Income Tax Appellate Tribunal - Chennai
Dxn Herbal Manufacturing (India) (P) ... vs Income Tax Officer on 25 January, 2007
Equivalent citations: [2008]110ITD99(CHENNAI), (2007)109TTJ(CHENNAI)87
ORDER
Chandra Poojari, A.M.
1. These two appeals by the assessee are directed against the common order of the CIT(A) dt. 17th Aug., 2006 for the above assessment years. Since the issues involved in all these appeals are common, these appeals were clubbed together, heard together and are being disposed of by this common consolidated order for the sake of convenience. The assessee raised the following grounds:
(1) The AO passed the order in violation of principles of equity and natural justice and also denied opportunity of examining the witness from whom statements were recorded and used against the assessee for completing the assessment.
(2) The CIT(A) erred in confirming the disallowance of deduction under Section 80-IB holding that the assessee is not engaged in manufacturing activities and instead is only doing trading of mushroom powder in capsule form though the assessee is engaged in the operation of production of capsules.
(3) The CIT(A) erred in confirming the disallowance of payment of differential duty of tax demanded by the Excise Department. Alternatively, the CIT(A) has erred in not directing the AO to consider this claim of the assessee as a petition for rectification under Section 154 of the IT Act since this payment was actually made as per Section 43B of the Act.;
(4) The CIT(A) erred in not deciding the issue on merit the taxability of interest income of Rs. 4,41,564 and Rs. 7,53,385 for the asst. yrs. 2003-04 and 2004-05 respectively, though the AO treated it as income from other sources.
(5) The CIT(A) erred in confirming the levy of interest under Sections 234B and 234C of the IT Act.
2. The brief facts of the case are that the assessee is engaged in dealing with the ayurvedic medicinal products at Pondichery for which the assessee has obtained license under Drugs & Cosmetics Act, 1940 and 1945. The assessee has been dealing with two ayurvedic products viz., Reshi GANO (RG) and GANO Ceilium (GL). The assessee has also obtained license from the Food & Drug Administration, Pondichery w.e.f. 13th March, 2002. For the asst. yr. 2003-04, the assessee claimed deduction under Section 80-IB at Rs. 7,91,96,432. Similarly for the asst. yr. 2004-05, the assessee claimed deduction under Section 80-IB at Rs. 5,66,07,651. The assessment was completed under Section 143(3) after giving notice under Section 143(2) of the IT Act. These deductions claimed by the assessee were denied by the authorities below. Before completion of the assessment, the assessee was heard by the AO on the following dates:
24th Nov., 2004, 28th Dec., 2004, 2nd Feb., 2005, 1st March, 2005, 23rd March, 2005, 10th May, 2005, 27th June, 2005, 23rd Aug., 2005, 8th Sept., 2005 and 3rd Jan., 2006.
The assessment order under Section 143(3) was passed on 10th Feb., 2006. During the course of assessment, the factory premises was inspected by the AO on 23rd Dec, 2005. The AO obtained statement under Section 131 of the Act from the production in-charge of the factory viz., Shri P. Diwakaran. He has stated in his statement as under:
With reference to the main raw materials - Reishi Gano and Genocelium - they are in the form of fine powder when purchased as a raw material from our suppliers. As finished goods when the powders are capsules they are then also in the nature of fine powder both in respect of Reishi Gano and Ganocelium, both in quality and in nature. Thus, the raw material does not undergo any change in quality and in nature with reference to the end product...the raw material is filled in the same form in gelatin capsules.
3. The lower authorities observed that the assessee was importing two combination of edible mushrooms in bulk powder form and simply filling them into capsules so as to make them convenient for use as also its marketability. The assessee has not carried out any process of whatever nature on the inputs received in powder form. The so procured readymade mushroom powder was put in hard gelatin capsules which are polished and inspected before bottling in HDPE bottles which also contain Dhy Drating (dehydrating) agents. These bottles are capped, labelled, shrink packed and dispatched to the warehouse for final packing. According to the Department, the assessee's job is limited to packing the pre-prepared powder in the form of capsules before marketing it. The assessee has got imported requisite mushroom powder RG & GC which is manufactured by the assessee's parent company, a non-resident, by name M/s DXN International (P) Ltd. The Department also relied on the agreement, entered into by the assessee with M/s DXN International (P) Ltd., and the assessee company did not have the know-how of any kind. According to the Department, the assessee has not manufactured any product to enable it to claim deduction under Section 80-03 of the Act.
4. Before us, the contention of the assessee is that the AO relied on the sworn statement and other information collected from its production in-charge, and the copy of the sworn statement obtained from the production in-charge on 23rd Dec., 2005 was not furnished to the assessee and this would mean violation of principles of natural justice. Further, opportunity of cross-examining the production in-charge was also not given. The production in-charge stated that RG or GC is filled in empty gelatin capsules in appropriate weight. The assessee's contention is that whether filling in gelatin capsules in appropriate weight amounts to manufacture or production was not examined by the AO. According to the assessee, filling the RG or GC in gelatin capsules in appropriate weight amounts to production. For this purpose, the assessee relied on the judgment of the Hon'ble jurisdictional High Court in the case of Empire Industries Ltd. and Ors. v. Union of India and Ors. . According to the assessee, the statement of the production in-charge is the basis for assessment. Since it was not furnished to the assessee for cross-examination, the assessment should be quashed.
5. The learned Departmental Representative, on the other hand strongly relied on the orders of the authorities below.
6. We have heard the rival submissions and perused the material on record. The AO visited the factory premises for better understanding of the operation of the assessee. The AO has given adequate opportunities of hearing on various dates as extracted above. There is no record to show that the assessee has asked for copy of any statement from the AO or opportunity for cross-examining the production in-charge. The assessee kept quite (sic-quiet) during the course of assessment proceedings. The production in-charge stated nothing but bare facts. The assessee stated more or less verbatim of what the production in-charge stated before Departmental authorities and also before us. For proper appreciation, we reproduce the same hereunder:
The manufacturing/production activities including the process are as follows:
(i) Filling section - The bulk drugs powder are filled in the powder hopper and the empty gelatin capsules are filled in capsules hopper of semi-automatic filling machine. The filling machine will be operated by the machine operators. The filling machine will be set to achieve the weight required for each filled capsule. The prescribed weight for RG capsule is 270 mg. and GL capsule is 450 mg. During the production, it should be ensured that the temperature and humidity are within the limits and the weight of fitted capsules are within the limit. Simultaneously, quality control will come for inspection and take samples of the filled capsules to carry out the necessary tests like disintegration test, microbiological test, moisture content test, stability test, weight test parameters and specification test, etc. The filling section maintains a separate production record.
(ii) Polishing section - In polishing, the outer surface of the capsules having powder masses shall be polished by polishing machine operated by the said machine operator. Again QC inspector/personnel shall inspect and observe the quality of the capsules so polished. This section also maintains a separate job record.
(iii) Sorting/inspection section - The operators will inspect and sort out the defected capsules as per in-house specification. Again QC inspector and personnel will inspect the capsules sorted and the capsules defected. Those defected filled capsules will be rejected accordingly. This section also maintains separate job record.
(iv) Counting and bottling section - In counting and bottling, the filled capsules are counted either in 30 Nos. or 90 Nos. by the operator via the counting plate, then it will be transferred to HDPE bottles. Then it will be weighed in the weighing balance for counterchecking. Then the silica gel are inserted into the bottle for moisture preservation purpose, then it will be caped. In this section, QC inspector/personnel also will carry out the required testing. This section also maintains a separate job record.
(v) Labelling section - In labelling section, the sticker is pasted on the bottle manually or via the labelling machine. The same QC inspector/personnel also will carry out the required testing. This section also maintains a separate job record.
(vi) Batch printing section - In batch printing, the batch number, manufacturing date and expiry date is printed on the bottom of the bottle. QC inspector/personnel also will carry out the required testing. This section also maintains a separate job record.
(vii) Shiink pack section - In shrink pack, the red/blue seal and the sleeves has been placed on the bottle and it will be shrinked in the shrink pack machines. QC inspector/personnel also will carry out the required testing. This section also maintains a separate job record.
(viii) Packing section - In the packing Section, 10 bottles are arranged in one polythene cover and it will be sealed by sealing machine and subsequently arranged in the carton box. Each carton box contains 250 bottles of 90 capsules or 400 bottles of 30 capsules. After each carton box is filled it will be sealed and pasted with the production information slip. After the quality control personnel examined and satisfied themselves with various testing, the approved seal is affixed and subsequently released to warehouse.
(ix) All the above manufacturing process of each section in production shall be done in the specified temperature and humidity as well as quality control and testing, and manufactured as per Schedule T. of Drugs and Cosmetics Rules, 1945. The RG and GL drugs are checked by quality control at each and every process. That every batch of 'raw materials', 'packing materials', and 'batch of finished goods' shall be tested by quality control by various test such as microbiological test, disintegration test, specifications test, moisture test, stability test, etc.
(x) The warehouse also shall maintain the inventories of 'raw materials', 'packing materials' and 'finished goods'. The 'raw materials', 'packing materials' and 'finished goods' shall be stored and kept at separate places so as to comply with the Drugs and Cosmetics Rules, 1945.
7. From the above it is evident that no injury was caused to the assessee by the Departmental authorities. The purpose of natural justice was not to defeat the justice but to promote and protect the justice. The argument of the assessee is only superficial and peripheral for which this forum cannot be a party. After going through the entire facts of the case, we feel that no useful purpose will be served by setting aside the matter back to the Departmental authorities for giving an opportunity to the assessee to cross-examine the production in-charge. The object of principles of natural justice is to foster justice and not to thwart justice. The principles of natural justice should reflect and guard the values of fairness and impartiality. It is true that audi alteiam paitem and nemo judex in causa sua are twin formidable pillars supporting natural justice. In order to decide whether in the instant case cross-examination of production in-charge was necessary, it becomes necessary to know whether the appellant assessee suffered any prejudice on account of non-furnishing of information collected from him. It is not the case of the appellant assessee that the assessing authority made use of some undisclosed information or evidence before he disallowed the claim of the assessee. Addition is made solely on the basis of the return filed by the assessee and the documents produced by him and submissions made by the assessee. Principles of natural justice are not engraved on tablets of stone as Lord Bridge of Harwich said in Lloyd v. McMahan (1987) 1 All ER 1118 (CA). The Supreme Court in Rattan Lal Shaima v. Managing Committee, Dr. Haii Ram (Co-education) Higher Secondary School opined that natural justice is not a fixed but a flexible concept, that there is no invariable standard of fair hearing and that each case has to be decided on its own merits. Since the principles of natural justice are not "embodied" rules and, therefore, it is not possible nor practicable to precisely define the parameters of natural justice; that the aim of the principles of natural justice is to secure justice or not to prevent miscarriage of justice and not to thwart justice; that there is no invariable standard of reasonableness in the matter of hearing and whether in a particular case natural justice has been contravened or not is ultimately for the Courts to decide. The Supreme Court in Union of India v. J.N. Sinha and Chandra Bhawan Boarding & Lodging v. State of Mysore , opined that each case has to be decided on its own merits. In Mineral Development Ltd. v. State of Bihar , the Supreme Court observed that the concept of fair hearing is "an elastic one and is not susceptible of easy and precise definition". Again, the Supreme Court in Fedco (P) Ltd. v. S.N. Bilgrami , observed that there can be no invariable standard for reasonableness in such matters except that the Court's conscience must be satisfied that the person against whom an action is proposed has had a fair chance of convincing the authority who proposes to take action against him that the ground on which the action is proposed are either non-existence, or even if they exist, they do not justify the proposed action. The core decision on this question will necessarily and invariably depend upon the peculiar facts and circumstances of each case, including the nature of the decision-making body, the nature of the action proposed, the grounds on which the action is proposed, the materials on which the allegations are based, the attitude of the party against whom the action is proposed in showing cause against such proposed action, the nature of the plea raised by him, his admissions by conduct or otherwise of some or all of the allegations, the effect of the ruling made and all other matters which help the mind of the authority in coming to a fair conclusion on the question. In Smt. Maneka Gandhi v. Union of India , the Supreme Court was pleased to observe at p. 628 that:
The rules of natural justice are not embodied rules. What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the enquiry is held and the constitution of the Tribunal or body of persons appointed for that purpose. Whenever a complaint is made before a Court that some principle of natural justice had been contravened the Court has to decide whether the observance of that rule was necessary for a just decision on the facts of the case.
8. In the instant case, it cannot be said that non-furnishing of copy of the statement given by the production in-charge of the assessee company amounts to denying opportunity of cross-examining the production in-charge which has resulted in causing prejudice to the assessee. We say this because, the addition made by the AO was exclusively and solely on the basis of disclosure made by the assessee at the assessment stage before the AO. Even before us, the learned Counsel for the assessee stated the same facts without any change or variation. Hence, the argument of the assessee as above will not hold water. Accordingly, we dismiss this ground of the assessee.
9. Regarding the next ground, the learned Counsel for the assessee submitted that the assessee is engaged in the manufacture of drugs. He relied on the term defined in the Black's Law Dictionary and submitted that as per that dictionary meaning, 'manufacture' means "the process or operation of making goods or any material produced by hand, by machinery or by other agency, anything made from raw materials by hand, by machinery or by Article The production of articles for use from raw or processed materials by giving such materials new form, quality, properties or combination, whether by hand labour or machine".
He further submitted that production means process or art of producing. The learned Counsel for the assessee relied on the judgment of Hon'ble Supreme Court in the case of Aspinwedl & Co. Ltd. v. CIT (2001) 170 CTR (SC) 68 : (2001) 251 ITR 323 (SC) wherein it was held that:
This Court while determining as to what would amount to a manufacturing activity held in Dy. CST v. Pio Food Packeis (1980) 46 STC 63 (SC) : (1980) Supp. SCC 174 : that the test for determination 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 recognized in the trade as a new and distinct commodity. It was observed (p. 65) that:
Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.
The learned Counsel for the assessee submitted that the final product of the assessee is in the capsule form which is different from original raw material used and it is a new and distinct product from what it was prior to the process employed. For this process of production, the assessee has obtained various license and the assessee has carried out various process by which imported raw material has to undergo changes to become final product. He further submitted that by putting the raw mushroom powder into gelatin capsule, new product has been emerged which is different from raw material and only capsulation makes the product marketable and consumable. It is only because of the capsulation, the product becomes digestible in the human system slowly and delayedly and because of this capsulation, drug will function in the human body in the manner it is expected to function and will achieve desired result.
11. The learned Counsel for the assessee further submitted that when the capsule is consumed by the end user what is digested in the system is not only mushroom powder but also the capsule itself. The capsule is absolutely made of material which is edible. The end product is mushroom (+) gelatin capsule. This is a new product distinct, from the original raw material. He relied on the judgment of the Hon'ble Supreme Court in the case of Empire Industries Ltd. (supra) wherein it was held that cotton fabrics which are subjected to process of bleaching, dying, etc., amount to manufacture though at the end of that manufacturing process, the product will still be cotton fabric only. He relied on the judgment of the Hon'ble Supreme Court in the case of Union Carbide Industries Ltd. v. Union of India wherein it was held that goods manufactured or produced must be capable of being sold to the consumer. He also relied on the judgment of the Hon'ble Supreme Court in the case of Moti Laminates (P) Ltd. and Ors. v. CCE wherein it was held that since the solution produced by the manufacturer could not be used as such without any further processing or application of head or pressure, it could not be considered as goods on which excise duty can be levied. The learned Counsel for the assessee also relied on the judgment of Hon'ble Supreme Court in the case of Dy. CST v. Coco Fibres (1992) Supp. (1) SCC 290, and submitted that the question before the Hon'ble Supreme Court was whether making coconut fibre from the husk would be manufacture. The Hon'ble Supreme Court held that the article that emerged from manufacture should be distinct and new article recognized and known as such in the commercial parlance for sale or supply. He further submitted that in the case of Laminated Packings (P) Ltd. v. CCE , the short question that arose is whether the limitation of duty paid craft paper with polythene would amount to manufacture. The Hon'ble Supreme Court held "by this process of lamination, distinct goods come into being and therefore it was manufacture."
12. The learned Counsel for the assessee further relied on the case law in the case of CCE v. Eastern Paper Industries Ltd. , and submitted that the Hon'ble Supreme Court held "excise is a duty on manufacture". Manufacture is the process or activity, which brings into existence new, identifiable and distinct goods. Goods have been understood to be articles known as identifiable articles known in the market as goods and marketed or marketable in the mart as such. It was an essential requirement to be goods to be wrapped in paper. Anything required to make the goods marketable, must form part of the manufacture and any raw material or any materials used for the same would be component part of the end product. Processes incidental or ancillary to wrapping are to be included in the process of manufacture, manufacture in the sense to bring the goods into existence as these are known in the market. Here the paper to be marketed is not complete until it is wrapped in wrapping paper. Apart from that, under Rule 56A of the Rules, the assessee would be entitled to the benefit of deduction of the duty to be charged on all wrapping papers, if any.
13. The learned Counsel for the assessee further placed reliance in the case of CIT v. N.C. Budharaja & Co. and Anr. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC) wherein the Hon'ble Supreme Court has categorically held as under:
The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterized as production, every production need not amount to manufacture. The word 'production' or 'produce1, when used in juxtaposition with the word 'manufacture', takes in bringing into existence new goods by a process, which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products, which emerge in the course of manufacture of goods.
The expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small - but they are never employed to denote construction activity of the nature involved in construction of a dam or a building.
The word 'article' is not defined in the IT Act or the Rules. It must, therefore, be understood in its normal connotation-the sense in which it is understood in the commercial world. It is equally well to keep in mind the context, since a word takes its colour from its context. The word 'articles' in Section 80HH(2)(i) cannot comprehend or take within its ambit a dam, a bridge, a building, a road, a canal and so on.
14. The learned Counsel for the assessee argued that bulk powder cannot be consumed directly because it may lead to inaccurate intake. The dose may be influenced by many factors like size of spoon, density of powder, humidity, degree of setting fluffiness due to agitation and processing pattern. Hence, administrating the drug in capsule form is very much required. Capsules are solid dosage form in which drugs are enclosed in gelatin capsule cells and these capsules are prepared by special process designed to modify the rate at which the active ingredients are released.
15. The learned Counsel for the assessee submitted that there are various advantages in putting the drug in capsule form as detailed below:
1. They obscure the taste and odour of unpleasant drugs.
2. They are attractive in appearance.
3. They are slippery when moist and, hence, easy to swallow with a draught of water.
4. If properly stored, the shells contain 12-15 per cent of moisture which gives flexibility and, consequently, very considerable resistance to mechanical stress.
5. Less adjuncts are necessary than for tablets (see Carter et al, 1972b)
6. The contents are usually in fine powder which, combined with freedom or near-freedom from adjuncts, provides rapid and uniform release of medicament in the gastrointestinal tract.
6. The shells can be specified (with titanium dioxide) or coloured, to give protection from light (contrast cachets).
7. The shells are made to very fine limits; hence the cap and base fit well and give substantial protection against air and moisture (contrast cachets).
8. The shells are physiologically inert and easily and quickly digested in the gastrointestinal tract.
10. Presentation of a drug in capsules, rather than in tablets, allows quicker submission of a new drug for clinical trials, because fewer development problems are involved. Also it is easier to vary the dose.
11. Complicated machinery is unnecessary for the extemporaneous dispensing of a few capsules (contrast tablets).
In a nutshell, he submitted that the preparation of capsule is very important activity of the manufacturing process.
16. The learned Departmental Representative submitted that the assessee is importing bulk mushroom powder and putting it in the gelatin capsules. Even these empty capsules are not being manufactured by the assessee. As per agreement with the foreign company M/s DXN International (P) Ltd., the foreign company has exclusive expertise and know-how in respect of the product and the foreign company is fully guarded itself regarding the product said to be manufactured by the assessee. The assessee company is not allowed to sell the product in its own trade mark or name in India and bound to use the trade mark of the foreign company. The learned Departmental Representative further submitted that by putting the imported raw material i.e. bulk mushroom powder in capsule, it does not make any change in the product. Putting the powder into capsule does not mean manufacture. He submitted that the quality of the original product remains in the final product also. The degree of the taste of final product is not different in any way from the original product. Mushroom powder remains the same only. The capsule is only a container for the purpose of marketing the product which is one way of packaging. There is no manufacturing activity at all involved. He relied on the decision of the Special Bench of the Tribunal in the case of Shaw Scott Distilleries (P) Ltd. v. Asstt. CIT (2001) 70 TTJ (Cal) (SB) 321 : (2002) 255 ITR 14 (Cal) (SB) (AT) wherein it was held that:
Potable spirit was already manufactured and did not require any further manufacturing. Only some processing was required to produce IMFLs like brandy, whisky and rum, etc., by adding a certain percentage of water, colour, essence and for safe marketing required bottling. No article or thing was consumed for production of another. No distinct article or thing had been produced. Alcohol remained alcohol throughout the processing stage till it was marketed. There was no difference between the potable spirit and the whisky or brandy except that in the process of production, water and certain essences had been added to them. The dealer and the consumer regarded both as alcohol. The activities of the assessee did not involve any manufacturing but only processing. Therefore, the assessee was not entitled to the benefit of Section 80HH.
Apart from the above decision, the learned Counsel for the assessee relied on the following judgments:
(i) CIT v. S.P. Jaiswal Estates (P) Ltd.
(ii) S.P. Jaiswal Estates (P) Ltd. v. CIT
(iii) CIT v. S.P. Jaiswal Estates (P) Ltd.
(iv) S.P. Jaiswal Estates (P) Ltd. v. CIT (1996) 130 CTR (Cal) 338 : (1996) 216 ITR 145 (Cal)
(v) CIT v. Dharat Sea Foods
(vi) CIT v. Relish Foods
(vii) CIT v. Venkateswam Hatcheries (P) Ltd. and Ors.
(viii) CIT v. Hindustan Metal Refining Woiks (P) Ltd.
(ix) CIT v. Lucky Mineral (P) Ltd.
(x) CIT v. Anjani Kumar & Co. (P) Ltd. .
17. We have heard the rival submissions and perused the material on record. We have gone through the case law relied on by the parties. The main contention of the assessee is that it is engaged in the capsulation of mushroom powder. This capsulation makes the commodity marketable and consumable. Without capsulation the commodity has no marketable value. Only after capsulation, the commodity becomes marketable and consumable and becomes distinct from the original commodity and the gelatin is swallowed along with the mushroom powder which leads to uniform release of the medicament in the gastrointestinal tract. The capsulation involves various stages of production like filling into the capsules, polishing of the surface, sorting, inspection of filled-in capsules, bottling of the capsules, labelling of the bottles, batching of the product, printing, shrink packing and putting the red/blue seal, placing of sleeves and packing the bottles by putting in polythene cover etc. These activities are done by maintaining specific temperature and all these are governed by various Acts of the Government. Hence, according to the assessee, this is said to be manufacturing activity.
18. We have carefully gone through the above activities. In our opinion, all these activities do not bring in any new article or product into existence. The mushroom powder even after capsulation remains the same. There is no transformation of mushroom powder into new article. Before the capsulation, it was mushroom powder and even after the capsulation, it remains to be mushroom powder only. Once the capsule is removed, only mushroom powder emerges out of it. By filling this mushroom powder into gelatin capsules no new and distinct or separate product comes into existence. There is no change in the basic identity of the product and taste of the product.
19. As per Section 80-IB of the IT Act, where the gross total income of the assessee includes the profit and gains derived from any business refer to Sub-section as eligible business and subject to provisions of this section, be allowed, in computing the gross total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. To avail this deduction the industrial undertaking is required to fulfil certain conditions mentioned in the section. The important conditions in Clause (iii) Sub-section (2) of Section 80-IB which reads as under:
(iii) it manufactures or produces any article or thing not being any article or thing specified in the list in the Eleventh Schedule or operates one or more cold storage plant or plants in any part of India.
Provided that the condition in this clause shall in relation to a small scale industrial undertaking or an industrial undertaking referred to in Sub-section (4) shall apply if the words 'not being any article or thing specified in the list in the Eleventh Schedule' had been omitted.
Thus, it is important that the assessee is engaged in the manufacture or production of any article or thing.
20. Now the first question for consideration before us is whether there is a difference between the expressions "produce" and "manufacture" or they are exactly synonyms. The words "manufacture" or "production" have not been defined in the IT Act, therefore, have to be accepted in their ordinary meaning as part of the statute., The expressions "manufacture" and "produce/production" have definite connotations in the judicial vocabulary and have been held to be not an expression of Article The expression "manufacture" has been explained in Black's Law Dictionaiy as under:
The process or operation of making goods or any material produced by hand, by machinery or by other agency; anything made from raw materials by hand, by machinery, or by Article The production of articles for use from raw and prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine.
The aforesaid explanation has been given as noun.
Black's Law Dictionaiy defines "manufacture" as the making of goods or wares by manual labour or by machinery, especially on a large scale, has expanded as workmanship and art have advanced, so that now nearly all artificial products of human industry, nearly all such materials as have acquired changed conditions or new and specific combinations, whether from the direct action of the human hand, from chemical processes devised and directed by human skill, or by the employment of machinery, are commonly designated as "manufactured". Correspondingly, the expression "manufacturer" has been defined to mean one who by labour, art or skill transforms raw material into some kind of a finished product or article for trade.
20.1 In contrast, the expression "produce" as a verb and as a noun has multifarious meanings depending on the context in which it is used, like to produce witnesses, to bring forward, to bring into view or notice, to present a play, etc. Firstly, "produce", as a noun means the product of natural growth, labour or capital. Articles produced, or grown from or on the soil or found in the soil. As a verb, in the context, it is stated to mean "to make, originate, or yield, as gasoline. To bring to the surface, as oil."
20.2 The expression "production" has been defined as under:
Process or act of producing. That which is produced or made i.e. goods. Fruit of labour, as the productions of the earth, comprehending all vegetables and fruits; the productions of intellect, or genius, as poems and prose compositions; the productions of art, as manufactures of every kind.
Thus, production not only includes expression, manufacture of articles or things by applying labour or process on the existing raw material but also bringing to surface a natural produce of soil like agricultural product, horticultural product, production of fruits and vegetables and excavation of minerals and mineral oil from the product of plants which are grown by the cultivators, agriculturists through labours and other plant products as well as exploitation of other natural resources like mines. Thus, learned Counsel for the assessee is right when he says that the word "produce" or "production" has a wider connotation than the term "manufacture".
20.3 The expression "produce" in the context of producing any thing or article has been assigned its meaning in the Oxford Dictionary as under:
3b. Of an animal or plant; To generate, bring forth, give birth to, bear, yield (offspring, seed, fruit, etc.);
d.To work up from raw material, fabricate, make, manufacture (material objects);
e.To produce the goods, money, results.
Apparently, the expression used in the provision with which we are concerned relates to "produce".
20.4 In contrast, the word "manufacture" has been defined to mean:
1b. The action or process of making articles or material (in modern use, on a large scale) by the application of physical labour, or mechanical power.
1. To work up (material) into forms suitable for use.
These definitions denote one inherent property of the term "manufacture" that is, existence of raw material which is subjected to a certain process, whether manually or by machine or by chemical treatment and as a result of which it undergoes a change and brings about a new commodity known to the commercial world. Thus, manufacture is an activity which is applied to an existing product known as raw material for altering its face to something else.
However, the question still arises whether the expression "produce" is wide enough to cover even a process which though makes the commodity more marketable does not result in bringing into existence any article or thing which did not earlier exist or brought out as a commercial commodity which may amount to production.
21. In Dy. CST v. Pio Food Packers (1980) 46 STC 63 (SC), the Supreme Court was considering the expression "manufacture" used in the Kerala General Sales-tax Act, 1963. The question has arisen in the context of an activity carried on. by Pio Food Packers of processing the fruit pineapple into slices for the purpose of being sold in sealed cans. The provision with which the Supreme Court was concerned related to charge of purchase tax. The contention of the dealer before the Supreme Court was that the tinned fruit and fresh fruit are two different commodities and, therefore, the petitioner was engaged in manufacturing of tinned fruits, therefore, on purchase of pineapple he was not liable to pay purchase tax. The Supreme Court dealt with the meanings of "manufacture" and quoted with approval the following passage from Anheuser-Bush Brewing Association v. United States (1907) 52 L. Ed. 336, 338 (p. 66):
Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary.... There must be transformation; a new and different article must emerge, 'having a distinctive name, character or use'.
The Court further held that in processing the raw pineapple into slices by pealing off its kernel, the fruit was not consumed as was the requirement of the Kerala Act. The ratio of the decision is primarily in the context of the provision of the Kerala Sales-tax Act which required consumption of the fruit in the process before it could be termed as manufacture. The Court said (p. 66):
There is no essential difference between pineapple fruit and the canned pineapple slices: The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient form and by reason of being canned, it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as a preservative. On a total impression, it seems to us, the pineapple slices must be held to possess the same identity as the original pineapple fruit.
In coming to this conclusion, the Court referred to yet another decision from the United States in East Texas Motor Freight Lines v. Frozen Food Express (1995) 100 1 Ed 917 where the United States Supreme Court held that dressed and frozen chicken was not a commercially distinct article from the original chicken. It was pointed out (p. 66):
killing, dressing and freezing a chicken is certainly a change in the commodity. But, it is no more drastic a change than the change which takes place in milk from pasteurizing, homogenizing, adding vitamin concentrates, standardizing, and, bottling.... There is hardly less difference between cotton in the field and cotton at the gin or in the bale or between cottonseed in the field and cottonseed at the gin, than between a chicken in the pen and one that is dressed. The ginned and baled cotton and the cottonseed, as well as the dressed chicken, have gone through a processing stage. But, neither has been 'manufactured' in the normal sense of the word.
22. In a recent case of Aman Marble Industries (P) Ltd. v. CCE , the Supreme Court has held that cutting of marble block into marble slabs or tiles does not amount to manufacture as in both the forms marble remains marble. However, for the present context, the principle which emerged from the Supreme Court case is that the manufacture is essentially the process applied to existing raw material which transforms the raw material into a commercially distinct article.
23. The Supreme Court in the case of Dy. Commr. of Agrl. IT/ST v. Palampadam Plantations Ltd. had considered this issue in a slightly different context. It was considering the meaning of the term "produce" used in the Kerala General Sales-tax Act, 1963. The expression used was "the person who sells goods produced by him by manufacture, agriculture, horticulture or otherwise". The question has arisen whether spontaneously grown plants which were cut by the assessee and sold in the market as timber was a person who had produced timber. The principal question was whether spontaneous growth of plantation resulting in providing timber to the dealer amounted to production of timber by him.
The Court, held at p. 233 that:
...The context in which the word 'produced' appears in the definition can only mean 'to bring forth, bring into being or existence - to bring (a thing) into existence from its raw materials or elements....
Thus, the expression "produced" was given a wider meaning than the word "manufacture" pointing out that the word "produced" will include an activity of manufacturing the materials by applying human endeavor on some existing raw material, but the word "produce" may include securing certain produce from natural elements, for example, by growing plants on soil, or by operating mines and the like or for example, by milking the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk.
24.In CIT v. N.C. Budharaja & Co. (supra), the question has arisen before the Supreme Court for interpreting the like provision contained under Section 80HH of the IT Act, 1961, as is contained in Section 80-IB with which we are concerned. Under Section 80HH, one of the conditions for availing of the benefit of deduction under Section 80HH was prescribed under Sub-section (2) which was couched in the same language as is the provision of Section 80-IB(2)(iii) with which we are concerned. The assessee had claimed that the foundation for superstructures on which the dam is to be constructed is an article manufactured by the assessee. The Court referring to its earlier decision in Pio Food Packers (supra), reiterated the difference as under (p. 423):
Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing, at each stage. With each process suffered, the original commodity experiences a change. But, it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity, but instead is recognized as a new and distinct article that a manufacture can be said to take place.
25. Coming to expression "production", the Court added as seen in p. 423 that:
The word 'production' or 'produce', when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.
In the case of manufacture, the original commodity transforms into a new commodity as per the illustrations we have seen earlier. The cultivation of crops, operation of mines for getting minerals from the sub-soil or for getting milk by milking the cow or say by producing meat by slaughtering animals, making milk of different grades by pasteurizing, homogenizing, adding vitamin concentrates, standardizing and bottling, or applying process to the original chicken by converting into a dressed or frozen, does not amount to an act of manufacture or production as it does not bring into existence a new commodity. Further, the Court said the manufacture or produce an article or thing refers to bringing into existence a movable thing or article and construction of the building or dam cannot be construed as an activity of manufacture for bringing a thing or article into existence. The ratio of this decision clinches the issue. In either case manufacture or produce brings into existence1 a new commodity either by altering the face of raw material, or by bringing into existence a new product from natural elements or process. It is immaterial whether the new product is a direct result or indirect result.
26. Illustratively, reference can be made to the Supreme Court decision in the case of Aspinwall & Co. Ltd. v. CIT (supra), wherein the Court after noticing the nine processes through which the raw coffee is made to undergo before it ultimately results into coffee beans amounts to manufacture as the coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished product.
27. In the case of CIT v. Sterling Foods (Goa) , the Hon'ble Bombay High Court has held that the expression "manufacture and production" used in the Act are to be understood in the context in which they have been used. These words used in different taxation statutes are not inter-changeable. Every process does not mean "manufacture" unless the processing results in the production of an article having a distinctive character, name, use and value. In the case of Dy. CIT v. Pio Food Products (supra) it was held that 'manufacture' normally involves consumption of a particular commodity in the process of manufacture of another commodity. The goods purchased should be consumed and the consumption should be in the process of manufacture and result must be manufacture of other goods. There are special criteria for determining whether the commodity is consumed in the manufacture of another. Generally, the 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. Manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another and indeed there may be special stages of processing and different kinds of processing? In each process, the original commodity experiences a change. It is only when a change or series of changes takes place in the commodity, the point that it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article with the manufacturing process can be said to take place. Where there is no essential difference in identity between the original commodity and processed article, it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing it must be regarded as still retaining its original identity. Thus the manufacturing or production must result in bringing into existence an article or thing as a distinct marketable commodity.
28. In the present case, the above observation of the Hon'ble Supreme Court is squarely applicable as stated in the earlier para. In the beginning it was mushroom powder which was imported and after putting the same into the gelatin capsules, it remains to be mushroom powder only. No distinct article or thing has been produced. Mushroom powder remains the same throughout the processing stage till its consumption. There is no difference between the raw material used and the end product. All the processes enumerated earlier are only to market the product in a particular container. The original identity of the product remains as it is.
29. The assessee relied on the judgment of the Hon'ble Supreme Court in the case of Union Caibide v. Union of India and also the judgment in the case of Moti Laminates (P) Ltd. and Ors. v. CCE (supra). This case is based on the Central Excise Act and the judgment was delivered with reference to exigibility of goods from levy of excise duty under that Act. It is a settled principle that an expression used in different Acts cannot automatically have the same meaning. It has to be read in the context of subject matter of that Act. This principle has been clearly stated by the Hon'ble Supreme Court in its judgment in the case of Ashirwad Ispat Udyog v. State Level Committee wherein it was held that the decision constituting the meaning of the word "manufacture" as used in other statutes do not apply unless the definition of that word in a particular statute under consideration is similar to that constituted in the decision. The case of Laminated Packings (P) Ltd. v. CCE , CCE v. Eastern Papei Industries Ltd. and CCE v. Johnson and Johnson Ltd. 2005 (188) ELT 467 (SC) are all related to Central Excise Act and hence the ratio of these cases cannot be applied to the present case on hand. Similarly, the judgment in the case of Dy. CST v. Coco Fibres (supra) was delivered in the context of Kerala General Sales Act, 1963 and hence the ratio of this case also cannot be applied to the present case. The Supreme Court in the case of Aspinwall & Co. Ltd. v. CIT (supra) and in the case of N.C. Budharaja (supra) was of the opinion that bringing into existence a new commodity is of essence of manufacture or production.
30. Now the question before us is whether putting the mushroom powder into the gelatin capsule to make it fit for marketing, the product can be considered as producing the thing or article under Section 80-IB. It is a matter of fact that mushroom powder can be consumed in bulk form nakedly without being put into any enclosure or it can be consumed by putting into the gelatin capsule. Putting of the mushroom powder into the gelatin capsule is for the purpose of smoothening its marketability which is nothing but a processing which does not amount to manufacture or production of a thing or article so as to fulfil the conditions stipulated for availing the benefit under Section 80-IB of the Act. For this purpose, we feel it pertinent to place reliance on the judgment of the Hon'ble Supreme Court in the case of Nilgiii Tea Co. (1959) 10 STC 500, it was held that when different brands of tea are mixed by the assessee for the purpose of producing of tea mixture of a different kind and quality, according to the formula evolved by them, there was plainly indubitably processing of different brands of tea because these brands of tea experienced as a result of mixing, qualitative change in that the tea mixture which came into existence was of different quality and flavour than the different brands of tea which went into the mixture. But the question whether the processing brings into existence any article or thing which may be said to be distinct from the article on which the process has been applied had been answered in negative. It was held that it was processing only.
31. In view of the above discussion, we have no hesitation in coming to the conclusion that the expression 'manufacture' or 'producing' any thing or article under Section 80-IB(2)(iii) has been used in a generic sense and within its ambit it does not include any processing of goods, which does not bring out a new or commercially distinct commodity. Accordingly, putting the mushroom powder into the gelatin capsule does not amount to manufacture or production of any commercially distinct commodity. Therefore, we hold that the assessee is not entitled for deduction under Section 80-IB. This ground of the assessee is rejected.
32. Regarding the third ground the learned Counsel for the assessee submitted that Section 43B stipulates that irrespective of the method of accounting followed by the assessee, any sum payable by way of taxes, duties, cess, etc. shall be allowed as a deduction in the previous year in which it is actually paid by the assessee. The fact of the assessee here is that the excise duty liability was in dispute and the payment of the disputed liability has been disclosed in the accounts which was available with the AO at the time of framing the assessment. The lower authorities refused to entertain the claim for the reason that it was only claimed during the course of assessment before learned AO and not through valid revised return.
33. The learned Counsel for the assessee submitted that the CIT(A) has also not gone into the facts fully. In fact, in p. 18 of the order on the top, the learned CIT has stated "It is also not clear to the exact nature of the liability to be eligible for allowance for deduction as claimed under Section 43B of the Act." Reference was also made to the Hon'ble Supreme Court decision in the case of Goetze India Ltd. v. CIT (2006) 204 CTR (SC) 182 : (2006) 284 TTR 323 (SC). The question there was whether a deduction can be claimed or not otherwise than by way of filing a revised return. However, in the assessee's case, there was no claim of expenditure because the payment on account of statutory liability stands on a different footing.
34. The learned Counsel for the assessee further submitted that Section 43B opens with a non obstante clause which means it overrides all other provisions of the Act and therefore all other provisions should be ignored. Section 29 clearly states that income under the head profits and gains of the business and profession shall be computed in accordance to the provisions contained in Sections 30 to 43D of the Act. Except 43B, no other section from 30 to 43B deals with payment of taxes or duties. Even Section 30 talks of sums paid on account of land revenue, local rates and municipal taxes only. Therefore, the sum paid against excise duty liability should be allowed as deduction. This section clearly stipulates that once a statutory tax, duty, cess, etc. is paid in a particular year, it should be allowed in that year as a deduction in computing the income. The word 'deduction' is not defined in Sections 28 to 43D. Section 30 to Section 36 are with reference to specific heads of expenditure and Section 37 is the residuary head for allowing any expenditure. The word 'expenditure' has not been defined in the Act. The deductions under Section 43B are in the nature of tax deducted and therefore they are not expenditure as normally understood in a commercial sense as money spent to earn an income. Excise duty is a duty on manufacture and the moment goods are produced, the liability to pay excise duty is fastened. The Central Excise Act permits the payment of duty at the point of time when the goods are removed from the factory gate or moved out of bonded stores. It is in this context that one must look at the word deduction that is used in Section 43B as opposed to the word expenditure that is used in Section 37. The fact that the excise duty is under dispute is of no consequence since the Department has crystallised the liability and issued an order for payment of duty. Until the appeal is allowed, the liability to the duty is fastened and therefore whatever has been paid by way of excise duty irrespective of the fact that it is paid pending dispute or otherwise is immaterial. The method of accounting is also immaterial as held in the case of Chominghee Sales Bureau (P) Ltd. v. CIT . Therefore, the payment of excise duty must be allowed. In the alternative, the matter must be set aside to the AO to consider since the learned CIT(A) has observed in this matter as to the exact nature of liability. The learned CIT(A), when it is not clear, should have called for the facts and examined it without dismissing the issue.
35. The learned Counsel for the assessee relied on the judgment of the Hon'ble Supreme Court in Chowiinghee Sales Buieau (P) Ltd. v. CIT (supra), the Hon'ble Supreme Court has held as under:
It is the true nature and the quality of the receipt, and not the head under which it is entered in the account books, as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee, would not prevent the assessing authority from treating it as trading receipt.
The learned Counsel for the assessee argued that based on the same principle, the fact that the assessee shows to treat the excise duty paid as disputed and therefore showed it as an asset will not make a difference since the assessee had an order by which the Excise Department had charged him with this liability. Therefore at the point of time when Section 43B was sought to be invoked, the AO should have attempted to find out whether the excise duty had been paid and if so, the extent to which it has been paid should have been allowed as a deduction.
36. Further the learned Counsel for the assessee relied on the judgment of the Hon'ble Gujarat High Court. In the case of Motilal Ambaidas v. CIT 1977 CTR (Guj) 165 : (1977) 108 ITR 136 (Guj), the Gujarat High Court has held in the context of Section 41(1) of the IT Act, 1961 as under:
Under the circumstances, the amounts of sales-tax collections which the assessee firm was bound to show on the credit side when received and was entitled to claim as deduction when sales-tax was paid, must be treated as deductions which ought to have been made. The words at the commencement of Section 41(1) "where an allowance or deduction has been made in the assessment for any year" should be read as "where an allowance or deduction ought to have been made in the assessment for any year" so far as the facts of this case are concerned and, so reading that provision, it must be held that the provisions of Section 41(1) apply to the facts of this case. It is, therefore, clear that the first condition regarding the applicability of Section 41(1) is completely satisfied in this case and the refund of sales-tax obtained by the assessee as a result of the decision of the Supreme Court is clearly an amount obtained in cash or in any other manner falling within Section 41(1).
The learned Counsel for the assessee contended that in the light of the above judgment also the excise duty ought to have been allowed.
37. The learned Departmental Representative submitted that the assessee never furnished the details of payment either to the AO or to the CIT(A). For the first time, the claim was made before the AO during the course of assessment without producing any evidence in support of the claim. The nature of liability was not substantiated. Further, the learned Departmental Representative submitted that the claim can be made by the assessee only after filing revised returns. In this case, no such return was filed. He relied on the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra).
38. We have heard the rival submissions and perused the material on record. The assessee claimed this amount of Rs. 2,58,93,909 as an expenditure towards excise duty liabilities for the asst. yr. 2003-04 and similarly for the asst. yr. 2004-05 at Rs. 3,31,56,118. This expenditure was never claimed as expenditure in the books of account and this was shown as advance in the books of account. The assessee made this claim before the AO by way of a letter. The AO disallowed this claim since there was no provision under the IT Act to make amendments in the return of income by modifying it by an application at the assessment stage without filing the revised return of income. The same was confirmed by the CIT(A) placing reliance on the judgment of the Hon'ble Supreme Court reported in (2006) 204 CTR (SC) 182 : (2006) 284 ITR 323 (SC) cited supra. Before us, the learned Counsel for the assessee has not furnished any iota of evidence in support of the claim of the assessee. Admittedly this amount was shown as current assets being loans and advances. The assessee is not in a position to spell out the nature of liability. The assessee was making only verbal argument without stating the nature of expenditure, for which assessment year it relates and whether it was wholly and exclusively spent for business purpose and whether it was advance payment or payment towards liability for the current year. The assessee has not produced any order of the excise duty through which this liability is stated to have emerged. No judgment from any Court of law was also produced for compliance. In our opinion, to avail of the deduction, the payments are required to be actually paid within the time stipulated in the proviso to Section 43B of the Act. If the payments have not been made within the stipulated time, the deduction cannot be claimed at any time thereafter. For this proposition, we place reliance on the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Synergy Financial Exchange Ltd. and the judgment of Hon'ble Rajasthan High Court in the case of CIT v. Udaipui Distillery Co. Ltd. .
39. The assessee relied on the following case law :
(i) Chowiinghee Sales Bureau (P) Ltd. v. CIT (supra) In this case, the assessee collected the sales-tax being the auctioneer but neither paid this amount to the State Exchequer for the reason that the statutory provision creating that liability upon the assessee was not valid nor did it pass the amount to the actual owner for the reason that statutory liability for payment of sales-tax was on the assessee. The Revenue authorities treated this amount as income of the assessee being trading receipt. On appeal, the Hon'ble Supreme Court held that this sales-tax amount is a trading receipt though it was shown in the accounts of the assessee as a liability under the head 'sales-tax collection account' and just showing the amount under this head does not make any material difference but only nature and quality of receipt is important. The facts of this case is entirely different from the one before us. In the present case, the issue relates to the payment to the Excise Department without showing the nature of payment for claiming deduction.
(ii) Motilal Ambaidas v. CIT (supra) This case also differs from the facts of the present case and this case relates applicability of Section 41(1) of the IT Act and the facts of the case decided by the Hon'ble Gujarat High Court cannot be applied to the present case. The learned Departmental Representative relied on the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra) wherein the Hon'ble Supreme Court has made it clear that the assessee could not make claim for deduction other than by filing the revised return. Hence, by filing the letter at the time of assessment, without revised return of income, the assessee cannot claim deduction.
The case law relied on by the assessee are not applicable to the facts of the present case. Hence, we have not considered the same. In the circumstances, we decline to interfere with the order of the lower authorities and the order of the CIT(A) on this issue is confirmed.
40. Regarding taxability of interest income of Rs. 4,41,564 for the asst. yr. 2003-04 and Rs. 7,53,385 for the asst. yr. 2004-05, the assessee raised this ground before the CIT(A) who has not adjudicated in his order. Hence, we set aside this issue to the file of the CIT(A) with a direction to adjudicate this ground on merits after affording opportunity of hearing to the assessee and record his findings. This ground is allowed for statistical purpose.
41. The last ground is with regard to levy of interest under Section 234B and 234C of the IT Act. This is only consequential and mandatory in nature and hence no interference is called for. Accordingly, this ground is dismissed and the order of the CIT(A) on this issue is confirmed.
42. In the result, the appeals filed by the assessee are allowed in part for statistical purpose.