M/S. India Cine
Agencies Vs. Commissioner of Income Tax, Madras [2008] INSC 1936 (12 November
2008)
Judgment
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 3649-3650 OF 2003 M/s
India Cine Agencies ...Appellant Versus Commissioner of Income Tax, Madras
...Respondent WITH
Civil Appeal No. 1522 of 2007 Civil appeal No. 3720 of 2007 Civil appeal Nos.
451-452 of 2008 Civil appeal Nos. 6835-6836 of 2005
Dr. ARIJIT PASAYAT,
J.
1.
In
all these appeals common questions are involved relating to the entitlement of
benefit in terms of Section 32AB, Section 80HH and Section 80I of the Income
Tax Act, 1961 (in short the `Act'). In all these cases the issue is the effect
of conversion of Jumbo rolls of photographic films into small flats and rolls
in the desired sizes. The assessees' contention was that the same amounted to
manufacture/production as the case may be. Stand of the revenue was that it was
not either manufacture or production. In some cases the High Court held that in
any event because of Item 10 of the Eleventh Schedule, no deduction was
permissible. The High Court decided in favour of the revenue and therefore
these appeals have been filed by the assesses.
2.
As
noted above, the core issue is whether activity undertaken was manufacture or
production.
3.
In
Black's Law Dictionary, (5th Edition), the word `manufacture' has been defined
as, "the process or operation of making goods or any material produced by
hand, by machinery or by other agency; by the hand, by machinery, or by art.
The production of articles for use from raw or prepared materials by giving
such materials new forms, qualities, properties or combinations, whether by
hand labour or machine". Thus by process of manufacture something is
produced and brought into existence which is different from that, out of which
it is made in the sense that the thing produced is by itself a commercial
commodity capable of being sold or supplied. The material from which the thing
or product is manufactured may necessarily lose its identity or may become
transformed into the basic or essential properties.
(See Deputy
Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M/s.
Coco Fibres (1992 Supp.
(1) SCC 290).
4.
Manufacture
implies a change but every change is not manufacture, yet every change of an
article is the result of treatment, labour and manipulation. Naturally,
manufacture is the end result of one or more processes through which the
original commodities are made to pass. The nature and extent of processing may
vary from one class to another. There may be several stages of processing, a
different kind of processing at each stage. With each process suffered, the
original commodity experiences a change. Whenever a commodity undergoes a
change as a result of some operation performed on it or in regard to it, such
operation would amount to processing of the commodity. But it is only when the
change or a series of changes takes 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. Process in manufacture or in relation to manufacture implies not
only the production but also various stages through which the raw material is
subjected to change by different operations. It is the cumulative effect of the
various processes to which the raw material is subjected to that the
manufactured product emerges. Therefore, each step towards such production
would be a process in relation to the manufacture. Where any particular process
is so integrally connected with the ultimate production of goods that but for
that process processing of goods would be impossible or commercially
inexpedient, that process is one in relation to the manufacture. (See Collector
of Central Excise, Jaipur v. Rajasthan State Chemical Works, Deedwana,
Rajasthan (1991 (4) SCC 473).
5.
`Manufacture'
is a transformation of an article, which is commercially different from the
one, which is converted. The essence of manufacture is the change of one object
to another for the purpose of making it marketable. The essential point thus is
that, in manufacture something is brought into existence, which is different
from that, which originally existed in the sense that the thing produced is by
itself a commercially different commodity whereas in the case of processing it
is not necessary to produce a commercially different article. (See M/s.
Saraswati Sugar Mills and others v. Haryana State Board and others (1992 (1)
SCC 418).
6.
The
prevalent and generally accepted test to ascertain that there is `manufacture'
is whether the change or the series of changes brought about by the application
of processes take the commodity to the point where, commercially, it can no
longer be regarded as the original commodity but is, instead, recognized as a
distinct and new article that has emerged as a result of the process. There
might be borderline cases where either conclusion with equal justification can
be reached.
Insistence on any
sharp or intrinsic distinction between `processing and manufacture', results in
an oversimplification of both and tends to blur their interdependence. (See
Ujagar Prints v. Union of India (1989 (3) SCC 488).
7.
To
put it differently, the test to determine whether a particular activity amounts
to `manufacture' or not is: Does a new and different good emerge having
distinctive name, use and character. The moment there is transformation into a
new commodity commercially known as a distinct and separate commodity having
its own character, use and name, whether be it the result of one process or
several processes `manufacture' takes place and liability to duty is attracted.
Etymologically the
word `manufacture' properly construed would doubtless cover the transformation.
It is the transformation of a matter into something else and that something
else is a question of degree, whether that something else is a different
commercial commodity having its distinct character, use and name and
commercially known as such from that point of view, is a question depending
upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union
of India (1985 (3) SCC 314).
8.
The
aforesaid aspects were highlighted in Kores India Ltd., Chennai v. Commissioner
of Central Excise, Chennai (2005 (1) SCC 385) in the background of Central
Excise Act, 1944 (in short the `Excise Act') and Central Excise Rules, 1944 (in
short the `Excise Rules') and Central Excise Tariff Act, 1985 (in short the
`Tariff Act'). The stand of the revenue was that it amounted to
"manufacture", contrary to what has been pleaded in these cases. This
Court held that it amounted to manufacture.
9.
The
matter can be looked at from another angle. In Commissioner of Income Tax v.
Sesa Goa Ltd. (2004 (271) ITR 331) this Court considered the meaning of word
`production'.
The issue in that
case was whether the extraction and processing of iron ore amounted to
manufacture or not in view of the various processes involved and the various
processes would involve production within the meaning of Section 32A of the
Act. It was inter alia observed as under:
"There is no
dispute that the plant in respect of which the assessee claimed deduction was
owned by it and was installed after March 31, 1976, in the assessee's
industrial undertaking for excavating, mining and processing mineral ore.
Mineral ore is not excluded by the Eleventh Schedule. The only question is
whether such business is one of manufacture or production of ore. -The issue
had arisen before different High Courts over a period of time. The High Courts
have held that the activity amounted to "production" and answered the
issue in question in favour of the assessee. The High Court of Andhra Pradesh
did so in CIT v. Singareni Collieries Co. Ltd. [1996) 221 ITR 48, the Calcutta
High Court in Khalsa Brothers v. CIT [1996] 217 TTR 185 and CIT v. Mercantile
Construction Co.
[1994] 74 Taxman 41
(Cal) and the Delhi High Court in CIT v. Univmine (P.) Ltd, [1993] 202 ITR 825.
The Revenue has not questioned any of these decisions, at least not
successfully, and the position of law, therefore, was taken as settled.
The reasoning given
by the High Court, in the decisions noted by us earlier, is, in our opinion,
unimpeachable. This court had, as early as in 1961, in Chrestian Mica
Industries Ltd. v. State of Bihar [1961] 12 STC 150, defined the word
"Production", albeit, in connection with the Bihar Sales Tax Act,
1947. The definition was adopted from the meaning ascribed to the word in the
Oxford English Dictionary as meaning "amongst other things that which is
produced; a thing that results from any action, process or effort, a product; a
product of human activity or effort". From the wide definition 8 of the
word "production", it has to follow that mining activity for the
purpose of production of mineral ores would come within the ambit of the word
"production" since ore is "a thing", which is the result of
human activity or effort. It has also been held by this court in CIT v. N.C.
Budharaja and Co. [1993] 204 ITR 412 that the word "production" is
much wider than the word "manufacture". It was said (page 423) :
"The word
`production' has a wider connotation than the word `manufacture'. While every
manufacture can be characterised as production, every production need not
amount to 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.
It also takes in all
the by-products, intermediate products and reside rodeos which emerge in the
course of manufacture of goods."
10.
In
"Words and Phrases" 2nd Edn. by Justice R. P. Sethi the expressions
`produce' and `production' are described as under:
"In Webster's
New International Dictionary, the word "produce" means something that
is brought forth either naturally or as a result of effort and work; a result produced.
In Black's Law Dictionary, the meaning of the word `produce' is to `bring
into view or notice; to bring to surface'. A reading of the aforesaid
dictionary meanings of the word `produce' does indicate that if a living
creature is brought forth, it can be said that it is produced.
(See Commissioner of
Income Tax v. Venkateswara Hatcheries (P) Ltd. (1999 (3) SCC 632), Commissioner
of Income Tax, Orissa and Ors. v. M/s N.C. Budharaja and Company and Ors. (1994
Supp 1 SCC 280).
Production or produce-
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 byproducts,
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 the construction activity of the nature involved in the
construction of a dam or for that matter a bridge, a road and a building. (See
Moti Laminates Pvt. Ltd. and Anr. v. Collector of Central Excise, Ahmedabad
(1995 (3) SCC 23).
11.
In
Advanced Law Lexicon, 3rd Edn. by P. Ramanatha Aiyar, the expressions
`production' and `manufacture' are described as under:
"'Production'
with its grammatical variations and cognate expressions; includes- (i)
packing, labeling, relabelling of containers.
(ii) re-packing from
bulk packages to retail packages, and (iii) the adoption of any other method to
render the product marketable.
`Production' in
relation to a feature film, includes any of the activities in respect of the
making thereof. (Cine Workers and Cinema Theatre Workers (Regulations of
Employment) Act (50 of 1981) S.2(i).
The word `production'
may designate as well a thing produced as the operation of producing; (as)
production of commodities or the production of a witness.
`Manufacture'
includes any art, process or manner of producing, preparing or making an
article and also any article prepared or produced by manufacture. (Patent and
Designs Act (2 of 1911), S.2(10).
`Manufacture'
includes any process- (i) incidental or ancillary to the completion of a
manufactured product; and (ii) which is specified in relation to any goods in
the section or Chapter notes of the First Schedule to the Central Excise Tariff
Act, 1985 (5 of 1986) as amounting to manufacture, or, and the word
`manufacturer' shall be constructed accordingly and shall include not only a
person who employs hired labour in the production or manufacture of excisable
goods but also any person who engages in their production or manufacturer on
his own account.
(iii) which is
specified in relation to any goods by the Central Government by notification in
the Official Gazette as amounting to manufacture.
(Central Excise Act
(1 of 1944) S.2(f))
12.
The
matter can yet be looked from another angle. If there was no manufacturing
activity, then the question of referring to Item 10 of the Eleventh Schedule
for the purpose of exclusion does not arise. The Eleventh Schedule, which was
inserted by Finance (No.2) Act, 1977 w.e.f. 1.4.1978 has reference to Sections
32A, 32AB, 80CC (3)(a)(i), 80-I(2), 80J(4) and 88A (3)(a)(i) of the Act.
13.
In
view of what has been stated above the appeals deserve to be allowed which we
direct.
........................................J.
(Dr. ARIJIT PASAYAT)
........................................J.
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