Ita/100/2009 Of M/S.girnar Industries,Ernakulam,Cochin v. The Commissioner Of Income Tax,Central

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE C.K.ABDUL REHIM MONDAY, THE 17TH AUGUST 2009 / 26TH SRAVANA 1931 ITA.No. 100 of 2009() --------------------- ITA.284/COCH/2007 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT/ASSESSEE ------------------------------------------------- M/S GIRNAR INDUSTRIES, 39/4, CSEZ., KAKKANAD P.O., ERNAKULAM, COCHIN 682037. BY ADV. SRI.FIROZE B. ANDHYARUJINA (SR.) SRI.S.ARUN RAJ RESPONDENT(S): APPELLANT/REVENUE -------------------------------- THE COMMISSIONER OF INCOME TAX, CENTRAL, COCHIN. BY ADV. SRI.P.K.R.MENON(SR.), SC THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 17/08/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &C.K.ABDUL REHIM, JJ.....................................................................I.T. Appeal No.100 of 2009 ....................................................................Dated this the 17th day of August, 2009. C.R. JUDGMENT Ramachandran Nair, J. Assessee-appellant hs an industrial unit located in the SpecialEconomic Zone at Kakkanad, Kochi where it is engaged in blendingand repacking of tea for export. For the assessment year 2004-2005 theassessee claimed deduction of export profit in respect of the blendedtea exported from the industrial unit under Section 10A of the IncomeTax Act (hereinafter called “the Act”). However, the assessingauthority held that “blending” does not answer the description ofmanufacture or processing and so much so, assessee is not entitled todeduction of export profits claimed under Section 10A of the Act. It isthe specific case of the department that blending can be treated as amanufacturing activity only after the definition clause of “manufacture”contained in Section 2(r) of the Special Economic Zones Act, 2005 is incorporated in the provisions of Section 10AA of the Income Tax Actwith effect from 10.2.2006. Even though first appeal was allowed bythe C.I.T.(Appeals) holding that the subsequent amendment isclarificatory in nature, on further appeal filed by the department, theTribunal reversed the order of the C.I.T.(Appeals) and confirmeddisallowance on the ground that blending and export of tea by theassessee qualifies for benefit only after incorporation of the definitionclause of “manufacture” from the Special Economic Zone Act inSection 10AA of the Income Tax Act. It is against this order of theTribunal the assessee has filed the appeal. We have heard Seniorcounsel Sri.Firoze B. Andhyarujina appearing for the appellant-assessee and Senior Standing Counsel Sri.P.K.R.Menon appearing forthe respondents. 2. The short question that arises for consideration is whetherblending and packing of tea for export in the industrial unit in theSpecial Economic Zone amount to manufacture or production of anarticle qualifying for exemption under Section 10A of the Act, that is, 2. The short question that arises for consideration is whetherblending and packing of tea for export in the industrial unit in theSpecial Economic Zone amount to manufacture or production of anarticle qualifying for exemption under Section 10A of the Act, that is, during the period prior to introduction of "blending" as "manufacture"with effect from 10.2.2006. There is no dispute on facts in as much asassessee is admittedly engaged in purchase of tea produced in variousestates from various auction centres and in the industrial unit theyblend the tea so procured into various grades of blended tea, repack intheir name and export it to various countries. The DevelopmentCommissioner, Special Economic Zone has issued permanentregistration certificate to the assessee declaring that the assessee isengaged in manufacture and export of blended tea (in bulk, inconsumer packs and tea bags). The case of the department is thatunless the item exported is treated as a product manufactured in theindustrial unit of the assessee, the assessee is not entitled to exemption.On the other hand, the assessee's case is that every unit in the SpecialEconomic zone enjoys income tax exemption on the profit derived onthe export of their products. Prior to the passing of the SpecialEconomic Zone Act, 2005, the assessee's industry was located in theZone previously known as the Cochin Export Processing Zone which is a Free Trade Zone covered by Section 10A of the Act. Sinceassessee's eligibility for exemption has to be considered under Section10A, the relevant portion of the said Section is extracted hereunder foreasy reference: "S.10A. Special provision in respect of newlyestablished undertakings in free trade zone, etc.--(1)Subject to the provisions of this section, a deduction ofsuch profits and gains as are derived by an undertakingfrom the export of articles or things or computer softwarefor a period of ten consecutive assessment years beginningwith the assessment year relevant to the previous year inwhich the undertaking begins to manufacture or producesuch articles or things or computer software, as the casemay be, shall be allowed from the total income of theassessee: Provided that where in computing the total income ofthe undertaking for any assessment year, its profits andgains had not been included by application of theprovisions of this section as it stood immediately before itssubstitution by the Finance Act, 2000, the undertakingshall be entitled to deduction referred to in this sub-sectiononly for the unexpired period of the aforesaid tenconsecutive assessment years: Provided further that where an undertaking initiallylocated in any free trade zone or export processing zone issubsequently located in a special economic zone by reasonof conversion of such free trade zone or export processingzone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-sectionshall be reckoned from the assessment year relevant to theprevious year in which the undertaking began tomanufacture or produce such articles or things or computersoftware in such free trade zone or export processing zone: Provided also that for the assessment year beginningon the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent, of the profits and gainsderived by an undertaking from the export of such articlesor things or computer software: Provided also that no deduction under this sectionshall be allowed to any undertaking for the assessment yearbeginning on the 1st day of April, 2010 and subsequentyears. consecutive assessment years referred to in this sub-sectionshall be reckoned from the assessment year relevant to theprevious year in which the undertaking began tomanufacture or produce such articles or things or computersoftware in such free trade zone or export processing zone: Provided also that for the assessment year beginningon the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent, of the profits and gainsderived by an undertaking from the export of such articlesor things or computer software: Provided also that no deduction under this sectionshall be allowed to any undertaking for the assessment yearbeginning on the 1st day of April, 2010 and subsequentyears. (1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income ofan undertaking, which begins to manufacture or producearticles or things or computer software during the previousyear relevant to any assessment year commencing on orafter the 1st day of April, 2003, in any special economiczone, shall be hundred per cent, of profits and gainsderived from the export of such articles or things orcomputer software for a period of five consecutiveassessment years beginning with the assessment yearrelevant to the previous year in which the undertakingbegins to manufacture or produce such articles or things orcomputer software, as the case may be, and thereafter fiftyper cent, of such profits and gains for further twoassessment years. ............... (2) This section applies to any undertaking whichfulfils all the following conditions, namely:- (i) it has begun or begins to manufacture or producearticles or things or computer software during the previousyear relevant to the assessment year-- (a) commencing on or after the 1st day of April,1981, in any free trade zone; or (b) commencing on or after the 1st day of April,1994, in any electronic hardware technology park or, as thecase may be, software technology park; (c) commencing on or after the 1st day of April,2001, in any special economic zone; ............" It is clear from the above provision that deduction is of the profits and gains derived by the industrial undertaking from the export of articlesor things or computer software manufactured or produced by it. Thecontention of the assessee is that since there is no definition of theword "manufacture" or "processing" in the Income Tax Act, thedefinition of "manufacture" contained in the Export Import Policy of2002-2007 under which Free Trade Zone is established, applies. According to the counsel, even though blending as such is not specifiedin the definition clause contained in the policy, it falls within thedefinition clause of "manufacture" contained in the Policy by necessary implication. The definition contained in Chapter IX of the EXIMPolicy under clause 9.30 is as follows: ""Manufacture" means to make, produce, fabricate,assemble, process or bring into existence, by hand or bymachine, a new product having a distinctive name, characteror use and shall include processes such as refrigeration, re-packing, polishing, labelling, re-conditioning repair,remaking, refurbishing, testing calibration, re-engineering.Manufacture, for the purpose of this Policy, shall alsoinclude agriculture, aquaculture, animal husbandry,floriculture, horticulture, pisciculture, poultry, sericulture,viticulture and mining." It is worthwhile to refer to the definition of "manufacture" contained in Section 2(r) of the Special Economic Zones Act, 2005, which isincorporated later under Section 10AA of the Income Tax Act witheffect from 10.2.2006. It reads as follows: S.2(r) "Manufacture" means to make, produce,fabricate, assemble, process or bring into existence, by handor by machine, a new product having a distinctive name,character or use and shall include processes such asrefrigeration, cutting, polishing, blending, repair, remaking, It is worthwhile to refer to the definition of "manufacture" contained in Section 2(r) of the Special Economic Zones Act, 2005, which isincorporated later under Section 10AA of the Income Tax Act witheffect from 10.2.2006. It reads as follows: S.2(r) "Manufacture" means to make, produce,fabricate, assemble, process or bring into existence, by handor by machine, a new product having a distinctive name,character or use and shall include processes such asrefrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animalhusbandry, floriculture, horticulture, pisciculture, poultry,sericulture, viticulture and mining." We notice from the above two definition clauses that though both thedefinition clauses are very similar, blending is not specifically stated inthe definition clause of "manufacture" contained in the EXIM Policy,whereas blending is specifically covered by Section 2(r) of the SpecialEconomic Zones Act. Counsel for the assessee contended that boththe definition clauses are very similar and though processes referred totherein such as refrigeration, repacking, polishing, labelling, re-conditioning repair etc., are not real manufacturing activities involvingproduction of a new article having distinctive name, character or useas required under the first part of the definition clauses, such activitiesare also treated as manufacture both under the EXIM Policy and underthe Special Economic Zones Act. 3. Even though there is no court decision directly on the questionraised, Senior counsel appearing for the appellant-assessee has reliedon various decisions of the Supreme Court on the general principles of construction on exemption clause and also on CBDT Circular No.794dated 9.8.2002 explaining the scope of Section 10A of the Income TaxAct. We do not think there is any need to refer to all the decisionscited before us because the position canvassed is one and the same i.e.adoption of a liberal construction pertaining to exemption clause.However, it is worthwhile to refer to atleast one of the decisions of the Supreme Court in COMMISSIONER OF INCOME-TAX V.GWALIOR RAYON SILK MFG. CO. LTD. (1992) 196 ITR 149,wherein the Supreme Court has stated the law as follows: "It is settled law that the expressions used in a taxingstatute would ordinarily be understood in the sense in whichit is harmonious with the object of the statute to effectuate thelegislative intention. It is equally settled law that, if thelanguage is plain and unambiguous, one can only look fairlyat the language used and interpret it to give effect to thelegislative intention. Nevertheless, tax laws have to beinterpreted reasonably and in consonance with justiceadopting a purposive approach. The contextual meaning hasto be ascertained and given effect to. A provision fordeduction, exemption or relief should be construedreasonably and in favour of the assessee." We have already noticed that in substance the provisions of Section10A and Section 10AA later introduced serve the very same purpose of We have already noticed that in substance the provisions of Section10A and Section 10AA later introduced serve the very same purpose of granting exemption on the profits earned by industrial units in the FreeTrade Zone/Special Economic Zone. These provisions introduced inthe Income Tax Act are essentially implementation of EXIM Policyperiodically announced by the Government providing incentives toexport oriented units located in Free Trade Zones/Special EconomicZones mainly to augment Foreign Exchange Earnings. In fact, it ispertinent to note that though Section 10A did not contain a definitionfor "manufacture", definition of the said term contained in Section 2(r)of the Special Economic Zones Act, 2005 is incorporated in Section10AA with effect from 10.2.2006. Admittedly the said definitioncovers blending also. Therefore, blending and packing of tea done bythe appellant-assessee qualifies for exemption under Section 10AAfrom 10.2.2006 onwards. The question to be considered is whether thebenefit is available to the appellant-assessee for the year 2004-2005 forthe reason that the then existing provision Section 10A did not containa definition clause. Admittedly Section 10A also provides forexemption in respect of goods manufactured or produced and sold by units in the Free Trade Zone. Going by the decision of the SupremeCourt abovereferred, the exemption clause has to be considered withreference to the object with which it is enacted. Nobody can havedoubt that exemption to industries in the Free Trade Zone is grantedbased on the EXIM Policy framed by the Government periodically. Inthis context it is pertinent to refer to the definition of "manufacture"contained in Chapter IX of the EXIM Policy extracted above. Wenotice that "manufacture" is given a very wide definition to take ineven processing involving conversion of something to another withdistinct name, character and use. Further, even refrigeration of an itemwhich involves only freezing, repacking, labelling etc. are also coveredby the definition of "manufacture". Blending of tea is mixing ofdifferent varieties of teas produced in estates located in differentregions having different altitudes, climate conditions etc. It iscommon knowledge that new flavours of tea are generated by blendingdifferent varieties. In our view, it would not be incorrect to say that inthe course of blending the product obtained namely, the blended tea, certainly has different characteristics in as much as flavour, taste etc. ofthe blended tea is different from that of the various varieties of tea usedin blending. We are of the view that since the purpose of exemptionunder Section 10A is to give effect to the EXIM Policy of theGovernment, the definition of "manufacture" contained in the EXIMPolicy is applicable for the purpose of the said provision. We havealready noticed that "manufacture" as defined under the EXIM Policyhas a wide and liberal meaning covering tea blending as well and somuch so, blending and packing of tea qualifies for exemption underSection 10A. Besides this, appellant-industry presently in the SpecialEconomic Zone engaged in the same process of blending and packingof tea is specifically brought under the exemption clause throughincorporation of Section 2(r) of the Special Economic Zones Act,2005,in the provisions of Section 10AA of the Income Tax Act. Weare, therefore, of the view that the later amendment is only clarificatoryand the definition of "manufacture" contained in Section 2(r) of theSpecial Economic Zones Act, 2005, incorporated in Section 10AA of the Income Tax Act with effect from 10.2.2006, which is essentiallythe same as the definition contained in the EXIM Policy, applies toSection 10A also. We, therefore, hold that blending of tea is amanufacturing activity which entitles the appellant-assessee forexemption under Section 10A of the Income Tax Act for theassessment year 2004-2005. Accordingly the appeal is allowed byvacating the order of the Tribunal and by restoring the order of the firstappellate authority. C.N.RAMACHANDRAN NAIRJudge pms C.K.ABDUL REHIM Judge