Income Tax Appellate Tribunal - Bangalore
M/S. Vakkal Impex Pvt. Ltd,, Bangalore vs Department Of Income Tax on 5 September, 2012
Page 1 of 13 1 ITA No.138/Bang/2011
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'C'
BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND
SHRI JASON P BOAZ, ACCOUNTANT MEMBER
ITA No. 138/Bang/2011
(Asst. year 2006-07)
The Deputy Commissioner M/s Vakkall Impex Pvt. Ltd.,
of Income-tax, Circle- No.480, IInd Floor, KHB
12(5), Bangalore-1. Vs Colony, 5th Block,
Koramangala, Bangalore-95.
PA No.AABCV4517H
(Appellant) (Respondent)
Date of Hearing : 05.09.2012
Date of Pronouncement : 14.09.2012
Appellant by : Shri Sundararajan, A., JCIT
Respondent by : Shri P Dinesh, Advocate
ORDER
PER GEORGE GEORGE K :
This appeal filed by the Revenue is directed against the order of the CIT (A)-III, Bangalore dated 4.10.2010. The relevant assessment year is 2006-07.
2. The Revenue, in its grounds of appeal, has raised four grounds. Ground No.1, 3 and 4 are general in nature and, thus, they have become inconsequential. The solitary ground survived for adjudication relates to the Page 2 of 13 2 ITA No.138/Bang/2011 issue that 'the CIT (A) had erred in holding that the assessee is entitled to claim of Rs.50,30,143/- u/s 10B of the Act.'
3. Briefly stated, the facts of the issue are as under:
The assessee is a company. It is engaged in the business of recycling of ferrous and non-ferrous scraps. It imports different types of scrap like unserviceable transformer scrap, unserviceable cable scrap, motor scrap, mixed ferrous and non-ferrous metals with attached scrap. Further, the non-ferrous metal is being sold overseas whereas the ferrous metal is sold in local markets. During the year under consideration, the assessee had shown a turnover of Rs.18.5 crores and a net profit of Rs.1.44 crores. After claiming exemption of Rs.50,30,143/- and other adjustments, the net income of Rs.84,14,027/- was offered for taxation. After due consideration of the details furnished during the course of assessment proceedings, the AO was of the view that the assessee had, after down-loading the ferrous and non-
ferrous scraps with attachments imported from various countries, carried out recycling/cleaning process and exported the same to different countries. Therefore, the AO took a stand that the assessee had not engaged in any kind of manufacturing of things/items whereas the assessee's nature of business was merely importing of scraps with attachments and after carrying out the recycling/cleaning process, exported the same to various destinations. Analyzing the issue with reference to the provisions of section 10B of the Act, the AO came to a conclusion that the assessee failed to prove that it had actually manufactured or produced any new article or thing. She had, further, pointed out that the assessee is basically engaged Page 3 of 13 3 ITA No.138/Bang/2011 in recycling/cleaning of the scraps from its attachments which is the principal business of the assessee.
3.1 Besides, the assessee is also engaged in manufacturing of aluminium ingots from its Aluminium Division and the sale is effected within India. This activity of the assessee has, according to the AO, nothing to do with its Exports Division.
3.2 Reverting back to the issue, the AO by rejecting the assessee's claim that the process of recycling of scrap was in the nature of producing an article and exporting of the same is eligible for deduction u/s 10B of the Act, she took a stand, by extensively quoting the provisions of s. 10B of the Act, that the assessee had failed to prove that it had actually indulged in manufacture or producing any article or thing so as to qualify for deduction u/s 10B of the Act. The conclusion of the AO was that the assessee had failed to furnish any conclusive proof in the process of recycling so as to claim deduction. Accordingly, the entire claim of exemption of Rs.50.3 lakhs was negated.
4. Aggrieved, the assessee took up the issue, among others, with the CIT (A) for relief. During the course of appellate proceedings, the assessee submitted a Note wherein it had exhaustively detailed its manufacturing process.
5. After giving due weight-age to the contentions of the assessee coupled with various case laws, the CIT (A) had directed the AO to grant Page 4 of 13 4 ITA No.138/Bang/2011 the exemption claimed by the assessee u/s 10B of the Act. The reasons recorded by the CIT (A) for such a stand are as under:
"11.0..........................................................I find much force in the contention of the appellant that the activity carried out by the appellant amounts to 'manufacturing' activity. After considering the submissions and the explanation given by the appellant as regard to the activity carried out by the appellant in the process of exporting the recycled scrap which are reproduced in the preceding paragraphs, I hold that the activity carried out by the appellant amounts to manufacturing. Further, in support of the case, the appellant has relied on certain judicial pronouncements which I have perused and in my considered opinion, the principles laid down by the Hon'ble Supreme Court in the case of India Cine Agencies vs. CIT 308 ITR 98 (SC) and the Hon'ble Bombay High Court in the case of Ship Scrap Traders, Ispat Brothers, Bansal Brothers v. CIT 251 ITR 806 (Bom) are akin to the facts of the present case. Hence, I am of the opinion that the importing of scrap form (sic) from other countries and the process involved by the appellant to recycle ferrous and non-ferrous scrap amounts to manufacturing activity and is well in the definition of 'manufacture' as per section 2 (29BA) of the Income- tax Act, 1961 and, hence, the appellant is eligible to claim exemption under section 10B of the Act........."
6. Aggrieved, the Revenue has come up with the present appeal.
7. During the course of hearing, the learned DR submitted that the CIT (A) had grossly erred in holding that the assessee's activity of recycling of ferrous and non-ferrous scraps imported from other countries amounts to manufacturing within the meaning of the definition of the term Page 5 of 13 5 ITA No.138/Bang/2011 'manufacture' as per section 2(29BA) of the Income-tax Act so as to entitle to claim exemption u/s 10B of the Act. For this proposition, the learned DR has placed reliance on the following case laws:
• CIT v. Vijaya Retreaders 253 ITR 53 (Ker);
• CIT v. Madurai Pandian Engineering Corporation Ltd 239 ITR 375 (Mad);
• DCIT v. Apollo Vikas Steels (P) Ltd - ITA No.926, 927 dt.30.9.1997 - ITAT, Ahmedabad Bench; & • Gatta Mallaiah Sons v. ITO - 60 ITD 131
8. On the other hand, the learned AR supported the findings of the CIT (A). He had, further, submitted a Note captioned 'Manufacturing Process' which was also furnished before the first appellate authority. To strengthen his submission, the learned AR had furnished a paper book containing 1 - 7 pages which consist of copy of a letter from (i) the Ministry of Commerce and Industries, Government of India, Visakhapatnam; and (ii) Small Industries Service Institute [SISI], Hyderabad.
9. We have carefully considered the rival submissions, perused the relevant materials available on records and also the case laws on which either party had placed reliance. The reasoning of the AO in denying the claim of the assessee for deduction u/s 10B of the Act was, briefly, that the assessee had failed to prove that it had actually manufactured or produced any new article or thing. According to the AO, the assessee was basically engaged in recycling/cleaning of scraps from its attachments which was the principal business of the assessee.
Page 6 of 13 6 ITA No.138/Bang/20119.1 However, the assessee had, in its Note detailed the various stages of process being undertaken by it to segregate the ferrous and non- ferrous scraps from the different types of scraps such as unserviceable transformers, cables, motor scraps imported from various countries. The entire contents of the assessee's Note have since been extracted verbatim by the CIT (A) in his order under consideration.
9.2 On a careful consideration of the process technique being applied by the assessee, we find that the different type of scraps imported by the assessee was subjected to various types of recycling and cleaning processes. The non-ferrous metals such as copper, aluminium, brass etc., are being separated from the scraps with attachments by employing hydraulic pushers. Copper, aluminium etc., so extracted is fed to hydraulic bundling machines to bundle them in different sizes according to the need of its customers. Likewise, the copper embodied with the scraps will also undergo different types of cleaning so as to peel off the insulated material, cutting of the same into various sizes to commensurate to the requirements of the customers.
9.3 Obviously, the AO had come to the conclusion that the assessee was doing only cleaning process of scraps and ultimately exporting the non- ferrous and ferrous metals which, according to her, does not involve in any manufacturing or producing of an article or thing on the premise that the assessee had failed to furnish any conclusive proof with regard to the process of recycling [source: Para 7 of Asst. order]. Had there been the details of process of recycling/cleaning of the scraps furnished by the Page 7 of 13 7 ITA No.138/Bang/2011 assessee before her, we suppose, the AO would not have resorted to reject the assessee's claim for deduction u/s 10B of the Act? 9.4 Turning our attention to the various case laws on which the rival parties had placed reliance, we have come across an identical issue to that of the present one on hand, which had cropped up before the Hon'ble Bombay High Court in the case of Ship Scrap Traders & Ors v. CIT & Ors reported in (2001) 251 ITR 806 (Bom). Briefly, the issue before the Hon'ble High Court was that the assessees were engaged in the business of ship-breaking. The deductions claimed by the assessees under sections 80HHA and 80-I of the Act were rejected by the Revenue on the ground that the business and activity of ship-breaking carried on by them did not amount to manufacture or production of article or thing. The assessees were claiming that they were treated as industrial undertakings by various tax authorities; and that they were holding licence under Central Excise Rules 1944 as iron and steel obtained by breaking of ships were excisable and that they were registered as Small Scale Industrial Units with the Director of Industries. However, the claims of the assessees were rejected by the AO on the ground that the activity of ship-breaking did not amount to manufacture or production of things or articles. However, the CIT (A) did oblige the assessees in accepting their contentions and held that the ship-breaking amounts to manufacture and/or production of articles or things. On appeals, the Tribunal reversed the findings of the CIT (A) and agreed with the findings recorded by the AO.
Page 8 of 13 8 ITA No.138/Bang/20119.5 On further appeals, the Hon'ble Court, before proceeding further with discussion on legal issues, had penetrated with the basic concept of 'ship-breaking activity' and its understanding of it has been summarized as under:
(a) Old ships were brought for the purpose of breaking to the breaking yards. In the course of breaking activity, the ship loses its identity and results into production of the following items:
Ferrous metals, Re-rollable steel, melting steel, cast iron scrap, non-ferrous metals, aluminium, brass, copper etc.,
(b) the ship-breaking activity calls for expertise in the technique to be adopted; and cutting of steel of the ship is done by using LPG and oxygen gas etc;
(c) the ship-breaking activity has been considered in various legislation as manufacturing activity. The Development Commissioner, Small Scale Industries Board, New Delhi had also recognized ship-breaking as an industrial activity. That is how the ship-breaking activity is understood and carried out in the country treating it as an 'industrial undertaking'; &
(d) the petitioners have also produced on record visual material in support of their contentions as to how the ship-breaking activities were carried out and tried to impress that it is a systematic organized commercial business venture involving the component of finance, labour, skill so as to give birth to altogether a new identifiable commercial product i.e., articles or things different from its original raw material i.e., ship.
9.6 After taking into consideration of rival contentions, the Hon'ble Court had observed thus:
Page 9 of 13 9 ITA No.138/Bang/2011
"16. The word 'manufacture' used as a verb is generally understood to mean an 'bringing into existence a new substance' and does not mean merely 'to produce some change in a substance", however, minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases. Vol. 26, from an American judgment. The passage runs thus:
" 'manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But, something more is necessary and there must be transformation a new land, different article must emerge having a distinctive name, character or use."
17. The expression manufacture has in ordinary acceptation a wide connotation. It means making of articles, or material commercially different from the basic components, by physical labour or mechanical process. However, it also needs to be considered that when the word manufacture is appearing in the company of word 'production' which has a wider connotation then the word 'manufacture', the word production or produce when used in juxtaposition with the word manufacture takes in bringing into existence new goods by a process which may or may not amount to manufacture. The associated words are indicative of the mind of legislature. Where a word is doubtful or ambiguous in nature the meaning has to be ascertained by considering the company in which it is found and the meaning of the word associated with it. The words manufacture and production have received extensive judicial attention both under the Act as well as the Central Excises Act and the various sales-tax laws. The word 'production' has a wider connotation than the word 'manufacture'. In Page 10 of 13 10 ITA No.138/Bang/2011 order to appreciate and understand the scope and meaning of the said words, it is necessary to turn to the various judgments dealt with the said subject and law laid down by the various High Courts including this Court and the views expressed by the Apex Court while dealing with such contentions."
9.7 After extensively quoting the ruling of the Hon'ble Apex Court in the case of CIT v. N.C. Budharaja & Co reported in (1993) 114 CTR (SC) 420 and also referring the word 'produce' as per Webster's New International Dictionary and the Shorter Oxford English Dictionary, the Hon'ble Court had come to the conclusion that:
"19. Applying the principles spelt out by the Apex Court in the aforementioned decision and the ordinary meaning of the word 'produce' as disclosed by the dictionary and by its ordinary connotation, we are of the opinion that when the word manufacture is appearing in the company of the word production which has wider connotation than the word manufacture, then in that event, the word 'manufacture' will have to be interpreted in wider sense and will have to be understood as par with the meaning assigned to the word 'production' and if such approach as contemplated by Legislature is adopted then in that event it is not difficult to reach to the conclusion that the assessees are the industrial undertakings, engaged in manufacture and production of articles and things.
................................................................................................
23. The Apex Court in the case of CIT v. N.C. Budharaja & Co. (supra) observed that the word 'production' or 'produce' takes into account all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. The Apex Court while considering the next word 'articles' occurring Page 11 of 13 11 ITA No.138/Bang/2011 in the said clause and noticed that the word 'articles' is preceded by the words 'it has begun of begins to manufacture or produce' and reached to the conclusion that the expressions 'manufacture' and 'produce' are normally associated with movables ie., articles and goods, big and small. Applying the said yardstick adopted by the Apex Court and considering the peculiar nature of the ship-breaking activity as mapped in para 6 (supra) we are of the view that the ship-breaking activity gives rise to manufacture and production of altogether a new commercial articles or things which are commercially identifiable in the commercial world other than the ship and, therefore, the assessees should be held entitled to claim deductions under ss. 80HHA and 80-I of the Act."
9.8 On a similar issue, the Hon'ble Supreme Court had, in the case of Vijay Ship Breaking Corporation & Ors v. CIT reported in (2009) 314 ITR 309 (SC), reinforced an identical view. It was held thus:
"The important test which distinguishes the word 'production' from 'manufacture' is that the word 'production' is wider than the word 'manufacture'. 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. It is important to note that the word 'new' is not used in the definition of the word 'produce'. Tribunal in the present case was right in allowing the deduction under ss. 80HH and 80-I to the assessee holding that the ship-breaking Page 12 of 13 12 ITA No.138/Bang/2011 activity gave rise to the production of a distinct and different article":
9.9. The ratio laid down by the Hon'ble Bombay High Court as well as the Hon'ble Supreme Court (supra) are, in our considered view, akin to the facts and circumstances of the issue under dispute. Further, as highlighted by the Hon'ble Court [courtesy: Para 6(c) of the order], the Development Commissioner, Ministry of Commerce & Industries, Government of India, Viskhapatnam vide her letter No.PER 155 (2002)/EOU/VEPZ/2002/3701 dated 27.5.2002 had permitted [under 100% EOS] the assessee for recycling of imported ferrous and non-ferrous scrap [Refer: P 1 - 3 of PB AR]. Likewise, the Development Commissioner, Special Economic Zone [SISI] Vizag vide his letter dated 28.11.2007 had permitted the assessee to recycle the imported ferrous and non-ferrous scrap for a further period of five years from 2.1.2008, the relevant portion of which, is extracted as under:
"I am directed to refer your letter dated 21.11.2007 on the subject mentioned above and to convey that in view of the certification given by the Director, SISI, Govt. of India that the process is undergoing manufacturing, approval has been accorded by the Development Commissioner, VSEZ extending the validity.."
[Courtesy: P4 of PB AR].
9.10 Taking into account all these facts and circumstances of the issue and also in conformity with the ratios laid down by the Hon'ble Bombay High Court as well as the Hon'ble Supreme Court cited supra, we are of the firm view that the recycling of ferrous and non-ferrous scraps by the assessee amounts to manufacturing activity and is well within the definition Page 13 of 13 13 ITA No.138/Bang/2011 of 'manufacture'. Thus, the assessee was within its realm to claim exemption u/s 10B of the Act. It is ordered accordingly. 9.11 Before parting with the issue, we would like to point out that the CIT (A), perhaps by misconception, drew strength from the provisions of s.2 (29BA) of the Act to the effect that the process employed by the assessee to recycle ferrous and non-ferrous scraps amounts to manufacturing activity. While doing so, the CIT (A) had failed to notice that the provision of s.2 (29BA) was inserted by Finance (No.2) Act, 2009 with effect from 1.4.2009 which applies in relation to assessment year 2009-10 and subsequent years, but, does not relate to the assessment year 2006-07 under consideration.
10. In the result, the Revenue's appeal is dismissed.
Order pronounced in the open court on 14th day of September, 2012 Sd/- Sd/-
(JASON P BOAZ) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER Copy to :
1. The Revenue 2. The Assessee 3. The CIT concerned.
4. The CIT(A) concerned. 5. DR 6. GF MSP/ By order Senior Private Secretary, ITAT, Bangalore.