The principal issue in the present appeals of the assessee-company relates to the denial of deduction under section 80-I of the Income Tax Act, 1961 ('Act' hereinafter), which have been decided by the CIT(A)-V, Ahmedabad vide his consolidated order dated 27-12-1996, for the assessment years 1991-92 to 1994-95. The revenue is in appeal in respect of one of the issues arising therefrom.
The assessee-company set up a new Industrial Undertaking during the previous year relevant to the assessment year 1990-91, for the 'manufacture' of 'demineralised water' in the brand name 'BISLERI', though claimed deduction under section 80-I of the Act in respect of its profits for the first time only for the assessment year 1991-92 as it had no positive income in the first year. The assessing officer, after carefully considering the submissions made by the assessee in respect of the scope of its operations, and which find mention, along with his own arguments/ reasoning, in his assessment orders for the relevant years, concluded that the assessee being engaged only in 'purification' of drinking water (for hygienic reasons), the industrial activity involved therein does not amount to 'manufacture' as contemplated under the Act, and as such, is not eligible for deduction under section 80-1 of the Act. The CIT(A), before whom the matter travelled at the instance of the assessee, concurred with the findings of the assessing officer, again, after a detailed discussion vide his consolidated impugned order, citing case law, both to meet the arguments of the assessee, as well as to advance the revenue's case, in the process.
The issue thus, as deciphered, is whether the industrial activity involved in the 'production' of demineralised water by the assessee-company amounts to manufacture within the meaning of the term as contemplated under section 80-I of the Act; there being no dispute as to the assessee's satisfaction of the other qualifying criteria as laid out in that section.
"Potable water received from Municipal Corporation is purified by Chlorine treatment and then it is filtered out and dechlorinated. This water is passed through demineralised unit with a view to take out all minerals. After going through the above process, controlled quantity of minerals are added in the dernineralised unit once again. This water is circulated through silver candles at specific current and time to get bacteria-free water which is then packed in plastic bottles with a capping operation and hence the mineral water is in saleable condition." The operations/processes involved assume significance as the decision regarding whether the same amount to manufacture or not can only be taken in the background of the scope and extent thereof. At this stage, the learned A.R. was confronted with the specific query by the Bench that whether the controlled quantities of minerals, as mentioned in the afore-referred write-up on the manufacturing process, which appears, almost uniformly, at various places as also in the grounds of appeal, are, in fact, added to the water under process, or not. This was so done as the schematic flow chart of the processes involved in the "manufacture' of packaged drinking water, vide Annexure 2 (page 40) of its compilation, which has been prepared by a Mumbai-based Consulting Food Technologist (who had also worked at BISLERI plants for over 20 years in various capacities), in support of its case, and to which our attention was drawn at the outset by the learned A.R., did not mention this process (of addition of minerals). The learned A.R. admitted that this process was indeed not carried out and, therefore, the description of the operational activity may be considered as amended to that extent. He further clarified that it is not the assessee's case that it has produced drinking water but manufactured one from raw water and as it is not article or thing specified in the list in the Eleventh Schedule (to the Act), the same would qualify the assessee for deduction under section 80-I of the Act. Further on, even if the process were to be regarded as only of purification of water for human consumption, the same leading to a new and different commercial product would amount to manufacture as understood in law. He sought to draw support from various case laws, the chief among them being the recent decision of the Hon'ble Supreme Court in the case of Kores India Ltd. v. CCE 2004 TIOL-92-SC-CX under the Excise Law and of the Ahmedabad Bench of ITAT in the case of Asstt. CIT v. Hynoup Food & Oil Industries (P.) Ltd. ( 1999) 63 TTJ (Ahd.) 111 as also the fact that the Excise Authorities had, in the case of one of the franchisees (Bottlers of the Bisleri packaged water), held the process as one of excisable manufacture leading to 'manufacture' of excisable goods. And which ratio, therefore, it was pleaded, would apply squarely to the assessee's case. The matter, he added, even if considered to be doubtful, should weigh in the favour of the assessee in view of the liberal construction that the provisions of beneficial deduction should merit, keeping in view the larger purpose and the object they subserve, as also the settled position in law that in case of two equally reasonable views, the one in favour of the assessee ought to be adopted.
The learned Departmental Representative, on the other hand, was equally vehement and emphatic in supporting the orders of the assessing officer and the learned CIT(A), which he pleaded had dealt with the subject in a very comprehensive manner, further arguing that if not so considered, every household or commercial establishment that installs a water purifier by the name 'Acqua Guard' (in which chlorinification, filtration, purification and sterilization take place), or of the more recent variety, i.e., reverse osmosis units (where minerals are also totally or partially removed), would qualify to be industrial undertakings 'manufacturing' drinking water. He also drew our attention to the various decisions of the Apex court (which we shall advert to later), where the processes involved were held as not constituting, or amounting to, manufacture of an article or thing.
We have heard the rival contentions as also perused the material on record as well as the case laws cited before us. The issue at hand, as also delineated earlier, is of deciding whether, in the facts of the case, the operational activity undertaken amounts to manufacture within the meaning of the term under section 80-I. The word 'manufacture' is not defined in the Act. The Hon'ble Supreme Court in Aspinwall & Co.
Ltd. v. CIT (2001) 251 ITR 323 has stated that in the absence of definition of the word 'manufacture' therein, it has to be given a meaning as is understood in common parlance. It further observes that 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 labour or machines, so that if the change made in the article results in a new and different article then it would amount to a manufacturing activity.
It is, therefore, clear that manufacture is more comprehensive and extensive and that every process, or indeed even a series of processes, may not lead to manufacture. And it is only where that a new and commercially distinct article, with an identity of its own, comes into existence, that 'manufacture' can be said to have taken place. The 'newness' or the 'distinctiveness' of the product that emerges, that informs, and thus, defines, manufacture, is not abstract, but one amenable to definitive tests in terms of the name, use and character of the end product, which together lead it to be recognized as such in the commercial circles. In the present case, however, we observe that the end product, i.e., packaged drinking water, is nothing but a purer, more hygienic form of drinking water than as available from the regular sources, in the main from the Municipal Corporation, also referred to as tap water in common parlance. Indeed, millions, in fact majority, of our population consume this tap water for their drinking needs, without the deleterious affects that the learned A.R. would have us believe would befall if so done. Nevertheless, the term 'manufacture', though not mathematically precise, is also not a term of art, so that we are obliged to consider the case law as well as the other arguments cited before us by the learned A.R. before deciding the matter. Further, it would be pertinent to state, as also argued before us by the learned Departmental Representative, that the case law in respect of cognate legislation cannot have an automatic application and is to be used/relied upon with circumspection, i.e., with due regard to the object and the intent of that legislation. The Excise Law, indeed, deals with products that arise out of manufacturing or production activity. However, the whole focus there is the coming into existence of a product, which is listed under a tariff schedule, so that it becomes irrelevant whether the same arises out of manufacturing or processing or production activity, and which alone is of significance in the present case. There have been instances in the recent past, as in the case of dyeing of fabrics, or stuntering, i.e., which are decidedly only processing activities, of having been subject to excise.
Also, the word 'production' has been explained by the Courts to be of much wider import than the term 'manufacture' so that while every manufacture can be characterized as production, the reverse is not true. As held by the Hon'ble Supreme Court in the case of CIT v. N.C.Budharaja & Co. (1992) 204 ITR 412 as under (page 424): '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 bye-products, intermediate products and residual productions which emerge in the course of manufacture of goods." (Emphasis supplied) However, though in agreement with the learned Departmental Representative on this point, we nevertheless, feel that the concept of 'manufacture' having been expounded by the Hon'ble Supreme Court, laying down definitive tests for its determination in the facts of any given case, and which could necessarily, or in all probability, be different for each case, reference to case law under any law, would only have illustrative significance/ value.Shaw Scott Distilleries (P.) Ltd v. Asst. CIT (2002) 255 ITR (AT) 14 a Special Bench decision of ITAT Calcutta, it was held that, in the context of section 80HH of the Act, which also stipulates a similar requirement of manufacture, that the preparation of IMFL products like Whisky, Brandy, Rum, etc. from raw-alcohol, being potable, does not amount to manufacture, involve as it does dilution in concentration and mixing of some additives such as essence, and the same can at best be termed as 'processing'. Quoting, by way of drawing support for its conclusions, the Hon'ble Supreme Court in the leading case of Dy. CST v. Pio Food Packers (1980) 46 STC 63 where their Lordships held that (headnote): "...manufacturing normally involves consumption of a particular commodity in the process of manufacturing of another commodity. The goods purchased should be consumed, the consumption should be in the process of manufacture and the result must be the manufacture of other goods. 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 whether 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. Where there is no essential difference in identity between the original commodity and the 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." It is difficult to see how this decision, and more importantly, the observations of the. Hon'ble Supreme Court on which it is based, helps to advance the assessee's case, and rather, does so of the revenue, placing the parameters involved in sharp focus.
In the case of Kores India Ltd. v. CCE 2004 TIOL-92-SC-CX, a decision under Excise Law, the Hon'ble Supreme Court observed that the resultant product, i.e., ink ribbons in spools, is a distinct, identifiable article having a distinct name, function and use, can the jumbo rolls from which it was produced, and which could not be used in typewriters.
Once the jumbo rolls are cut into smaller size, they completely lost their earlier identity and could not be used for the same purpose as done before cutting. Equally, the jumbo rolls could not be used or marketed for being used in typewriters, computers, etc., even if, in a hypothetical case, the smaller sized spool ribbons were stitched or fixed together in any manner. The decision of the Apex court is based on the factual findings of the coming into existence of a product having a distinct name, character and use, while in the present case, we find that the packaged drinking water which is also used only for drinking purposes, has only to be left undisturbed for a period of time, or come into contact with the atmosphere for even a lesser period of time, to regain some of the impurities/foreign material that had earlier been removed therefrom.
The next case cited, i.e., CIT v. Oswal Woollen Mills Ltd. (No. 1) (2002) 257 ITR 737 (Punj. & Har.), where the Hon'ble High Court was called upon to decide whether the conversion of crude palm oil into refined oil amounted to manufacturing activity, decided it in the affirmative, holding that a new commodity had come into being by the process of deguming, neutralizing, bleaching and deodorizing. In fact, the court in this case was moved by the fact that it was only upon the process of deodorizing that a new marketable produce came into being, which the consumers used as a cooking medium, besides being an intermediate product in the manufacture of vegetable ghee (Vanaspati).
As such, the court sought to distinguish the earlier decision of the Hon'ble Supreme Court in the case of Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 wherein the Apex court had, in the facts of that case, where the refined oil did not include the process of deodorizing, held the processes undertaken as not leading to manufacture. It was only after this process (deodorizing) that the product was rendered fit for human consumption, complying with the standards laid down in its respect, and with which the buying public identified. Again, the decision, rendered in the facts of its case where a new product, distinct in its name, character and use comes into being, would not, to our mind, advance the assessee's claim.
In the case of Hynoup Food & Oil Industries (P.) Ltd. (supra), wherein the process of refining of raw cotton seed oil into refined cotton seed oil was held to be a manufacturing activity, the decision was based on the factual understanding that the raw (unrefined) cotton seed oil is not at all eatable, and used, as well as sold, as washoil (being used primarily for the manufacture of soap), while the refined cotton seed oil is an edible product and used, among others, as a cooking medium, thus leading to a manufacture of a different commercial article with a different class of consumers, and which in the instant case purchased it for manufacturing of biscuits. It was on these considerations that the ITAT departed from its earlier view of the refining of oil as not amounting to manufacture, which was taken in respect of groundnut oil and rice bran oil which were edible even in the unrefined state.
Coming to the assessee's stand of one of its franchisees viz., Silver Springs Pvt. Ltd., Bangalore, being held under the Excise Law to be engaged in manufacturing and thus liable to excise, and therefore, a similar view ought to be adopted in the assessee's own case; the operational activity being identical and though held as manufacture under a different law cannot have a different interpretation under the Act - the term 'manufacture' ought but to have a common and consistent judicial interpretation. The assessee's stand, and thus statement made above, is factually incorrect on several counts. Firstly, as explained earlier, what is of relevance under the Excise Law is of the coming into existence of an excisable product liable to duty under the Tariff Schedule, i.e., the excisability being not a function of 'manufacture' alone. Secondly, if what it states were to be true, not only the franchisee under reference, but all other franchisees of the assessee, as well as it itself, would be liable to excise duty on the manufacture of the treated water, while the fact remains that they are not, and neither is the assessee.
The assessee has, before the Excise Authorities, taken a consistent stand that its end product is non-excisable as by the process(es) of treating it was only making water potable for hygienic reasons, and therefore, there was no transformation of form and/or use, and the product remained what it was, i.e., drinking water, This fact has been trumped up by the learned CIT(A) in his order, though, however, he has fallen short of ascertaining the reasons for this deviant behaviour at the assessee's end.
Based on these representations (to the Excise Authorities), and which are not incorrect, the Government of India, after consultation with the Chief Chemist, vide Board Circular No. 9/87, dated 28-7-1987, agreed with the assessee's arguments and held that the treated water as 'manufactured' by the assessee did not fall under the Tariff heading 22.01, and therefore, was non-excisable. Among the reasons cited in the said Circular, it states that : (a) Section 2(f) of Central Excise and Salt Act, defining 'manufacture' has no specific provision in respect of this commodity unlike in some other cases, so that the product would continue to be non-excisable even under the new Tariff; (b) The Explanatory Note to HSN which reads as "natural water, even if filtered, sterilized, purified or softened, is excluded (Heading 22.01)., and thus, removes the assessee's end product from the purview of Excise (Heading 22.01 covers "natural or artificial mineral water and aerated waters, not containing added sugar or other sweetening matters, not flavoured ice") nor is it covered under Chapter 22.02 which include 'sweetened or flavoured mineral water'; and (c) That if such products are to be considered as excisable, tap water for domestic use supplied by the Municipal Corporation could also get covered since 'waters' are specifically mentioned under Heading 22.01 of HSN though charging of duty is not intended.
It would be profitable to reproduce the process of manufacture (of treated water) as described in the said Circular, and which we find is in agreement with the process as declared by the assessee (refer para 3.1 of this order), at para 2 thereof : "...water is treated with bleaching powder to eliminate injurious microorganisms. Thereafter, it is purified by filtration. Subsequently it is softened. Finally, it is sterilized to keep such drinking water free from bacteria, and to avoid contamination during treatment." However, subsequently, it come to the Board's notice that apart from the processes listed above, some manufacturers were also adding minerals to water and by which process the treated water came into category of mineral water and therefore subject to excise duty. It was on this basis, and on such finding, that the Board, in sequel to its earlier Circular No. 9/87-CE (F.No.9/1/87-CX), dated 28-7-1987, issued fresh Circular (No.84/84/94, dated 20-12-1994) partially amending its earlier Circular, and thereby clarifying that the exemption from Excise Duty did not extend to mineral water. Paras 2 to 4 of the said Circular being relevant are reproduced; para 1 only referring to the earlier Circular as well as the manufacturing process by reproducing verbatim para 2 thereof : "2. It has been brought to the notice of the Board that in addition to processes given above, some manufactures are also demineralising the treated water and are adding minerals in it. The Chief Chemist has earlier advised that the process that distinguishes artificial mineral water from purified potable water, is whether mineral salts have been added or not. In case, there is addition of mineral salt, the product will have to be treated as mineral water and will be liable to duty accordingly.
3. It is, therefore, clarified that in case in addition to processes mentioned above, if mineral salt(s) are also added in the treated water, the resultant product will be mineral water and will be excisable and liable to duty under sub-heading 2201.90.
4. The word 'Bisleri' wherever it occurs in Circular No.9/87 stands deleted." It, thus, becomes abundantly clear that the excisability of the treated water produced by M/s. Silver Springs Pvt. Ltd. was only on account of addition of mineral contents to the water to meet a particular desired end product specification. And therefore, this fact, by itself can be of no assistance in assessee's case, the only reasonable inference that one might draw therefrom is that mineral water as produced by the said company is an excisable product. That apart, the same cannot be said in respect of the assessee's case, and not only for the reason that the learned A.R. confirms so (refer para. 3.2 of this order), but also that the report of the consultant food technologist dated 16-2-2004, filed by the assessee in support of its claim, clarifies that all such mineral salts (carbonates /bicarbonate/sulphate, etc., of sodium, calcium, magnesium, etc.) which work up to 500 ppm or more in the raw water are reduced to 500 ppm in the treated water (refer para 3 of paper book page 33). Further, in the sample test report of the physical/chemical/ microbiological characteristics, which forms Annexure- 1 of the said report (paper book page 38), we find that there is a reduction in the content of all such minerals from that found in raw water so that there is a removal of the minerals to that extent through the process of demineralization, rather than their addition. As such, reference to the case of M/s. Silver Springs Pvt. Ltd. does not in any manner help the assessee's case and, rather highlights the depreciable tendency on its part to conceal material facts as it would but be aware of the same, being the sole basis on which it has been able to, and for so long, successfully convince the Excise Authorities, and thus, avail exemption from the levy of excise. In fact, the Excise Authorities had, in view of a telex message found at the said franchisee's premises, sought to levy penalty for evasion of duty, which read as under: "Please immediately change the SSI Registration of Mineral water to 'Purified Treated Water' or 'Bottled Water' or any other suggestion given but definitely not mineral water. Otherwise you will be in excise trouble sometime." And which clearly exhibits the knowledge, in the trade circles, of the difference in the excisable status of the two products. This matter stands discussed in the order of CEGAT South Zonal Bench, Bangalore dated 15-11-2002, in an appeal preferred by the said company against the levy of duty and penalty, and which also confirms the fact of increase in the minerals salt concentration in its final product, in contradistinction to the assessee's case.
It would also be not out of place to mention that some of the cases as cited by the learned A.R. before us have been in the context of other sections, for example, section 32A, section 33, which though employ identical expression as used in section 804, have different nuances associated with them and which could lead to divergent views. For illustration, the very fact that section 32A, by virtue of second proviso to sub-section (1) thereof, excludes any machinery or plant installed in office premises or residential accommodation or guesthouse or used as office appliances or as road transport vehicle, from the ambit of that section, shows that such plant or machinery, but for the sub-section, would fall within its purview even as the said section also stipulates the use of such machinery for the purpose of business of manufacture or production of any article or thing.
Lastly, the appellant has prayed for a liberal interpretation in the matter, arguing that benevolent provisions such as the one under reference should always be construed liberally so as to advance and subserve their stated purpose. And for the purpose, cited the decisions of the Hon'ble Supreme Court wherein such ratio emanates. The said argument was also made by the assessee before the lower authorities too, who refused the same by, once again placing reliance on the decision of the Apex court in the case of N.C. Budharaja & Co. (supra) in which the court has said that the principle of adoption of a liberal interpretation which advances the purpose and object of beneficiant provisions cannot be carried to the extent of doing violence to the plain and simple language used in the enactment as it was neither reasonable or permissible for the court to rewrite the section or substitute words of its own for the actual words employed by the Legislature in the name of giving effect to the supposed underlying object, which after all, has to be covered only on the basis of reasonable interpretation of the language employed. We are in full agreement with the assessing officer as well as the first Appellate authority in this matter. In fact, the argument of the assessee, if given effect to, by, as prayed, construing the word 'manufacture' so as to include within its purview activity which would not other-wise qualify for the same, would be to negate the entire case law on the subject and the meaning of the term 'manufacture' as judicially interpreted and elucidated by the Courts. In fact, the learned Departmental Representative has cited not less than five cases, wherein the Hon'ble Supreme Court has held, in the facts of those cases, the industrial process as undertaken as not amounting to manufacture, and all in the context of some beneficial provision (as also some High Court decisions), and all of which would be of no avail, if the contention of the appellant company were to be accepted. The Hon'ble Supreme Court in a recent and popular case of IPCA Laboratory Ltd. v.Dy. CIT (2004) 266 ITR 521, at page 529 expressed its unequivocal view in the matter in the following words: "We are unable to accept the submission of Mr. Dastur. Undoubtedly section 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision the interpretation has to be as per the wording of this section. If the wordings of the section are clear then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section." We fist herein below afore-referred cases cited by the learned Departmental Representative in support of his arguments for their ratio as well as illustrative clarity in the matter.
(i) Sacs Eagles Chicory v. CIT (2002) 255 ITR 178 (SC)Wherein it was held in the context of sections 80HH, 80-I and 80-J on the application of test laid down in Aspinwall & Co. Ltd. v. CIT (2001) 251 ITR 323 (SC), that the conversion of chicory root into chicory powder by roasting and powdering did not amount to manufacture.
(ii) CIT v. Gem India Mfg. Co. (2001) 249 ITR 307 (SC)Wherein it was held that the cutting and polishing of uncut raw diamonds did not amount to manufacture or production of article or thing within the meaning of under section 80-I of the Act.
(iii) Divisional Dy. CST v. Bherhaghat Mineral Industries (2000) 246 ITR 230 (SC) wherein the Supreme Court held crushing dolomite lumps into chips and powder is not a process of manufacture that brings about a new commercial commodity.CIT v. Venkateshwara Hatcheries (P.) Ltd. (1999) 237 ITR 174The Hon'ble Supreme Court held that the production of chicks (lid not amount to manufacture or production of articles so as to enable the assessee deduction under section 32A/80HH/80HHA/80-I/80-J of the Act.
Being essentially a natural or biological process, it could, by application of the mechanical method could only be better regulated.
(v) CIT v. Relish Foods (1999) 237 ITR 591 (SC)It was held that a peeling and freezing of shrimps did not lead to distinct commodity so as to entitle the assessee the special deduction under section 80HH of the Act, after applying its own decision and in the Sales tax cases i.e., Sterling Food v. State of Karnataka (1986) 63 STC 239 (SC).
It would be profitable to understand the decision of the Apex court in the case of Kores India Ltd. (supra), which was based on the terra firma of the factual findings of the case. By way of elucidating the concept of manufacture, it extracts the fundamentals from its previous decisions, and lists them therein, as: "13. 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 case 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." "14. To put differently, the test to determine whether a particular activity amounts to 'manufacture' or not is: Does new and different goods 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 Lid v. Union of India (1985) (3) SCC 314." The law in the matter, thus, having been brought forth, to our mind, with sufficient clarity, what needs to be seen to decide the issue, is whether the end product, i.e., the treated water, which is a purified and demineralised (to the extent required) version of the normal tap water as supplied by the Municipal Corporation, can be said to have acquired the 'newness' or 'distinctiveness' to the degree where it is recognized as a separate product from the raw/base material, in terms of its name, character and use, i.e., an identity of its own.
Recognition has to be in the trade circles; of the market where it is bought and sold. If the market perceives it as a new and distinct product, it has to be so recognized. It would be relevant to state here that section 80-I, i.e., the section under which the claim for deduction has been pressed, applies only where article or thing (not falling under the negative list) is 'manufactured' and 'produced' and not 'processed', which term; as would be evident, has a narrower connotation, and in which category the assessee's case, without doubt, falls.
Though, by the process to which water is subject it is rendered free of impurities, minerals (present either free or in the form of their salts), and micro organisms, and thus, made more hygienic and suitable for human consumption, yet, despite this transformation, it remains only drinking water, i.e., what it was at the raw-material stage. There can be no doubt that its name, character and use is only of drinking water, and no more, and the buying public, as well as those who deal in it, regard it as such. In fact that is its USP, i.e., on the basis on which its sold and marketed as a pure, and thus safe, water for human consumption. The water 'consumed' in the process, ie., tap water, is also drinking water which satisfies the drinking needs of a large majority of our people, as indeed it has for the past many decades. As such, it is difficult to see how a new product has come into existence.
It may be that the treated water as produced is a better or superior form of drinking water. But that would not alter the ratio afore-stated; we have, for that matter, a range of qualities for each product being sold in the market. But this would not make them, for that reason, to be recognized as separate (generic) products, so that the market strives to attract customers by building a brand name/image around it on the strength of any of its distinctive or superior attributes.
As long as the tap water, from which the treated water is churned out, is not declassified as drinking water, as being 'unsafe' for human consumption, we do not think that it shall be possible to consider the proposition, i.e., of the production of treated water as one arising out of manufacture. A scan of the sample test report in respect of the physical, chemical and micro-biological characteristics of the raw and treated, i.e., packaged drinking water (paper book pages 38 and 39) reveals that for most part, i.e., 24 out of 28, the physical and chemical parameters fall within the norms prescribed by BIS for the packaged drinking water (also mentioned therein), as also the micro-biological (8 out of 10). Whether the prescribed norms, to the extent not met, would make the tap (untreated) water unfit for human consumption is not known. No empirical evidence has been brought forth to establish that it is so, and that the human body suffers from any infliction on consuming such water.
The water being produced by the assessee-company, though popularly referred to as 'mineral water', is in fact, 'demineralized water', in that the excess minerals are removed from the raw tap water. It may be that further purification/treatment may lead to 'specialized water', as the 'Therapeutic Water' (not presently available in India) as referred to by the food technologist in his report, foe specific application(s), as for selective patients who are forbidden intake of certain salts and which may be considered, on factual considerations, to be resulting from 'manufacture'. It would also be pertinent to state that the assessee's claim of having 'manufactured' its end product is being not accepted only on the basis of tests as laid down by the Courts in the interpretation of the word 'manufacture', and not, for its producing demineralised water, as against mineral water, which distinction is of significance for excise purposes. As also stated at para 4, the focus of the Excise Law is decidedly different, and the excisability of the water as discussed at para 5 of this order was only to meet the arguments of the assessee in respect of one of its franchisees.
We are, thus, of the opinion, under the given facts and circumstances and the law in the matter, that the transformation wrought on the normal drinking water, definitely with the purpose to make it purer, yet, does not satisfy the test of sufficient difference in name, character and use so as to qualify the antecedent processes as amounting to manufacture; the sophisticated machinery, labour, or other skills and knowledge that may have been deployed for the purpose, notwithstanding, as value addition, for which there could be several other contributing factors also, by itself, is not conclusive of the matter.
The only other ground in assessee's appeals (Ground No. 1 in ITA No.2290/Ahd/ 1997) relates to the disallowance of advertisement expenditure amounting to Rs. 22,31,700. The assessee had, during the year under consideration, expended Rs. 35,61,628 on advertisement and publicity to promote its product/brand name, of which Rs. 22,31,700 pertained to the advertisement of the product 'MAAZA', which was neither manufactured nor marketed by it either during the relevant year or in the past. Upon inquiry, it was explained that the assessee had given possessing rights in respect of its Trade Mark 'MAAZA' for exploitation to its 100 per cent, subsidiary, namely, M/s. Golden Agro Products Limited and which manufactured and marketed the same by itself and through a network of bottlers. Further, in view of the sagging sales as well as to restore confidence among its franchisees, specially in view of the entry of a similar soft drink by the name 'MANGOLA', it had incurred this special expenditure through advertisement on the National circuit in the form of a 'campaign'; the routine expenditure on advertisement being incurred in the normal course by its subsidiary company or the franchisees, i.e., the bottlers. The said expenditure was, therefore, it was contended, incurred on grounds of commercial expediency, and being revenue in nature would merit allowance. On its ground of commercial expediency being questioned as it had not charged any license fee from its subsidiary, which constitutes a distinct legal and taxable entity, nor any royalty from the franchisees even as it did so and earned a sum of Rs. 35,08,507 as royalty from the bottlers of the Bisleri packaged drinking water, it further revealed that as the brand owner the ultimate responsibility for maintaining and preserving its value lay with it. And that a serious situation had developed with the entry of multinational giants viz. 'COKE' and 'PEPSI' in the soft drink beverage market, with some of its franchisees (in respect of 'MAAZA' drink) having left its fold and its market intelligence feeding it with information on the prospective buy-out of 'MANGOLA' brand by 'PEPSK And further, that it was on account of this campaign that it was able to restore its sales, which during the assessment year under question had fallen by 15 per cent, with respect to the preceding year, rose by 25 per cent, in the immediately succeeding year, i.e., assessment year 1994-95, and more importantly, was able to fetch a very handsome bargain from 'COKE' with which it struck a deal in the middle of 1993, i.e., after the close of the previous year under reference.
However, none of its arguments found favour with the authorities below, who considered it to be only a tax saving devise in view of the precarious financial position of its subsidiary company which the assessee-company admittedly did not want to burden with this special expenditure; it having no direct or indirect business interest in the production and marketing of the 'MAAZA' soft drink which business was solely managed and run by its subsidiary, so that by incurrence of the said expenditure it did not serve any of its business purposes; and maintaining of brands, or the share value of the subsidiary companies, by any score, could not constitute its Business. In respect of its argument of maintenance of the brand value, in its capacity as its owner, it was held that, though a capital asset, expenditure on preservation of which would definitely qualify as a revenue expenditure, the same could not be held as deductible in view of the fact that it did not constitute a business asset in its hands. The learned CIT(A) thus rejected the assessee's claim. Hence this appeal.
Before us the learned A.R. reiterated the assessee's contention before the lower authorities stating that promoting its brand name as well as preserving its brand value and warding off - of competition was solely for business considerations, citing the case of R.C. Jain v. CIT (1973) 91 ITR 557 (Delhi) in its favour. The learned Departmental Representative., elaborating the arguments of the lower authorities placed full reliance on them, as also that the case law as cited is not fully applicable, while on other hand the revenue's case stands fortified by the decision of the Hon'ble Calcutta High Court in Associated Mining Industries Ltd. v. CIT (1955) 27 ITR 429, as also of Gujarat High Court in the case of Sarabhai Sons. (P.) Ltd. v. CIT (1993) 201 ITR 464.
We have heard the rival parties as well as perused the orders of the authorities below and the case law cited. It would be relevant to mention the other allied facts in the matter. The assessee-company belongs to renowned Parle group of companies, which has built a name for itself in the soft drink trade, marketing its products all over India for the past several years. It, consequent to the entry of the MNCs 'PEPSI' and 'COKE' in the Indian market, perceiving a threat to its leadership status or the strong-hold therein, sought to leverage its advantage and was able to secure a good price for the sale of its soft drink brands to 'COKE', its deal for which was reportedly struck in the middle of 1993 and the formal agreement entered into in November, 1993. We observe that the assessee-company having not either licensed its brand to its subsidiary company, which for all purposes is a distinct legal and taxable entity, nor charged any royalty from its franchisees for the 'MAAZA' line of product(s), it could not be said that it was in the business of manufacture of, or marketing of, the said product(s), even though it was legally the owner of the Trade Mark, and thus, the brand name associated therewith. Its incurrence of expenditure on the advertisement campaign of the 'MAAZA' product, therefore, could not be in response to its business needs, and which under the circumstances, becomes the business of its subsidiary. No doubt the sale promotion would, as indeed it has, also promote its brand value, being reckoned only in terms of the market share a product or product group enjoys. However, what appears to be, on a total consideration of facts, that the said expenditure was incurred with the primary intent and the dominant purpose of enhancing or promoting the brand image/position in the market, and thus its value, with an eye on realizing a better price therefor, negotiations for which, or the planning for which, were already under way. That the expenditure was also able to pay short term dividends by affecting the reversal in the declining sales of its subsidiary and its bottlers, or rather, even effect an increase therein, is of no significance; the benefit arising to a third party not diluting or taking away the character or purpose of an expenditure. Rather, in the facts of the case, this benefit is not incidental, but only a natural corollary, as it is only with the increase in sales, or at best an arrest in its decline, that the brand value could be maintained or enhanced.
We are fortified in our finding by the fact that the assessee itself states that the incurrence of this expenditure would have 'crippled the resources' of M/s. Golden Agro Products Limited, its subsidiary, and the other franchisees and therefore, it had thought fit, as a strategic purpose, not to burden this special expenditure on advertisement, as doing so, apart from loosing on the tax benefit, to which we do not assign much significance (being reversible), would depress the profitability of the subsidiary, and thus the value of the related business which was under contemplation for sale, and for which it has, subsequently, been able to bargain for and fetch a fabulous price both in its hands as well as that of its subsidiary.
It has been contended by the assessee that the bottlers are its franchisees, and not of its subsidiary, and produced letters of arrangements entered into by it with them in substantiation of its claim. In our opinion, this is not relevant. For, as far as the franchisees are concerned, it would not be a matter of concern as to whom grants them the franchise, i.e., the assessee or its subsidiary, and rather, are in the facts of the case, placed on a sounder legal footing; the assessee being the owner of the trade mark/brand, which consideration would have perhaps guided this action. And, as regards the assessee-company, again, this becomes irrelevant, if not outright mischievous, in view of the fact that no franchise fee is charged by it, as from the bottlers of Bisleri packaged water, but is paid directly by the bottlers to its subsidiary.
Under the circumstances we, therefore, are of the opinion that this expenditure by way of a special advertisement campaign of the 'MAAZA' line of product(s) by the assessee-company is not a business expenditure in its hands being not incurred in its capacity as a businessman in the course of carrying on or to facilitate its business, there being no direct relationship, apart from that of a shareholder, with the 'MAAZA' business segment. We find the ratio of the Supreme Court decision in CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601, wherein the Apex court has held that the expenditure incurred for fostering the business of another or by way of distribution of profits, or gratuitously, or for some improper or oblique purpose outside the course of business is not deductible, as also of Associated Mining Industries Ltd.'s case (supra), to be fully applicable to the facts of the case, ie., the finding as to its dominant purpose of promoting its brand position/value and which it successfully attained. Its contention of being a revenue expenditure is, therefore, dismissed on the ground of absence of commercial expediency and the action of the lower authorities in disallowing its claim as such, upheld.In the result, we find no basis or interfering with the orders of the authorities below, which are upheld, dismissing the assessee's appeals.
The only effective ground of the departmental appeal relates to the deletion of an addition of Rs. 2,94,813 affected by the assessing officer on account of alleged unaccounted purchase of bottles during the previous year relevant to the assessment year 1992-93, The facts of the case are that the assessing officer observed an excess consumption of 1,05,079 bottles with reference to their purchase. The same were explained to be on account of free replacement by the supplier in lieu of the broken bottles. However, this contention was not accepted by the assessing officer on the ground that the assessee could not furnish any details or records in respect of the broken bottles as kept by it for the purpose, as well as the fact that he observed that the assessee had, in fact, deducted a sum of Rs. 1,3 7,240 on account of damaged bottles from the account of the supplier, so that the question of free replacement by the latter did not arise. Before the learned CIT(A), however, the assessee contended that along with its written submissions to the assessing officer, it had furnished the confirmation from the supplier for the free replacement complete with the dates and challan numbers vide which the same was effected. As regards the deduction of Rs. 1,37,240 from its account, the same was stated to be on account of quantity discount allowed by the supplier and which fact was specifically mentioned in the credit note issued by the supplier so that this amount had no nexus or relevance with the breakages. The learned CIT(A) held in the assessee's favour on the basis of the foregoing, assailing also the other grounds, viz., the absence of records as well as absence of transport receipt with the assessee, taken by the assessing officer, as being not relevant in the facts and circumstances of the case. The addition, he further observed, would in any case stand to be set off by the additional deduction on account of purchases, which would have to be allowed to the assessee-company.
It may be that what the assessee contends before the CIT(A) is true and that there has been a lapse on the part of the assessing officer in failing to mention about the factum, of the confirmation from the supplier having been filed before him, as also in his inference of the nature of receipt of Rs. 1,37,240 by the assessee, which are to be, nevertheless, and if at all, considered as honest mistakes committed bona fidely being in discharge of his duty as a public servant.
However, having not actually remitted the matter back to the file of assessing officer for the factual confirmation of the material adduced, or sought to be adduced before him by the assessee, being so obliged by the rules (R.46A), the least that ought to have been done by the CIT(A) was to confirm it himself, and record his finding(s) in his order.
However, the CIT(A) has not done so as gathered from his findings as listed at para 13 of his order. Even more so, as the alleged lapse, i.e., the error in construing a credit for quantity discount as being against damaged/ defective stock, by the assessing officer is not one that one would expect in the normal course, being entirely different in nature, as also the fact that the assessing officer does not make a casual reference to this credit/receipt, as stated by the assessee, and accepted by the CIT(A), but, rather is the finding on which the assessing officer bases his case. Also, we do not agree with his observation that the addition, if upheld, would stand to be set off by the additional deduction on account of purchase.
As such, the matter being entirely factual, would need to be verified in material respects, i.e., the mode and -manner in which the breakages are dealt with by the assessee-company in the normal course, which would also obtain in respect of 1,05,079 bottles under reference, as also the nature of credit of Rs. 1,37,240. Accordingly, this matter is restored to the file of the assessing officer for necessary verification for the purpose of which the assessee may be offered proper opportunity of being heard. This ground of appeal is, therefore, decided accordingly.
In the result, the assessee's appeals are dismissed, and that of revenue allowed for statistical purposes.