Income Tax Appellate Tribunal - Bangalore
Komarla Feeds vs Deputy Commissioner Of Income Tax on 5 July, 1999
Equivalent citations: [2000]74ITD65(BANG)
ORDER
T. A. Bukte, J.M.
1. These are the appeals filed by the assessee-firm against the consolidated order of the CIT(A) dt. 8th March, 1999 for the asst. yrs. 1994-95 and 1995-96 on six common grounds pertaining to the only issue of not allowing the deduction under s. 80-I of the IT Act, 1961 by considering the entire exercise followed by the assessee as processing instead of accepting the activity as manufacture of the cattle feed by the assessee. The CIT(A) held that the word 'manufacture' is not distinct in the IT Act and, therefore, reliance has to be placed on the normal dictionary meaning of the word 'manufacture'.
2. The CIT(A) considered the meaning of the word 'manufacture' to make by hand, by machinery or other agency. According to the CIT(A) the word 'manufacture' should involve transformation or change in the material as a result of art or mechanical manipulation. The CIT(A) further considered that the word 'manufacture' should bring into existence a new substance i.e., a new article or thing must emerge with a distinctive name. Character and identity. According to the appellant the CIT(A) did not consider the activity adopted by the appellant-firm as production. According to the dictionary meaning of the said word is creation of utilities having value in exchange.
3. We have heard the learned representative for the appellant-firm Shri J. J. Madan and the learned representative for the Department Shri Shaji P. Jacob. Their arguments are taken into consideration.
4. Shri Madan advanced an argument that the appellant-firm is a registered firm under the Indian Partnership Act, 1932. The appellant-firm was entitled to the benefit provided under s. 80-I of the IT Act, 1961. But the AO refused to give such deduction on the ground that the assessee's business involved only 'processing' and not 'manufacture or production of an article or thing not specified in the Eleventh Schedule'. The assessee is engaged in the manufacture of feeds like poultry feed, cattle feed, etc. and also trading the same. The business of the appellant-firm according to the learned representative, is manufacturing of animal feed.
5. While elaborating his arguments, the learned representative Shri Madan submitted that the appellant-firm purchases various raw-materials such as maize, jawar, broken-rice, rice bran, rice polish and a variety of cakes such as groundnut, rape seed, sun flower, soya, gingely, etc. These raw materials are batched through computerised batching system in required propositions as per nutritional requirements of the different varieties of feeds. Then the raw-material are mixed together and thoroughly ground into the required particle size mash form. The mash form is added with fish meal, bone meal, meat meal and vitamins such as vitamin A, B2, B3, B1, B6, B12, E and also certain amino acids, growth promoters anti-oxidants and other nutrient items. The resultant products are then blended into homogenous mixtures and sprayed with oils and fats. They are then passed through spraying system wherein specialised items like molasses, etc. are sprayed. Then the mash is taken through the levator to the conditioner, where the mash is cooked with dry steam and passed to the pelletizer for pelletizing. The product is then cooled with the help of cooling towers where air is blown to cool the pellets. The product is then cooled with the help of cooling towers where air is blown to cool the pellets. The finished product i.e. mash or pellets are then bagged.
6. The learned representative for the assessee Shri Madan further submitted that the firm manufactures poultry feed such as layers, broilers and breeders having nomenclatures like chick mash, grower mash, layer mash, breeder feed like breeder broiler chick mash, breeder broiler grower mash, breeder broiler layer mash, broiler starter, broiler finisher, etc. The appellant-firm also manufactures cattle feeds like M.R. Pellets, SMR Kissan, etc. He submitted that the appellant-firm manufactures more than 20 varieties of feeds. At the time of advancing his arguments the learned representative for the appellant-firm displayed certain varieties of feeds and contended that those varieties of feeds were quite different from the raw-material. The qualities of the manufactured feeds were quite different from the raw-material. The raw materials mixed cannot be brought back to the original share or original character. The creation of poultry feeds/cattle feeds as detailed cannot be compared to the creation of a medicinal pill or tablet which is referred to as 'manufacture'. According to the learned representative the CIT(A) held the entire exercise as processing instead of manufacture, denying the assessee the benefit of s. 80-I of the IT Act, 1961. The AO considered various High Courts and Supreme Court's decisions. But according to the learned representative for the appellant the said decisions are entirely in respect of processing alone and not regarding manufacture. According to him those cases have no relevance whatsoever to the facts and circumstances of the assessee's case. He submitted that the case law followed by the AO has no relevance to the case under consideration. He finally submitted that the AO as well as the CIT(A) have taken an erroneous view for not allowing deduction under s. 80-I of the IT Act.
7. As s. 80-I of the IT Act, 1961 is involved in this appeal, therefore, it has become necessary to look into the said provisions. The head note of s. 80-I is "Deduction in respect of profits and gains from industrial undertakings after certain date, etc." Sec. 80-I reads as under :
"80-I. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a shop or the business of a hotel (or the business of repairs to ocean-going vessels or other powered craft) to which this section applies there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof."
8. Now the rate is enhanced from 20 per cent to 25 per cent. In accordance with the said provision the assessee must be an industrial undertaking and the assessee must manufacture or produce articles or things. To clarify a point at this stage, it appears fit and proper that the appellant-firm is neither a firm of supplying the original one nor the reconstruction of a business already in existence. The machinery or plant was not at any time previous to the date of installation used in India.
9. The appellant is an industrial undertaking is not in dispute. What is in dispute is that the appellant does not manufacture or produce any new articles or things from the raw-materials. Hence it has become necessary to consider or examine the facts pertaining to the activity carried on by the assessee. The preliminary process followed by the appellant-firm is already discussed above. The process of mixing the raw-materials with several other materials is also explained. The only point which has arisen for our consideration is whether the activity adopted by the appellant-firm for producing cattle feed amounts to manufacture or production or only a processing. The learned representative for the appellant-firm has produced a certificate dt. 21st February, 1991, issued by the Director of Industries, Government of Maharashtra for registering as a small-scale industrial unit. The appellant-firm was registered by the said director of industries as small-scale industrial unit to manufacture poultry feed. A licensing authority and Joint Director (DEV) also considered the appellant-firm as manufacturer. The Government of Karnataka by its letter dt. 6th January, 1992 also registered the appellant-firm as a manufacturer and seller of poultry livestock feeds and under Karnataka Poultry & Livestock Feed (Regulation of Manufacture & Sale) Order, 1987, it is registered as a feed manufacturer. There are other papers also on record being Part I. The Factories Act, 1948, wherein the definition of 'factory' is given. The factory means any premises including the precincts thereof wherein 10 or more workers are working or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on, or wherein twenty or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on. There is a notification from Animal Husbandry, Fisheries and Forest Secretariat of the Government of Karnataka on record for issuing licence for manufactured and sale of poultry feed. In accordance with the said provisions person who commenced to carry on business of manufacture of poultry feed shall obtain a licence within a period of three months from the date of commencement of the order. The manufacturing of poultry feed without using electrical power and also by using electrical power is also given. The poultry feeds are manufacture for sale. Certain conditions have been laid down regarding manufacture of poultry feed to issue licence. Copy of the notification is produced before us to show particularly how the Department of Animal Husbandry, Fisheries and Forest Secretariat has used the word manufacture for poultry feed a cattle feed at several places.
10. How and in what manner the word 'manufacture' is used by different authorities is immaterial. Certain nomenclature may give different meanings at certain places and under certain situations depending on the facts and circumstances of the case. Apart from using the word 'manufacture' by several authorities as described above we are required to consider the activity adopted by the appellant-firm to produce poultry and cattle feed. The learned representative for the appellant-firm has produced several photographs to show how and under what situation the activity is being carried on. Machines are used for spraying and grinding the raw-materials of foods such as maize, rice etc. Electrical power is also used. The appellant-firm is having more than 100 workers.
11. The learned Departmental Representative Shri Shaji P. Jacob vehemently argued and contended that the activity carried on by the assessee-firm amounts to only processing and not manufacture. According to him the raw-materials used do not change their qualities. The raw-materials of goodgrains used would be having same qualities and same taste. Jawar, rice, etc. even after processing will contain the same elements. The original cattle feed will remain cattle feed only even after processing. The main ingredients of the raw feed are not changed. The assessee has done only powdering. He has relied on para (11) of the CIT(A)'s order in support of his contention. According to him the mixture is produced mechanically.
12. The learned Departmental Representative has cited the decision of the Karnataka High Court in the case of CIT vs. Hotel Ayodya (1993) 201 ITR 1002 (Kar). In that case the issue of investment allowance was involved. The Karnataka High Court held that the hotel in respect of installing the machine in it was not entitled to investment allowance. He has cited a decision of the Madras High Court in the case of CWT vs. P. Devasahayam (1997) 236 ITR 885 (Mad). The Madras High Court in that case considered the meaning of industrial undertaking and preparation of sweetmeats and biscuits. The Madras High Court has held that the preparation of sweetmeats and biscuits does not constitute manufacture and the assessee was not entitled to exemption of wealth. In that case the qualities of the raw materials used in preparation of sweetmeats and biscuits did not change even after preparation of the same. The sweetness of sugar used in its remained sweet only even after the preparation of the sweetmeats and biscuits. The taste of sweetness also did not change after preparation of the sweetmeats and biscuits. Therefore, he submitted that the preparation of cattle feeds stands on the same par and did not change its qualities and therefore, no manufacturing activity of a new article or thing is involved.
13. At this stage it appears quite proper to mention here that the sugar and other raw-materials used in preparation of the sweetmeats and biscuits could be eaten by human beings as well as animals and again they can be eaten by the human beings as well as the animals even after preparation. It is true that some of the raw-materials used in the manufacture of poultry feed and cattle feed can be eaten by both the human beings as well as the animals. The pertinent distinct fact involved herein is that the poultry feed or cattle feed after manufacture can be eaten only by animals or cattle. The end-product coming out of its activity is not eaten by human beings. Therefore, is would not be correct to say that the poultry feed or cattle feed manufactured by the appellant-firm using machinery and electricity did not change the quality and taste and it would further be not correct to say that the taste of the raw-materials remained the same even after the manufacture of poultry and cattle feed. Lot of change occurs after poultry or cattle feed is manufactured than the raw-materials used in it.
14. The learned representative for the Department Shri Shaji P. Jacob also relied on the decision of the Kerala High Court in the case of CIT vs. Casino (P) Ltd. (1973) 91 ITR 289 (Ker). In that case also conversion of raw-materials into food in a hotel was the point for consideration. The question involved was whether conversion of raw-materials into food constituted manufacturing or processing of goods. The Kerala High Court held that the activity carried on in preparing the articles of food from raw materials in a hotel would not constitute "manufacturing or processing of goods'. The hotel did not fall within the decision of industrial company in that case. He also cited the decision of the Karnataka High Court in the case of V.M. Salgaocar Bros (P) Ltd. vs. CIT (1996) 217 ITR 849 (Kar) wherein the question of manufacture or production of article was considered. The Karnataka High Court has held that improving marketability of article does not constitute manufacture or production. According to the learned Departmental Representative the appellant-firm has only raised the marketability of the raw-materials used in processing the poultry and cattle feed. Therefore, he submitted that the assessee was not entitled for deduction under s. 80-I. However, this argument of the Department does not appear fully justifiable when the taste and the ingredients of the raw-material used in manufacturing the poultry and cattle feed has fully changed when the end-product is made available for eating to the animals. Therefore, the argument that only marketability is improved is not acceptable. The learned Departmental Representative further relied in support of his contention that the activity adopted by the appellant firm does not amount to manufacture but it is only a mechanical mixture. He cited a decision of the Supreme Court in the case of Builders Association of India vs. Union of India (1994) 209 ITR 877 (SC). In that case again construction of a dam, building, bridge, road and the like was a point for consideration. The Supreme Court held that the construction activity was not involved because a new article or thing was not manufactured and, therefore, the Builders Association of India was not entitled for investment allowance on machinery and plant. That case stands on a different footing and the facts of that case are not pari materia with the facts of the instant appeal. He has also cited a decision of the Delhi Bench of Tribunal in the case of B.R. Maheshwari & Co. vs. CIT. However, that decision is not available. He has cited another decision of the Kerala High Court in the case of CIT vs. Aspinwall & Co. Ltd. The Kerala High Court in that case has held curing of coffee is not a manufacturing activity and the assessee was not entitled to investment allowance under s. 32A.
15. In that case the Tribunal inspected the factory premises to have a first-hand knowledge of the operations carried on by the assessee-company. The Tribunal wanted to find out the fact and found nine aspects in curing the coffee - (1) receipt of coffee from the estates; (2) storage of coffee in covered godowns; (3) drying of coffee to the required standards prescribed by the Coffee Board in drying yards; (4) hulling/pealing/polishing; (5) grading of coffee mechanically; (6) colour sorting; (7) garbling and manual grading; (8) out-turning of garbled coffee; and (9) bulking. The Tribunal found that all the nine stages of the processing do not make any kind of change or a commercially different commodity was not seen to be passing through the various stages of the process. The assessee was not therefore, entitled to relief under s. 32A for investment allowance. However, the facts of that case are not identical and similar to the facts of the instant appeal.
16. The learned Departmental Representative also relied on a decision of the Madras High Court in the case of CIT vs. Veena Textiles (P) Ltd. (1985) 155 ITR 794 (Mad) and another decisions also of the Madras High Court in the case of CIT vs. S.S.M. Finishing Centre (1985) 155 ITR 791 (Mad). The question involved in those cases was processing of goods without resulting in any new end-product. Therefore, the Madras High Court held that the operations carried on by the assessee on the cloth purchased by it from others was not in the nature of either manufacturing or production operations, nor can such operations relate to production or manufacture of textiles and not manufacturing cloth as feed material and resultant product remains cloth only and therefore, the assessee had not brought into being or existence textiles by employing the process of dyeing and consequently the assessees were not entitled to the benefit of higher development rebate. These two decisions are also distinguishable on facts because no new end-product came out of the processes adopted by the assessees, therein. He has relied on the decision of the Punjab & Haryana High Court (Full Bench) in the case of Niemla Textile Finishing Mills (P) Ltd. vs. ITO (1985) 152 ITR 429 (P & H). In that case the Punjab & Haryana High Court has held that mere process of dyeing, finishing, scouring and singeing of fabrics and textiles of all kinds only results in giving a good finish to a particular article manufactured or produced and making it a better marketable article, but these processes by themselves do not amount to "manufacture or production of textiles" within the meaning of Entry 23 of Sch. I to the Industries (Development and Regulation) Act, 1951, and hence, the assessee would not be entitled to the grant of tax credit certificate under s. 280ZB of the IT Act, 1961. This decision is also distinguishable on facts because the end-product in the instant appeal, manufactured by the appellant-firm is eatable only by hens and cattles. The end-product is altogether a changed article or thing from its original qualities. He has also cited a decision from Chowgule & Co. vs. Union of India (1981) 47 STC 124 (SC). Even the CIT(A) has discussed about this decision stating that this case involved blending of different qualities of ore possessing different chemical and physical composition so as to produce ore of the contractual specification was held not to involve the process of manufacture. The facts of the case cited are not similar to the present case under consideration.
17. The sum and substance of the arguments advanced by the learned Departmental Representative is that no manufacturing activity is involved in the present case and the end-product did not change from its original qualities and, therefore, the assessee is not entitled to get the deduction under s. 80-I of the IT Act, 1961.
18. The learned representative for the assessee Shri Madan distinguished the decision of the Madras (sick-Kerala) High Court in Eminent Enterprises vs. CIT (1999) 154 (Ker) 513 : (1999) 236 ITR 883 (Ker), the decision in Casino (P) Ltd.'s case (supra), the decision in CIT vs. Berry's Hotels (P) Ltd. (1994) 207 ITR 615 (Bom), and also the decision in CIT vs. Buhari Sons (P) Ltd. (1983) 144 ITR 12 (Mad). He has submitted that in all these cases the activity was similar to a hotel activity and they relate to the hotels. The assessee is not a hotel. The animal feed being manufactured is a saleable commodity and it is not a product to be supplied to the visitors to consume in the place of production like in the case of hotels. The animal feed manufactured or produced have been sold to various customers for use to consume in their respective business for feeding the animals. He has also cited the judgment of the Karnataka High Court in 209 ITR 983 (sic) in the case of Krishna Flour Mills, wherein production of horse feed was considered as manufacture. It is submitted that the concept of manufacturing activity has been explained in Idandas vs. Ananth Ramachandra Padke AIR 1982 SC 127 and the relevant portion at p. 129. The Hon'ble Supreme Court at p. 129 of the said judgment held that "coming now to the tests laid down by this Court, the position may be summarised as follows :
(1) That it must be proved that a certain commodity was produced.
(2) That the process of production must involve labour or machinery.
(3) That the end-product which comes into existence after the manufacturing process is complete should have a different name and should be put to a different use. In other words, the commodity should be so transformed so as to lose its original character."
19. In the instant appeal the appellant-firm has fulfilled these conditions laid down by the Hon'ble Supreme Court. He has submitted that the judgment of the Karnataka High Court in 209 ITR 983 (sic) is the judgment of the jurisdictional High Court and could be construed as more relevant by the lower authorities. He has also submitted that the case of State of Karnataka vs. B. Raghurama Setty (1981) 47 STC 369 (SC), the Supreme Court held that even the conversion of paddy into rice amounts to manufacture. According to him the judgment reported in 137 ITR has no relation whatsoever to Komarla Feeds. i.e., to the case of the appellant. That case relates to packing, wrapping, folding, stitching, ginning and pricing, which was therefore, considered by the Court as processing only. While referring to the decision of Karnataka High Court in Hotel Ayodya case (supra) he has submitted that according to the Karnataka High Court the hotel is not an industrial undertaking. The hotel is a trading concern as it is mainly intended for trading and not for production or manufacture. According to him this does not relate to the present case as the assessee is not a hotel.
20. The learned representative Shri Madan also submitted that the point involved in the case in Hind Nippon Rural Industries (P) Ltd. vs. CIT (1993) 201 ITR 588 (Kar), is whether chipping, sizing and polishing of granite is 'manufacturing' or 'processing'. The Karnataka High Court in the above decision held that such activity did not amount to manufacture or processing of goods as the end-product is not commercially different product and consequently the process involved does not amount to manufacture. He distinguished that in the appellant-firm's case the process involves generation of a product which is commercially different with a different name and usage and with no identification to the original raw-material used. He has submitted that the judgment of the Supreme Court in Builders Association of India's case (supra) is also not relevant. Construction of dams and building is not held as manufacturing activity to allow the investment allowance. The thing contemplated under ss. 80-I and 80-IA of the Act are different than the thing contemplated by the Supreme Court.
21. He has stated that the Karnataka High Court in the case in V.M. Salgaocar Bros. (P) Ltd. (supra) has held at p. 854 that the generally prevalent test is whether the article produced is regarded in the trade by those who deal in it, as distinct in identity from the commodity involved in its manufacture. There may be change or series of changes which take a commodity to a 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. Where there is no essential difference in identity between the original commodity and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another. His pertinent submission was that although it has undergone a degree of processing, it must be regarded as still retaining its original identity. The mash and pellets produced by the appellant-firm have been brought about as a result of a series of changes that have taken the commodity to a point where commercially it can no longer be regarded as the original commodity, but instead, is recognised as a new and distinct article with brand name "Shanku", which has no resemblance, whatsoever to the raw-material involved in its manufacture and commercially known and identified as such.
22. While distinguished the judgment of the Supreme Court in the case of Chowgule & Co. (supra) he has submitted that the commodity even undergoing certain change in an operation would not amount to processing of the commodity. The commodity has as a result of the operation experienced some change, but it is only when the change or series of changes that are experienced by the commodity takes the commodity to the point of being known commercially as a distinct, different commodity. The different commodity known by brand name Shanku has emerged as a result of the various processes which has culminated in the final product of mash and pellets in the instant case. He has distinguished the judgment of the Karnataka High Court in the case of V.M. Salgaocar Bros. (P) Ltd. (supra). It is held that the function of the iron-ore sizing and washing plant was to remove impurities from the ore by the hydraulic washing process and simultaneously segregating the ore on the basis of size. The iron ore remained commercially the same commodity. There was no change in the commercial nomenclature of the article nor was there any transformation or production of a new or different article. He submitted that mash and pellets manufactured by the appellant-firm have totally changed in size, shape, appearance and usage from the original raw-material used in its manufacture. The transformation is complete with not the slightest resemblance to the original raw-materials involved. He submitted that the judgment of the Karnataka High Court in the case of Sri Ranganatha Enterprises vs. CIT (1998) 232 ITR 568 (Kar), has no bearing whatsoever on the appellant's case. In that case the Karnataka High Court held that the activity of toddy tapping and vending does not involve "manufacture" or "production" of an article or thing. He has submitted that an industrial company amounts to a company which is mainly engaged in the manufacture or process of goods. If the income attributable to such activity included in its total income of the previous year as computed before making any deduction under Chapter VI-A of the IT Act, is not less than fifty one per cent of such total income. He has given details for the year ended 31st March, 1994 and 31st March, 1995. According to him the essence of manufacturing is that something is produced or brought into existence which is different from that out of which it is made in the sense that the thing produced is by itself commercial commodity which is capable as such of being sold or supplied.
23. Finally Shri Madan submitted that appellant-firm is a manufacturer of feeds in bulk and not in small quantities. According to him the items are not manufactured according to the orders of the customers whereas in a hotel it is prepared according to the customers' orders. His arguments in particular relatable to the case of the appellant are that the activity involved in producing the poultry feed and cattle feed does not amount to processing at all. This clearly amounts to manufacture and the appellant-firm being a small-scale industrial undertaking it is definitely entitled to get the deduction under s. 80-I.
24. We have examined the facts and considered the arguments advanced at large by both the parties. We have also perused the assessment order and the order of the CIT(A). We have gone through the relevant contents of the paper books filed on record. The cumulative effect of the facts, arguments and the case law leads us to come to a correct conclusion that the activity followed by the appellant-firm is a manufacturing activity and it is entitled for the deduction under s. 80-I of the IT Act, 1961.
25. In the result, the appellant-firm succeeds and the appeals are allowed.