Shri Ramit Kumar Sharma Vs. Director of Income Tax(international Taxation)-1 New Delhi - Court Judgment

Mr. Rao Ranvijay Singh, J. 

The applicant is a non-resident individual as referred to in sub-clause (i) of clause (a) of the section 245N of the Income Tax Act, 1961 ( in short the Act) and has reportedly stayed outside India for more than 182 days in each year during the span of last 10(ten) years. In the application filed before us it has been stated that the applicant intends starting a 100% ancillary unit to one tractor manufacturing industry in the state of Himachal Pradesh during the financial year 2008-09 with initial investment of Rs.40 lakhs in the Plant and Machinery and the said investment will gradually go up to Rs.1 (one) crore. The applicant avers that the proposed business establishment will be covered as small-scale industrial unit in the status of a proprietary concern. The applicants primary job, as stated, will be to provide milling, tooling and grinding of the surface of the raw castings of Rear Cover and Differential Housing which are important parts of tractors. These raw castings are to be provided by the Principal and they will be, as stated, processed by the applicant within the specified parameters given by the Principal. The processing is reportedly to be done through requisite technology such as Special Purpose Machines (SPM), special Jigs, Jags and tools. The applicant avers that pursuant to processing, a new product/article called ‘Machined casting is manufactured and these ‘machined castings fit compatibly into tractor parts.

2. Based on the above facts, the applicant sought advance ruling from this Authority on the following question:-

1. Whether the applicant would be eligible for deduction under Section 80 IC(2) (similar to Section 80 IB(4) of the Income-tax Act 1961) for carrying out activities as ancillary unit as defined in Section 80 IA(12)(f).”

In course of hearing of the case, we have, after notifying the applicants and Revenues representatives, recast the above question in the following terms:-

1. “Whether the applicant would be eligible for deduction under section 80-IC(2) of the Income-tax Act, 1961 for carrying out the activities stated in the application as a small scale industrial undertaking / ancillary unit?”

3. In the statement of facts the applicant has submitted that the moment the raw castings is chiselled into ‘machined castings, the event of manufacturing takes place and the applicant is eligible for the requisite deduction under section 80-IC(1)(2) of the Act. Placing reliance on the decision of Madras High Court in the case of Perfect Liners, reported in 142 ITR 654, it has been emphasized that the industrial activities proposed to be carried out by the applicant tantamounts to manufacturing or production of articles or things. Section 80-IC of the Act, inserted by the Finance Act, 2003 with effect from 1^st April, 2004, is a special provision in respect of certain undertakings or enterprises in some specified states and the applicants case, as stated, falls within the four corners of the said section. Since the applicant is a Small Scale Industry, it has further been stated that the applicants case gets indirectly strengthened by the definition of ‘Small Scale Industries given in section 80-IB(14)(G) of the Act which lays down that ‘Small Scale Industrial Undertaking means an industrial undertaking which is regarded as a Small Scale Industrial Undertaking under Section 11B of the Industries (Development and Regulation) Act, 1951. Section 11B of the Industrial (Development and Regulation) Act regards an industrial undertaking as a Small Scale Industry if it is engaged in a business of the manufacture of parts, components, tooling or intermediaries.

4. In the comments furnished, the Revenue has stated that the details filed by the applicant are inadequate to ascertain whether the proposed activities constitute ‘manufacturing to enable him (the applicant) to avail the deduction under section 80-IC(2) of the Act. The Revenue submits that what constitutes a manufacturing activity has been explained by the Supreme Court in the case of Union of India vs. Delhi Cloth and General Mills (1977) ELT(J) 199 wherein it has been observed that the manufacturing process necessarily postulates some change in the shape of new articles or things with a distinct name, character or use. It has been emphasized that in the instant case no new article or thing has been manufactured and it can thus be said that the applicant has not done any manufacturing to enable it to merit the requisite deduction under section 80-IC(2) of the Act.

5. The representative for the Revenue has further argued that the applicant has received the raw castings from the Principal and has immediately sent back these raw castings to the principal after making some cosmetic changes. The process adopted by the applicant cannot be termed as manufacturing process as no new product has come into being. The decision in the case of Perfect Liners (supra), as relied upon by the applicant, is not applicable to the facts of the case. Reliance is placed on the decision of Rajasthan High Court in the case of CIT Vs. Lucky Minerals Pvt.Ltd. 226 ITR 245.

6. In the course of hearing of the application we required the applicants counsel to furnish details of manufacturing processes which are to be undertaken at the proposed unit by the applicant. The counsel for the applicant has accordingly furnished the details comprising of (a) Process flow chart (b) Operation Sketches (c) Check Sheets (d) Work Instruction (e)Tool Detail of Machine (f) Measuring Instruments.

7. Explaining the various manufacturing processes involved, the counsel for the applicant has furnished a paper book wherein technical details of activities and the photographs of rough castings and the final products have also been enclosed. It has been stated therein that the applicant will obtain rough castings from the principal M/s. International Tractors Ltd. and pursuant thereto, the main job of the applicant will be confined to cutting and milling of the surfaces of the raw castings. The counsel for the applicant states that after these mechanical activities have been carried out, these castings will be known as ‘machined castings, which fits suitably in the tractor. As emphasized, without the surface milling etc. the raw castings cannot be fitted in to the tractor. In fact, the castings are the outer shell in to which other parts are fitted. The learned counsel has emphasized the fact that the photographs furnished indicate that the raw casting has undergone a distinct change and a new product called ‘machined casting has emerged. It has also been contended that the Courts have adopted a very broad and liberal approach while deciding whether a particular activity constitutes manufacturing or not. In this regard, reliance has been placed on a host of Judicial pronouncements – the important one being that of Kerala High Courts CIT vs Marvell Sea Foods 166 ITR 624, wherein even the processing of prawns have been regarded as manufacture or production of an article or a thing. Reference has also been made to the decision of Apex Court in the case of CIT vs N.C.Budhiraja and Co. 204 ITR 412 (SC) and Kores India Ltd. vs. CCE, Chennai, 2004 (174) ELT 7(SC). The counsel for the applicant has further submitted that the applicants is a ‘notified Industrial area as per the provisions of section 80-IC(2)(ii) of the Act. It has thus been emphasized that the applicant merits allowance of deduction under the aforesaid section of the Act in respect of proposed activities.

8. Before the point at issue i.e. whether the refining process of the raw castings constitutes ‘manufacturing or not is taken up, it will be quite apposite to reproduce section 80-IC of the Act which is in following terms:-

“Special provisions in respect of certain undertakings or enterprises in certain special category states –

80-IC- (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section(a) (2), (a) there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3).

(2) This section applies to any undertaking or enterprise-

(a) which has begun or begins to manufacture or produce any article or thing(a), not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning-

(i) on the 23^rd day of December, 2002 …………………. in the State of Sikkim ; or

(ii) on the 7^th day of January, 2003 and ending before the 1^st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate (emphasis supplied) or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal ; or

(iii) on the 24^th day of December, 1997 ……….. in any of the North-Eastern States ;

(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertaken substantial expansion during the period beginning-

(i) xxx xxx xxx

(ii) on the 7^th day of January,2003 and ending before the 1^st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or

(iii) xxx xxx xxx

(3) The deduction referred to in sub-section (1) shall be –

(i) in the case of any undertaking or enterprise referred to in sub-clauses (i) and (iii) of clause (a) or sub-clauses (i) and (iii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for ten assessment years commencing with the initial assessment year;

(ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains.

(4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely :

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section ;

(ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation : The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (ii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.

(5) ]

to ] xxx xxx xxx

(7) ]

(8) For the purposes of this section, -

(i) “Industrial Area” means such areas, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;

(ii) to (x) xxx xxx xxx

9. Tracing the legislative history we find that the Finance Act, 2003 has inserted the above section with effect from 1.4.2004 in order to give effect to the new packages of fiscal and non-fiscal concessions announced by the Union Government for special category of states such as Himachal Pradesh, Uttaranchal, Sikkim and North-Eastern States. Consequent to this, deductions under section 10C and 80-IB(4) of the Act are not available in respect of the undertakings or enterprises eligible for deduction under this section (i.e. 80-IC) from the Assessment Year 2004-05. The deduction is granted broadly to an undertaking / enterprise referred to in either clause (a) or clause (b) of sub-section (2). Clause (a) of sub-section (2) is applicable where the undertaking or enterprise is located in a notified area and is engaged in manufacture or production of any article or thing not specified in the Thirteenth Schedule. In fact, industrial areas of States referred to above have been separately notified. To be specific, Industrial Estates / Areas in Himachal Pradesh have been notified vide S.O. 1269(E), dated 4^th November, 2003. Further, Clause (b) of sub-section (2) is, on the other hand, applicable where the undertaking or enterprise is located in any other area, not being a notified area, and is engaged in manufacture or production of any article or thing or commences any operation that is specified in the Fourteenth Schedule.

10. Explaining the scope and effect of the above new provisions, the Central Board of Direct Taxes, issued a Circular bearing No.7/2003, dated 5^th September, 2003 (Ref. 263 I.T.R. 62, St.) which stands in the following terms:-

“49. New provisions allowing a ten year tax holiday in respect of certain undertakings in the States of Himachal Pradesh, Sikkim,, Uttaranchal and North-Eastern States –

49.1 The Union Cabinet has announced a package of fiscal and non-fiscal concessions for the special category states of Himachal Pradesh, Uttaranchal, Sikkim and North-Eastern States, in order to give boost to the economy in these states. With a view to give effect to these new packages a new section 80-IC has been inserted to allow a deduction for ten years from the profits of new undertakings or enterprises or existing undertakings or enterprises on their substantial expansion, in the States of Himachal Pradesh, Uttaranchal, Sikkim and North-Eastern States. For this purpose, substantial expansion is defined as increase in the investment in the plant and machinery by at least 50 per cent of the book value of the plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken.

49.2 The section provides that the deduction shall be available to such undertakings or enterprises which manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule and which commence operation in any Export Processing Zone, or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate, or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with rules prescribed in this regard. Similar deduction shall be available to thrust sector industries, as specified in the Fourteenth Schedule.

49.3 The amount of deduction in the case of undertakings or enterprises in the States of Sikkim, and the North-Eastern States shall be one hundred per cent of the profits of the undertaking for ten assessment years. The amount of deduction in case of undertakings or enterprises in the States of Uttaranchal, Himachal Pradesh shall be one hundred per cent of the profits of the undertaking for five assessment years, and thereafter twenty-five per cent (thirty per cent for companies) for the next five assessment years.

49.4 The section also provides that no deduction shall be allowed to any undertaking or enterprise under this section, where the total period of deduction inclusive of the period of deduction under this section or under section 80-IB or under section 10C, as the case may be, exceeds ten assessment years. Further, in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VI-A or in section 10A or 10B, in relation to the profits and gains of the undertaking or enterprise.

49.5 A new Thirteenth Schedule has been inserted in the Income-tax Act to specify the list of articles and things, which are ineligible for the purpose of deduction under section 80-IC. Further, a new Fourteenth Schedule has also been inserted, which specifies the list of articles and things, being thrust sector industries, which are eligible for the purposes of availing of deduction under this section. Consequent to these amendments, the provisions of section 10C and sub-section (4) of section 80-IB have been made inoperative in respect of undertakings or enterprises in the State of Himachal Pradesh or in North-Eastern region including Sikkim, with effect from the April 1, 2004.

49.6 These amendments will take effect from April 1, 2004, and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years.”

11. From the above discussion, the cardinal point which emerges is that in order to claim relief under section 80-IC of the Act, there must be (i) an undertaking or an enterprise and (ii) the said undertaking/enterprise must manufacture or produce any article or thing. The phraseology ‘undertaking or enterprise has nowhere been defined in the Act. As such, we have to refer to the dictionary meanings. As per Concise Oxford Dictionary, 10^th Edition, edited by Judy Pearsoll, these words mean – “a company or a business”. Secondly, these undertakings must manufacture or produce any article or thing. In case of every claim for treatment of any undertakings activity as manufacture or production of an article or a thing to qualify for the benefit of deduction under section 80-IC of the Act, the description of the activity of the undertaking would best serve the purpose. In a number of decisions by different High Courts and Supreme Court of India, the principles governing the words “to manufacture, or produce any article or thing” have been laid down. Reference to a few important decisions will suffice. In fact, all Judicial pronouncements establish that the end product, after undergoing some sort of processing, should be a commercially different product, having different name, character and use. At this juncture, the following observations of Justice R.S. Pathak, in the case of Deputy CST vs. PIO Food Packers (1980) 46 STC 63, 65 can be usefully recalled:-

“There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. 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.”

Similarly, the Apex Court in the case of CIT vs N.C.Budhiraja, 204 ITR 413 (SC), has observed as follows:-

“The test for determining 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.”

In the case of Aspinwall and Co.Ltd. vs. C.I.T. 251 I.T.R. 323 (SC),the following observations at P.327 may also be adverted to:-

“The word “manufacture” has not been defined in the Act, In the absence of a definition of the word “manufacture” it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared material by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity.”

As observed by the Supreme Court in Aditya Mills Ltd. vs. Union of India, AIR 1988 SC 2237, manufacture is complete as soon as the raw material undergoes some change and a new substance or article is brought into existence, having its own character and use. Karnataka High Court in the case of CIT vs. Darshak Ltd. 247 I.T.R. 489 explained the word ‘manufacture as under:-

“The word manufacture is to be understood in a wide sense. Manufacture would imply a change and a transformation. A new and different article must emerge having a distinct and different character and use.”

It may not be out of place to refer to two decisions of Madras High Court wherein the following observations have been made:-

(i) “The word manufacture has not been defined in the Income Tax Act. In the absence of a definition, the word manufacture has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity.”

[C.I.T. vs Premier Tobacco Packers P. Ltd. (2003) 284 I.T.R. 222(Mad)]

(ii) “The expression manufacture involves the concept of changes effected to the basic raw material resulting in the emergence of, or transformation into, a new commercial commodity. But it is not necessary that the original article or material should have lost its identity completely. All that is required is to find out whether as a result of the operation in question, a different commodity has been produced having its own name, identity character or end use.”

[C.I.T. vs. Jamal Photo Industries (I)Pvt.Ltd. 285 I.T.R. 209 (Mad)]

In other words, the essence of manufacturing is that what is made shall be a different thing from that out of which it is made despite the original material not losing its identity completely.

12. Applying the above tests, if the present case is analyzed, it emerges that the applicants is a proposed undertaking i.e. business establishment which will be processing or refining the raw castings provided by the Principal. It further emerges that the mechanical process to be applied to raw castings would bring into existence commercially new goods called ‘machined castings which fits compatibly into a tractor. The raw castings pass through the inspection drill, tooling and milling processes on machines and in its wake flat surfaces, contour surfaces are chiselled and refined. Pursuant thereto, the original article i.e. raw casting, as the photographs furnished indicate, would undergo a substantial change and there comes into being a commercially different product with distinctive name, character and use called ‘Machined casting. There is a detailed description of the process through which raw castings have to pass to acquire a different name ‘machined castings. The operations in question in respect of raw castings cannot be described as mere ‘feather touches as it is subjected to a detailed ‘machine processing. After the completion of the machining operations, the end product, as stated, cannot be used as raw casting again. On the basis of the facts presented, the conclusion that inevitably follows is that the applicants enterprise can be said to have undertaken business activities which amount to manufacture or production of an article different from the raw casting and therefore merits requisite deduction under section 80-IC(2) of the Act.

13. Since the applicants undertaking itself, as the above discussion shows, falls within the criteria laid down in section 80-IC (2) of the Act, we need not go into the arguments advanced by the applicant in respect of Small Scale Industries as defined in another section [i.e. 80-IB(14)(G)] of the Act.

14. Placed in the factual scenario that has emerged, we do not think that the case laws relied upon by the Revenue support their stand. In the case of Lucky Minerals Pvt.Ltd.(Supra) relied upon by the Revenue, the activities of the assessee company consisted of excavating limestone and marble boulders and after cutting the boulders into slabs, selling them. It was in this backdrop that the Rajasthan High Court came to the conclusion that cutting the boulders into slabs might have been with the aid of machinery but the original commodity retained a substantial identity inspite of processing carried out by the assessee company and was, as such, not regarded as manufacturing or producing any article or thing. As against this, in the present case, the raw casting has undergone distinct change and has not retained a continuing substantial identity. On the other hand, we find that learned Judges of Madras High Court in the case of Perfect Liners (supra) concluded as under:-

“The word “manufacture” has to be understood in a wide sense. After the rough casting was polished, the product was a new product which was utilized as a component in internal combustion engines as essential parts……….”

In the instant case also, the new product ‘machined casting has been utilized as an essential part of a tractor. Further, it may be appropriate here to refer to a decision of Allahabad High Court in the case of CIT vs. UP State of Agro Corporation 188 ITR 370 wherein the activity of assembling imported component parts into a tractor has been held to be manufacturing or producing an article for the purpose of section 80-J of I.T.Act. It was observed at P.375 in the above Judgement as under:-

“The activity in the instant case is, no doubt, one of assembling, but it is not a case where a tractor was imported in a knocked down condition and re-erected. A large number of parts were imported and they were first knit into 23 components, which, in turn, were fitted together to result in a tractor.”

15. In the light of the fore-going discussion we are of the view that the applicant, in the given set of facts, would be eligible for deduction under section 80-IC of the Act, as it can be said to have manufactured or produced an article or a thing.

16. Accordingly, the ruling is given, answering the question in affirmative, as contended by the applicant.

Pronounced by the Authority on this the 27th day of January 2009.