Income
Tax Officer, Udaipur Vs. M/S Arihant Tiles & Marbles (P) Ltd. [2009] INSC 1769
(2 December 2009)
Judgment
IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.8036 OF
2009 (Arising out of S.L.P.(C) No.9812/2008) Income Tax Officer, Udaipur
...Appellant(s) Versus M/s Arihant Tiles & Marbles (P) Ltd.
...Respondent(s) W I T H CIVIL APPEAL NOS.8037 TO 8044 OF 2009 (Arising out of
S.L.P.(C) Nos.1685, 1691, 2577, 3711, 5283, 16674, 20789 & 20619 of 2009)
S.H.
KAPADIA, J.
Leave
granted.
In this
batch of Civil Appeals, a common question of law which arises for determination
is: whether conversion of marble blocks by sawing into slabs and tiles and
polishing amounts to "manufacture or production of article or thing"
so as to make the respondent(s)-assessee (s) entitled to the benefit of Section
80IA of the Income Tax Act, 1961, as it stood at the material time.
The lead
matter is Civil Appeal arising out of S.L.P.(C) No.9812/2008 in the case of
Income Tax Ltd.
The
assessee, during the relevant Assessment Year 2001-2002, was engaged in the
business of manufacture/production of polished slabs and tiles which the
assessee exported (partly). The prime condition for allowing deduction under
Section 80IA, as it stood at the material time, was that industrial
undertakings should manufacture or produce any article or thing, not being any
article or thing specified in the list in Eleventh Schedule of the Income Tax
Act, 1961.
The
question before us is: whether on facts and circumstances of the case(s) the
activities undertaken by the respondent(s) herein would fall within the meaning
of the words "manufacture or production" in Section 80IA of the 1961
Act? To answer the above issue, it is necessary to reproduce the details of
stepwise activities undertaken by the assessee(s) which read as follows:-
"i) Marble blocks excavated/extracted by the mine owners being in raw
uneven shapes have to be properly sorted out and marked;
ii) Such
blocks are then processed on single blade/wire saw machines using advanced
technology to square them by separating waster material;
iii)
Squared up blocks are sawed for making slabs by using the gang saw machine or
single/multi block cutter machine;
iv) The
sawn slabs are further reinforced by way of filling cracks by epoxy resins and
fibre netting;
v) The
slabs are polished on polishing machine; the slabs are further edge cut into
required dimensions/tiles as per market requirement in prefect angles by edge
cutting machine and multi disc cutter machines;
vi) Polished
slabs and tiles are buffed by shiner."
In
addition to the above activities, it may also be noted that the assessee(s) has
been consistently regarded as a manufacturer/producer by various Government
Departments and Agencies. The above processes undertaken by the respondent(s)
have been treated as manufacture under the Excise Act and allied tax laws.
At the
outset, we may point out that in numerous judgments of this Court, it has been
consistently held that the word "production" is wider in its scope as
compared to the word "manufacture". Further, Parliament itself has
taken note of the ground reality and has amended the provisions of the Income
Tax Act, 1961 by inserting Section 2(29BA) vide Finance Act, 2009, with effect from 1st April, 2009.
We quote
herein-below the relevant provisions of Section 2(29BA) as also the relevant
provisions of Section 80IA (2)(iii) of the Income Tax Act, 1961.
"2(29BA)
"manufacture" with its grammatical variations, means a change in a
non-living physical object or article or thing,- (a) resulting in
transformation of the object or article or thing into a new and distinct object
or article or thing having a different name, character and use; or (b) bringing
into existence of a new and distinct object or article or thing with a
different chemical composition or integral structure;"
"80IA(2)
(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."
The
Authorities below rejected the contention of the assessee(s) that its
activities of polishing slabs and making of tiles from marble blocks
constituted "manufacture" or "production" under Section
80IA of the Income Tax Act. There was difference of opinion in this connection
between the Members of the ITAT. However, by the impugned judgment, the High
Court has accepted the contention of the assessee(s) holding that in the
present case, polished slabs and tiles stood manufactured/produced from the
marble blocks and, consequently, each of the assessee was entitled to the
benefit of deduction under Section 80IA. Hence, these Civil Appeals have been
filed by the Department.
Incidentally,
it may be noted that some of the assessees before us are also job workers duly
registered under the provisions of the Excise Act/Rules framed thereunder. It
may also be clarified that in these cases, we are concerned with assessees who
are basically factory owners and not mine owners. This distinction is of some
relevance when we analyse the various judgments cited before us fairly by the
learned counsel on behalf of the Department.
The main
judgment on which the Department has placed reliance is the judgment of this
Court in Lucky reported in (2001) 9 SCC 669. In that case, the following
question came up for consideration before the Tribunal:
"Whether
on the facts and in the circumstances of the case, the Tribunal was justified
in holding that business activity of the assessee was in the nature of
manufacturing or production so as to be entitled for relief under Section 80HH
of the Income Tax Act, 1961."
The
assessee in that case had the business of mining of limestones and marble
blocks which thereafter were cut and sized before being sold in the market. It
was held by this Court that the assessee was essentially in the business of
mining of limestone. It was held that the activity of excavation will not constitute
manufacture or production. It was further held that even the activity of
cutting and sizing of marble blocks after excavation would not come within the
ambit of expression 'manufacture' or 'production'. In the circumstances, this
Court held that the assessee was not entitled to the benefit of Section 80HH of
the Income Tax Act.
However,
this Court distinguished the judgment of the Rajasthan High Court in the case
of CIT vs. Best Chemical and Lime Stone Industries Pvt. Ltd., reported in 210
ITR 883 (Raj.). In that case, M/s Best Chemical was engaged in the business of
extracting limestone and its sale thereafter after converting it into lime and
limedust or concrete which was held to be an activity of manufacture or
production. The activity of conversion into lime and limedust, according to
this Court, in the case of Lucky Minmat Pvt. Ltd. (supra) certainly constituted
a manufacturing process. It was clarified in the said case that mere mining of
limestone and marble and cutting the same before it was sold will not
constitute "manufacture" or "production" but conversion
into lime and limedust could constitute the activity of manufacturing or
production. This distinction has not been taken into account by the Department
while rejecting the claim of the assessee(s) for deduction under Section 80IA
of the Income Tax Act, 1961.
There is
one more judgment of which Shri Bhattacharya, learned Additional Solicitor
General, appearing on behalf of the Department, has placed reliance. That is
the judgment of this Court in Industries & Anr., reported in AIR 2000 SC
2382. In that case, the only question that arose for consideration was whether
pumping out water from the mines came within the meaning of the word
manufacture, production, processing or repair of goods so as to claim exemption
from duty under Notifications issued under Section 3(3) of the Rajasthan
Electricity Duty Act, 1962. In that case, the first respondent was a registered
public limited company, engaged in excavating stones from collieries and
thereafter cutting and polishing them into slabs. The Rajasthan State
Government levied excise duty under the provisions of the Act. A Notification
dated 23rd March, 1962 was issued by the State under Section 3(3) of the Act
granting exemption from tax on the energy consumed by a consumer in any
industry in the manufacture, production, processing or repair of goods and by
or in respect of any mine as defined in the Indian Mines Act, 1923. This
notification was later on superseded on 2nd March, 1963 by which electricity
duty came to be remitted in certain cases. One more notification was issued on
1st November, 1965 once again superseding earlier notifications. By clause (c)
of the said notification, the State of Rajasthan reduced the duty on the energy
consumed in industries, other than those mentioned in clause (a) of the
notification which are in the manufacture, production, processing or repair of
goods.
The basic
controversy which arose for determination in the said case was whether the
activity of pumping out water from the mines came within the meaning of the
words "manufacture", "production", "processing or
repair of goods". While disposing of the matter, this Court, vide
paragraphs 1 and 10, stated that the specific case of the company was that the
electrical energy was consumed for pumping out water from mines to make mines
ready for mining activity.
This
aspect is very important. It needs to be highlighted that the case of the
company was that pumping out water from mines to make the mines ready for
mining activity came within the ambit of the term "manufacture". This
argument was rejected by this Court, after examining various judgments of this
Court on the connotation of the word "manufacture". In our view, the
judgment of this Court in Rajasthan State Electricity Board has no application
to the facts of the present case. Even if one reads paragraph 17 of the said
judgment in the light of paragraphs 1 and 10, it is very clear that the only
activity which came up for consideration before this Court in the case of
Rajasthan Electricity Board (supra) was the activity of pumping out water from
a mine in order to make the mine functional. In the present case, we are not
considered with such activity. Therefore, in our view the judgment of this
Court in Rajasthan Electricity Board (supra) has no application to the facts of
the present case.
In the
case of Aman Marble Industries Pvt. Ltd. vs. Collector of Central Excise,
reported in 157 ELT 393 (SC), the question that arose for consideration was
whether cutting of marble blocks into marble slabs amounted to manufacture for
the purposes of Central Excise Act. At the outset, we may point out that in the
present case, we are not only concerned with the word "manufacture",
but we are also concerned with the connotation of the word
"production" in Section 80IA of the Income Tax Act, 1961, which, as
stated herein-above, has a wider meaning as compared to the word
"manufacture". Further, when one refers to the word
"production", it means manufacture plus something in addition
thereto. The word "production" was not under consideration before
this Court in the case of Aman Marble Industries Pvt. Ltd. (supra). Be that as
it may, in that case, it was held that "cutting" of marble blocks
into slabs per se did not amount to "manufacture". This conclusion
was based on the observations made by this court in the case of Rajasthan State
Electricity Board (supra). In our view, the judgment of this Court in Aman
Marble Industries Pvt. Ltd.(supra) also has no application to the facts of the
present case. One of the most important reasons for saying so is that in all
such cases, particularly under the Excise law, the Court has to go by the facts
of each case. In each case one has to examine the nature of the activity
undertaken by an assessee. Mere extraction of stones may not constitute
manufacture. Similarly, after extraction, if marble blocks are cut into slabs
per se will not amount to the activity of manufacture.
In the
present case, we have extracted in detail the process undertaken by each of the
respondents before us. In the present case, we are not concerned only with
cutting of marble blocks into slabs. In the present case we are also concerned
with the activity of polishing and ultimate conversion of blocks into polished
slabs and tiles. What we find from the process indicated herein-above is that
there are various stages through which the blocks have to go through before
they become polished slabs and tiles. In the circumstances, we are of the view
that on the facts of the cases in hand, there is certainly an activity which
will come in the category of "manufacture" or "production"
under Section 80IA of the Income Tax Act. As stated herein- above, the judgment
of this Court in Aman Marble Industries Pvt. Ltd. was not required to construe
the word "production" in addition to the word
"manufacture".
One has
to examine the scheme of the Act also while deciding the question as to whether
the activity constitutes manufacture or production. Therefore, looking to the
nature of the activity stepwise, we are of the view that the subject activity
certainly constitutes "manufacture or production" in terms of Section
80IA. In this connection, our view is also fortified by the following judgments
of this Court which have been fairly pointed out to us by learned counsel
appearing for the Department.
In the
case of Commissioner of Income Tax vs. Sesa Goa Ltd., reported in 271 ITR 331
(SC), the meaning of the word "production" came up for consideration.
The question which came before this Court was whether the ITAT was justified in
holding that the assessee was entitled to deduction under Section 32A of the
Income Tax Act, 1961, in respect of machinery used in mining activity ignoring
the fact that the assessee was engaged in extraction and processing of iron
ore, not amounting to manufacture or production of any article or thing.
The High
Court in that case, while dismissing the appeal preferred by the Revenue, held
that extraction and processing of iron ore did not amount to
"manufacture".
However,
it came to the conclusion that extraction of iron ore and the various processes
would involve "production" within the meaning of Section
32A(2)(b)(iii) of the Income Tax Act, 1961 and consequently, the assessee was
entitled to the benefit of investment allowance under Section 32A of the Income
Tax Act. In that matter, it was argued on behalf of the Revenue that extraction
and processing of iron ore did not produce any new product whereas it was
argued on behalf of the assessee that it did produce a distinct new product.
The view expressed by the High Court that the activity in question constituted
"production" has been affirmed by this Court in Sesa Goa's case
saying that the High Court's opinion was unimpeachable. It was held by this
Court that the word "production" is wider in ambit and it has a wider
connotation than the word "manufacture". It was held that while every
manufacture can constitute production, every production did not amount to
manufacture.
In our
view, applying the tests laid down by this Court in Sesa Goa's case (supra) and
applying it to the activities undertaken by the respondents herein, reproduced
herein-above), it is clear that the said activities would come within the
meaning of the word "production".
One more
aspect needs to be highlighted. By the said judgment, this Court affirmed the
decision of the Karnataka High Court in the case of Commissioner of Income Tax
vs. Mysore Minerals Ltd, (2001) 250 ITR 725 (Kar). N.C. Budharaja & Co.,
reported in 204 ITR 412 (SC), the question which arose for determination before
this Court was whether construction of a dam to store water (reservoir) can be
characterised as amounting to manufacturing or producing an article. It was
held that the word "manufacture" and the word "production"
have received extensive judicial attention both under the Income Tax as well as
under the Central Excise and the Sales Tax laws. The test for determining
whether "manufacture" can be said to have taken place is whether the
commodity, which is subjected to a process can no longer be regarded as the
original commodity but is recognised in trade as a new and distinct commodity.
The word
"production", 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 word
"production" takes in all the byproducts, intermediate products and
residual products which emerge in the course of manufacture of goods.
Applying
the above tests laid down by this Court in Budharaja's case (supra) to the
facts of the present cases, we are of the view that blocks converted into
polished slabs and tiles after undergoing the process indicated above certainly
results in emergence of a new and distinct commodity. The original block does
not remain the marble block, it becomes a slab or tile. In the circumstances,
not only there is manufacture but also an activity which is something beyond
manufacture and which brings a new product into existence and, therefore, on
the facts of these cases, we are of the view that the High Court was right in
coming to the conclusion that the activity undertaken by the respondents-assessees
did constitute manufacture or production in terms of Section 80IA of the Income
Tax Act, 1961.
Before
concluding, we would like to make one observation. If the contention of the
Department is to be accepted, namely that the activity undertaken by the
respondents herein is not a manufacture, then, it would have serious revenue
consequences. As stated above, each of the respondents is paying excise duty,
some of the respondents are job workers and the activity undertaken by them has
been recognised by various Government Authorities as manufacture. To say that
the activity will not amount to manufacture or production under Section 80IA
will have disastrous consequences, particularly in view of the fact that the
assessees in all the cases would plead that they were not liable to pay excise
duty, sales tax etc. because the activity did not constitute manufacture.
Keeping in mind the above factors, we are of the view that in the present
cases, the activity undertaken by each of the respondents constitutes manufacture
or production and, therefore, they would be entitled to the benefit of Section
80IA of the Income Tax Act, 1961.
For the
afore-stated reasons, Civil Appeals filed by the Department stand dismissed
with no order as to costs.
..................J. (S.H. KAPADIA)
..................J. (J.M. PANCHAL)
..................J. (H.L. DATTU)
New Delhi, December 02, 2009.
Back