that the Tribunal decided the identical issue in favour of the assessee and against the Revenue in assessment year 2006-07 and 2007-08 in ITA Nos. 1320/Chd/2010 and 1321/Chd/2010 vide order dated 10.10.2001 and 19.10.2011 respectively following the earlier order of the Tribunal dated 30.11.2009 relating to assessment year 20005-06 (supra).
6. The facts of the present year are similar to that of assessment year 2005-06 and, therefore, respectfully following the order of the Tribunal dated 30.11.2009 in ITA No. 215/Chandi/2009 (supra), we uphold the order of CIT(A) and dismiss the ground of appeal raised by the Revenue.
7. Ground No.2 of the appeal reads as under:-
2. The ld. CIT(A) has erred in allowing deduction u/s 80IC in respect of receipts earned, on account of job work carried out for Stesalit Industries Ltd.
8. The Assessing Officer did not consider job work carried out for Stesalit Ldt amounting to Rs. 42,711/- for deduction u/s 80IC despite the fact 20 that the same manuf acturing process was involved in the cas e of Sales. On appeal, the CIT(A) allowed the claim of the assessee observing as under:-
10.3 The submissions of the appellant have been considered with reference to the facts of the case. There is strength in the arguments of the appellant that the job work receipts are done in the course of production process carried out in the appellant's industrial undertaking. Accordingly, the job wor k receipts are directly related to the pr oduction activities of the appellant firm. Accordingly the said receipts qualify for deduction u/s 80IC of the Act. The appellant succeeds on this ground of appeal.
9. We have heard the rival submissions and have also perused the materials available on record. In our opinion, the CIT(A) has correctly allowed the claim of the assessee. The view taken by the CIT(A) is fully supported by the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs Impel Forge and Allied Industries Ltd (2010) 326 ITR 27 (P&H). In the said case, the assessee was engaged in manufacturing and trading of tractor and auto parts and also doing job works of similar nature. It claimed deduction u/s 80IB of the Act on income from job works, also which was partly allowed by the Assess ing Officer. The CIT(A) upheld the plea of the assessee which was affirmed by the Tribunal. On appeal, the Hon'ble Punjab & Haryana High Court held that where the assessee was engaged in business of manufacturing and trading of tractor and auto parts and also in doing job work of similar nature, it would be entitled to deduction u/s 80-IB in respect of both incomes i.e. income derived form its own manufacturing and income derived form job work done from others. In our view, the job work receipts are directly related to the production activities of the assessee firm.
21In view of the above, we uphold the order of CIT(A) on this issue and dismiss ground No.2 of the appeal.
10. Ground No.3 of the appeal reads as under:-
3. The ld. CIT(A) has erred in deleting the addition made on account of processing char ges to Megna Wires (P) Ltd.
11. The Assessing Officer has discussed this issue in para 4 of the assessment order. The As sessing Officer observed that ass essee had paid processing charges to M/s Megna Wires (P) Ltd, Jalandhar. The total work done by M/s Meghna Wires (P) Ltd was Rs. 5,59,263/-. The assessee informed that it got wire drawing of 18280.240 Kg. The Assessing Officer asked the assessee as to why deduction u/s 80IC of the Act should not be disallowed. However, the assessee did not furnish any documentary evidence in this regard. Therefore, deduction u/s 80IC of the Act on this assignment was not allowed by the As sessing Officer. On appeal, the CIT(A) deleted the disallowance made by the Assessing Officer, observing as under:-
"11.2 The appellant's contention has been considered and is found to be correct. The AO has duly mentioned that the appellant paid processing charges to M/s Megna Wires (P) Ltd. The genuineness of the said expenses has not been doubled by the AO. He has simply misled himself into mistaking the said expenditure for income and then by refusing deduction u/s 80IC on the same. There is no gr ound for making any addition on account of expenditure claimed by the appellant as the same is not subject matter of claim for deduction u/s 80IC of the Act. The disallowance on the said head made by the AO is accordingly deleted. The appellant succeeds on this ground of appeal."22
12. We have heard the rival submissions and have also perused the materials available on record. Shri Ashwani Kumar, Ld. Counsel for the assessee submitted that the assessee has simply incurred and claimed expenditure on account of job work charges paid to M/s M egna Wires (P) Ltd. Therefore, the Assessing Officer was not justified in making any addition on account of expenditure claimed by the assessee as the same was not subject matter of claim for deduction u/s 80IC of the Act. There is no material on record to controvert the above contention of the Ld. Counsel for the assessee, Shri Ashwani Kumar. It appears, that the Assessing Officer has simply mislead hims elf into mistaking the said expenditure for income and then by refusing deduction u/s 80-IC on the same. Thus, there was no justification in making the addition. In fact, the Assessing Officer has not doubted the genuineness of the payment of Rs. 5,59,263/- towards processing charges to M/s Megna Wires (P) Ltd. In our view, the CIT(A) has correctly deleted the addition. Accordingly, we uphold the order of CIT(A) on this issue.
13. In the result, appeal of the Revenue is dismissed.
Order Pronounced in the Open Court on this 21 s t day of February, 2012. Sd/- Sd/-
(MEHAR SINGH) (H.L.KARWA)
ACCOUNTANT MEMBER VI CE PRESIDENT
Dated : 21 s t February, 2011
Rkk
Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR True Copy
By Order
Assistant Registrar
23