Gujarat High Court
Commissioner Of Income Tax vs M/S Ambika Recycling....Opponent(S) on 9 April, 2014
Author: Akil Kureshi
Bench: Akil Kureshi, Sonia Gokani
O/TAXAP/297/2010 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 297 of 2010
TO
TAX APPEAL NO. 300 of 2010
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COMMISSIONER OF INCOME TAX....Appellant(s)
Versus
M/S AMBIKA RECYCLING....Opponent(s)
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Appearance:
MR PRANAV G DESAI, ADVOCATE for the Appellant(s) No. 1
MR RK PATEL, ADVOCATE for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL
KURESHI
and
HONOURABLE MS JUSTICE SONIA
GOKANI
Date : 09/04/2014
COMMON ORAL ORDER
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. In these Tax Appeals the following common question of law was framed while admitting these appeals :
"Whether in the circumstances and the facts of the case and in law, the Appellate Tribunal erred in treating the processes employed by the assessee in segregating the metal scrap from cable scrap as 'Manufacture or produce' within the meaning of section 10B of the Incometax Act ?Page 1 of 16
O/TAXAP/297/2010 ORDER
2. It was also ordered that the Tax Appeals be heard with Tax Appeal No.2567 of 2009. It is pointed out that Tax Appeal No.2657 of 2009 came to be disposed of by a judgment dated April 02, 2014.
Somehow these appeals got segregated. These appeals involve only one question, whereas Tax Appeal No.2567 of 2009 and other connected appeals concern certain additional questions.
3. Though the question of law suggested by the Revenue and framed by us is somewhat inaccurate, the central controversy is whether the respondentassessee, who was an exporter, carried out manufacturing process. The respondent assessee was 100% Export Oriented Unit (hereinafter referred to as 'the EOU'). It imported metal scrap and after segregating such metal scrap, produced various articles including graded brass metal, metal wires, etc. and reexported the same. The entire process was explained by the assessee before the Revenue Authorities. The Tribunal relied on the decision Page 2 of 16 O/TAXAP/297/2010 ORDER in the case of Assistant Commissioner of Income tax v. Metal Recycling Industries, rendered in ITA No.375/R/2006 and C/o.No.39/R/2006. Both the sides had agreed before the Tribunal that this decision would cover the said case also, as can be seen from the following observations of the Tribunal :
"5. At the time of hearing both the parties pointed out that the issues involved in assessee's appeals and departmental appeals are the same as in the case of the Asstt. Commissioner of Income Tax Circle2, V/s Metal Recycling Industries, in ITA No.375/R/2006 and C/o., No.39/R/2006 for AY 200304. Both the parties also submitted that there is no change except figures and assessment years in the facts of the case decided one and case on hand. Therefore from both the sides it was agreed that whatever decision this tribunal may take in the case cited (supra) shall be followed in these appeals.
6. We have heard both the parties, perused the material on record and also gone through the orders of authorities below. We find that the facts of the present case and the case cited by both the parties are similar except the figures and assessment year. We have already decided the appeal as filed by the revenue and crossobjection vide our order dated 31.7.2009. We find that the issues involved in these matters stand covered by our decision passed in Asstt. Commissioner of Income Tax, Circle2, Jamnagar V/s Metal Recycling Industries in ITA No.375/R/2006 and CO No.39/R/2006 for the assessment year 200304. Therefore, Page 3 of 16 O/TAXAP/297/2010 ORDER following same precedent and to maintain consistency with the Tribunal orders we dismiss the appeals of the revenue and allow the appeals of the assessee."
4. This Court in the case of Commissioner of Incometax v. Mitesh Impex, decided on April 02, 2014 while dealing with Tax Appeal No.2562 of 2009, which also included the case of Metal Recycling Industries (supra), by the aforesaid judgment dated April 02, 2014, answered the question in favour of the assessee and against the Revenue, making following observations :
"9. From the record, it emerges that the assessees import three kinds of scrap, namely, mix cable scrap,mix metal scrap and old/used transformers. From such scrap so imported, they undertake different processes for extraction of materials, which are possible to salvage from such scrap. Admittedly, part of the scrap is used for production of iron ingots. To this extent even the assessing officer accepted that the same amounted to manufacturing activity. Production of iron ingots would necessarily require not only segregation of the scrap but also melting at a high temperature and thereafter production of bars. To this aspect, therefore, the Revenue rightly did not raise any issue.
10. The process undertaken by the assessees was explained before the authorities as under: Page 4 of 16 O/TAXAP/297/2010 ORDER "a) Mix Cable Scrap Principle raw material being mix metal copper cable scrap is imported. This material when received in factory is sorted and segregated in different diameters and of various lengths. This process is done manually or most of the times mechanically to remove jackets, upper layer and paper and for making them suitable for feeding in different cable cutting machines and stripping machines. After a process various strips in the cables are removed, the sorted cable scraps put in to cable cutting machine for cutting and stripping. Out of this process, several types of copper wire are generated. This process also generates several types of impurities such as plastic, dust and other metals. Clean copper material emerges out of this process, which is different and distinct from the cable wire scrap. The pure copper obtained from this process is then bailed in bailing machine. This makes this metal in different sizes and weights as required.
Then this material is packed and exported.
a) Mix Metal Scrap Mix metal scrap is imported from various countries. This scrap is consisting of several substances such as stones, rubber, steel, metalferrous as well as nonferrous etc. It is generally the scrap generated from dismantling of buildings or other structures and plants etc. after importing them several processes are being carried out manually and mechanically through various machines and Metal is derived from the whole process. The scrap on which manufacturing process is carried out is of no use but subject to this manufacturing process. The mix metal was used as a raw material and a further manufacturing process was carried out namely segregation, removal of attachments and sorting of various metals is various Page 5 of 16 O/TAXAP/297/2010 ORDER grade/categories. In the entire process of manufacturing the raw material was mix material, which has not any direct commercial usage for other industries. In the course of manufacturing process metals having different identity and usability are generated from the mix metal. The mix metal loses its identity and results in production of nonferrous metal, ferrous metal, other nonmetallic parts, slag or ingots by using such manufacturing metals.
b) Old/Used Transformer The firm has imported old & used machinery. Gadgets etc. after the completion of their useful life. The nature of the raw material was machinery, gadgets etc, distinct and identifiable articles.
The machinery, gadgets etc. were used as raw material and a further manufacturing process was carried out namely opening of gadgets for removal of clean metal by machine or hand for manufacturing different metals. In the entire process of manufacturing the raw material was old and used, discarded machinery, gadgets and in the course of manufacturing process of nonferrous metal, ferrous metal, non metallic material or ingots by using such manufactured metals."
11. On the basis of such process, the Tribunal held and observed as under: "21. We have gone through the above process and final product which is ferrous and non ferrous metal scrap and other type of scrap was quite different from the raw material. The final products of raw material were further used for industrial uses. While the raw material of the assessee is of no use in foundry or industries. The final products being the scrap of specific metal/nonmetal material had distinct identity,use, character and name. The final products had been obtained after applying Page 6 of 16 O/TAXAP/297/2010 ORDER one or more process may be manually or mechanically and thereafter the different commodity has come into existence. Therefore the process employed by the assessee unit is falling in the four corners of manufacture or produce.
22. We find that concept of EOU is covered by Excise, Customs and Foreign Trade Rules. One of the requirements for getting EOU status was that a person should be engaged in manufacturing or production. Anybody not doing manufacturing is not granted EOU status. During the course of hearing the ld.AR drawn out attention to section 10AA in IT Act granting tax benefits to SEZ (Special Economic Zone) units and the definition of manufacture was same as section 2(r) of SEZ Act, 2005. That definition was very wide and included the process of cutting, repair; assemble etc, within the meaning of manufacture. As per section 10B has to be understood as per Income Tax Act. We find that the word "Manufacturing" is also defined in DGFT and similarly, about the definition of manufacturing in SEZ Act, 2005. We find that the definition used in section 10B has to be read altogether and what shown in the definition of manufacturing in Custom Act cannot be same while examining the claim of the assessee u/s. 10B of the Act.
23. We have examined the basic requirement of word "Manufacturing and Production". The assessee has used three types of raw material viz. mixed cable scrap, mixed metal scrap and old/used transformers. An electric cable is a product which contains a plastic cover, a protecting access sheet or wire mesh, below that there are further insulating and protecting sheets which in term contain one or more insulated copper/aluminum wire which carries electric current. We find that after its useful life is over, such cable may be sold as scrap.
Page 7 of 16O/TAXAP/297/2010 ORDER Such cable is one type of raw material for the appellant. In order separate different types of materials available in the cable, different processes like cable cutting, cable stripping (removal of rubber/plastic cover) are to be employed. We find that it is only after employing different manual/mechanical processes it results into production of scrap of various metal/material like aluminum, copper lead, mild steel, stainless steel, rubber zinc, paper and waste. We find that the input raw material was a cable scrap and the output of the processes is different kinds of material in the form of scraps. Both these commodities are commercially distinct and separate. Their identity, name usability is different. Therefore, we find that the process employed by the appellant has resulted into production of different commodity. Similarly, the transformer also contains different kinds of material in the outside steel body. There again various processes like cutting, stripping etc. have to be applied to obtain in a scrap form, aluminum, copper,bead MS etc. Hence, this process can also be treated as manufacturing or production because the final product is commercially distinct and different from raw material.
24. We find that the third material being mixed metal scrap is just a mixture of different scrap material which may include used parts, fittings, shredded industrial waste of various nonferrous metal/non metal items. From this mixed scrap, different types of scrap material are segregated and separately collected. We find that the raw material was simply mixture of different scrap material which has been separated.
25. We find that there is difference in the raw material and final product and the process was segregation of mixed scrap.
Page 8 of 16O/TAXAP/297/2010 ORDER Based on the decision of the Hon SC in the case of Vijay Ship Breaking Corporation vs. CIT reported in 175 Taxman 77 and India Cine Agencies (175 Tax 361 (SC) where production is also eligible for deduction. Therefore, out of the processes of three different types of raw material, the segregation of mixed metals scrap can be held as the Production. There is one more activity which the appellant is doing which is melting the final scrap material obtained from any of these processes and foundry to make ingots. We find that this activity there is no doubt that it amounts to production. Although the AO has denied the entire claim, it is submitted by the learned AR of the assessee that in some other cases, the AO has considered the activity of making ingots as manufacturing."
12. The term "manufacture" was not defined in the Act till the year 2009. Currently under section 2(29BA) introduced with effect from 1.4.2009, the term "manufacture" is defined as under: "2(29BA)"manufacture", with its grammatical variations, means a change in a nonliving 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;"
13. The Central Excise Act, 1944 contains definition of the term "manufacture" in section 2(f) as under: "2(f)"manufacture" includes any process Page 9 of 16 O/TAXAP/297/2010 ORDER
(i) incidental or ancillary to the completion of a manufactured product;
(ii) which is specified in relation to any goods in the section or Chapter notes of The First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or
(iii)which in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or relabelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer; and the word " manufacture"
shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;"
14. The Special Economic Zones Act,2005 also defines the term 'manufacture' but in a slightly different manner. Such definition contained in section 2(r) reads as under: "2(r) "manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining;"
15. Though the three Acts mentioned above contain definitions of the term Page 10 of 16 O/TAXAP/297/2010 ORDER "manufacture", which definitions are worded slightly differently, the Courts have accepted the principle of fairly universal application that where the change or 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 process, it would amount to manufacture of an article or thing. Reference in this respect may be made to the decision of the Supreme Court in the case of M/s. Ujagar Prints and others (II) vs. Union of India and others reported in (1989) 3 SCC 488.
16. At the same time, it is also well settled that the word "manufacture" implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinct name, character or use. Reference may be made in this respect to the decision of the Supreme Court in the case of M/s. Tungabhadra Industries Ltd., Kurnool vs. The Commercial Tax Officer, Kurnool reported in AIR 1961 SC 412.
17. In the present case, as pointed out by the counsel for the assessee, in case of mix cable scrap the material would be sorted and segregated in the factory in different diameters of various lengths. Thereafter, jackets and upper layers would be removed mechanically in order to make them suitable for feeding in different cable cutting machines and stripping machines. Thereafter various strips in the cables are removed and sorted cable scrap would be put in cable cutting machines for cutting and stripping. In the process, several types of copper wires would be generated. Impurities such as plastic, dust and other metals would be separated through Page 11 of 16 O/TAXAP/297/2010 ORDER this detailed process and clean copper material would be sold after baling them on the baling machines and packing for export sale.
18. Likewise, mix metal scrap would consist of several substances such as stones, rubber, steel, ferrous as well as non ferrous metals. This would be derived mostly from dismantling of buildings and other structures and plants. Scrap as such would have no other use or marketability before subjecting to manufacturing process. Assessees would segregate and remove attachments, sorting out various metals in categories from the mix metals. This process would derive ferrous metal, other nonmetallic parts etc.
19. In the case of old/used transformers the assessees would import used old gadgets and machines once their useful life is over. From such used machines and gadgets the assessees would remove metal and other parts and ultimately segregate nonferrous and ferrous metals, nonmetallic material or ingots by using such metals extracted from the gadgets.
20. It can thus be seen that in all three cases the assessees would put the imported material to series of manual and mechanical processes and through such exercise so undertaken, bring into existence entirely new, distinct and different commodities which are marketable. Thus, the Tribunal, in our opinion, correctly came to the conclusion that this process amounted to manufacturing. In the case of Vijay Ship Breaking Corporation and others vs. Commissioner of Incometax (supra), the Supreme Court considered a question where activity of ship breaking amounted to manufacture and observed as under: Page 12 of 16 O/TAXAP/297/2010 ORDER "8.Firstly, in the case of Ship Scrap Traders Vs. Commissioner of Income Tax, reported in 251 ITR 807, the Bombay High Court has analysed the entire ship breaking activity, the articles which emerged from that activity, the various steps which are required to be undertaken for ship breaking activity and, consequently, after placing reliance on the judgment of this Court in Budharaja's case [1993] 204 ITR 412, it has held that the ship breaking activity resulted in production of articles which emerged when the ship breaking activity stood undertaken. In our view, the important test which distinguishes the word 'production' from 'manufacture' is that the word 'production' is wider than the word 'manufacture' as held in Budharaja's case. Further, it is true that in Budharaja's case, the Division Bench has used the word 'new article'. However, what the Division Bench meant was that a distinct article emerges when the process of ship breaking is undertaken. Further, the Legislature has used the words 'manufacture' or 'production'. Therefore, the word 'production' cannot derive its colour from the word 'manufacture'. Further, even according to the dictionary meaning of word 'production', the word 'produce' is defined as something which is brought forth or yielded either naturally or as a result of effort and work (see Webster's new international dictionary). It is important to note that the word 'new' is not used in the definition of the word 'produce'."
21. In the case of Incometax officer vs. Arihant Tiles and Marbles P.Ltd. reported in [2010] 320 ITR 79 (SC) in the context of the assessee's claim for deduction under section 80IA of the Act on its activity of cutting and polishing marbles, the Apex Court held and observed as under: Page 13 of 16 O/TAXAP/297/2010 ORDER "22. Applying the above tests laid down by this Court in Budharaja's case [1993] 204 ITR 412(SC)to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only is there manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents assessees did constitute manufacture or production in terms of Section 80IA of the Income Tax Act, 1961."
22. Additionally we also notice that the assessee, as an EOU is required to carry out manufacturing activity and on its DTA sales is also required to pay excise duty which admittedly, the assessee paid and excise department collected. It would be a dichotomy if on the same activity the assessees were to pay excise duty on the ground that the same amounted to manufacturing activity but would be declined deduction under the Income Tax Act on the ground that the same did not. In this context, in the case of Incometax officer vs. Arihant Tiles and Marbles P.Ltd.(supra) the Supreme Court had observed as under: "23.Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the Page 14 of 16 O/TAXAP/297/2010 ORDER respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognised by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Section 80IA of the Income Tax Act, 1961."
23. Under the circumstances Question No.(1) is answered in favour of the assessee and against the Revenue. Insofar as second question is concerned, since the Tribunal has merely remanded the entire issue before the assessing officer for fresh consideration of the entire issue without any observations and/or directions, we do not see any reason to interfere. The assessing officer shall examine whether on DTA sales by the assessee, claim of deduction under section 10B of the Act would be allowable. It is clarified that whether the remittances on such sales have been received in foreign exchange or not would be just one of the additional aspects of the matter."
5. In the result, the Tax Appeals are dismissed.
There shall be, however, no order as to costs.
(AKIL KURESHI, J.)
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O/TAXAP/297/2010 ORDER
(MS SONIA GOKANI, J.)
Aakar
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