The Commissioner Of Income Tax Ii, Chandigarh v. M/S Anand Affiliates, Chandigarh

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.648 of 2008 Date of decision: 9.12.2008 The Commissioner of Income Tax II, Chandigarh Vs. -----Appellant M/s Anand Affiliates, Chandigarh --Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOELHON'BLE MR JUSTICE L.N.MITTAL Present: Ms. Urvashi Dhugga, Standing Counsel for the revenue. Adarsh Kumar Goel,J. 1.This appeal has been preferred by the revenue under section260A of the Income Tax Act, 1961 (in short, ‘the Act’) against the order ofthe Income Tax Appellate Tribunal, Chandigarh Bench ‘A’ in ITANo.1033/Chandi/2004 dated 29.12.2006, in respect of assessment year1997-98, proposing to raise following substantial question of law:- “Whether on the facts and circumstances of the case and in law, theITAT was correct in holding that business carried out by theassessee amounted to manufacturing of article or things for thepurposes of deduction under section 80IA of the IT Act, 1961?” 2.The assessee has a factory in backward area where the assesseeproduces Automobile Filter elements for M/s Puralator India Limited, whichare further used for manufacture of Automobile Filters. The assesseeclaimed deduction under section 80IA of the Act, which was disallowed bythe assessing authority on the ground that the process carried out by the assessee did not yield commercially any new or different commodity andthus, the assessee could not be held to be engaged in production ormanufacture. This view was upheld by the CIT(Appeals) but on furtherappeal of the assessee, the Tribunal upheld the claim of the assessee.Following finding has been recorded by the Tribunal:- “8. We have considered the rival submission carefully.The crux of the dispute i.e., presently before us is to establish asto whether or not the assessee is engaged in the manufacture ofan article or thing so as to qualify for deduction under section80IA of the Act. Before we proceed to dilate on the legalposition, it would be appropriate to understand the fact positionwith regard to the process canvassed by the assessee. Thefinished product of the assessee is automobile filter element. Theraw materials used are:- 1. Filter Paper 2. Steel Sheet components a) Centre Tube/Outer Retainer b) End Caps. 3. Adhesives. The manufacturing process considered by the lower authoritiesis detailed as below:- Paper passes through the marathon machine for pleating.Paper passes through the marathon machine for pleating. After pleating of paper, paper passes through the procuringoven so that the position of pleats has to be permanent.After pleating of paper, paper passes through the procuringoven so that the position of pleats has to be permanent. Paper is being cut as per the specified length.Paper is being cut as per the specified length. Both ends of the particular length of the paper are being sealedwith the help of a clip at side sealer machine.Both ends of the particular length of the paper are being sealedwith the help of a clip at side sealer machine. After the sealing of ends, round shape (Vertical) has to begiven to paper and insert into the outer retainer along with acentre true inside the paper pack. It is called sub assembling.After the sealing of ends, round shape (Vertical) has to begiven to paper and insert into the outer retainer along with acentre true inside the paper pack. It is called sub assembling. PVC adhesive to be filled in the end cap with the help of PVCdispenser machine.PVC adhesive to be filled in the end cap with the help of PVCdispenser machine. Place cap on one end of sub assembly and passes it throughjeller having a constant temperature for curing of adhesive.Place cap on one end of sub assembly and passes it throughjeller having a constant temperature for curing of adhesive. After the sealing of ends, round shape (Vertical) has to begiven to paper and insert into the outer retainer along with acentre true inside the paper pack. It is called sub assembling.After the sealing of ends, round shape (Vertical) has to begiven to paper and insert into the outer retainer along with acentre true inside the paper pack. It is called sub assembling. PVC adhesive to be filled in the end cap with the help of PVCdispenser machine.PVC adhesive to be filled in the end cap with the help of PVCdispenser machine. Place cap on one end of sub assembly and passes it throughjeller having a constant temperature for curing of adhesive.Place cap on one end of sub assembly and passes it throughjeller having a constant temperature for curing of adhesive. Fill another cap with adhesive with the help of dispenser, placeon the other end and passes if through FCO at specifiedtemperature of curing of PVC adhesive and paper.Fill another cap with adhesive with the help of dispenser, placeon the other end and passes if through FCO at specifiedtemperature of curing of PVC adhesive and paper. Find Product-Semi-finished Automotive filter. 9. The finished product of the assessee i.e. Automobile Filterelement is a semi-finished automotive filter, which is supplied tothe original equipment manufacturer in Automotive Filter industryi.e. M/s Purolator India Limited.element is a semi-finished automotive filter, which is supplied tothe original equipment manufacturer in Automotive Filter industryi.e. M/s Purolator India Limited. 10. Having noted the process which is involved, we have toexamine whether the activity carried out by the assessee amountsto manufacture and if yes, then what does it manufacture. From theprocess noted above that the assessee brings together the variousraw materials, components and by carrying intermittent processes,assembles them together so that they can work as one equipmentwhich is termed as a semi-finished Automotive Filter. The semi-finished Automotive Filter, which the assessee manufactures as aresult of various processes is a product, which is distinct bycharacter as also in its use than each of raw materials. This is forthe reason that none of the components or the raw material usedcan partake the character of or be a substitute for the functionsperformed by the finished product of the assessee.” 3.We have heard learned counsel for the revenue and perused theimpugned order. 4.Learned counsel for the revenue submits that the activity of theassessee was merely assembling certain components, which did not give riseto any new product, particularly when the assessee, on job work basis, did a part of process and finishing was done by the principal for whom theassessee was supplying. Activity resulting in production of semi-furnishedproduct could not be held to be manufacturing. The identity of the itemsused in the manufacture did not undergo a complete change. 5.We are unable to accept the submission. 3.We have heard learned counsel for the revenue and perused theimpugned order. 4.Learned counsel for the revenue submits that the activity of theassessee was merely assembling certain components, which did not give riseto any new product, particularly when the assessee, on job work basis, did a part of process and finishing was done by the principal for whom theassessee was supplying. Activity resulting in production of semi-furnishedproduct could not be held to be manufacturing. The identity of the itemsused in the manufacture did not undergo a complete change. 5.We are unable to accept the submission. 6.The Tribunal has discussed the nature of raw materials and theprocess conducted by the assessee resulting in production of automobilefilter element, which is supplied to the automobile manufacturer. Theassessee brings together various raw materials and after carrying outprocess, assembles the same leading to the equipment being produced. It iswell settled that every change or process cannot be termed as manufactureor production. Well known tests applied for determining whether a processamounted to manufacture or production are that a new and distinctcommercial product is produced. In each case, it may be a question of factwhether a particular process involves manufacture or not. The question maybe of degree and extent of change and though, the issue may at times bedebatable, by applying the relevant tests, the Tribunal has recorded afinding and such finding cannot be held to be perverse, it cannot be heldthat a substantial question of law arises.The Tribunal has applied the correcttest and recorded a finding that the process undertaken by the assesseeinvolved manufacture. Merely because a different view can be taken willnot be a ground to hold that a substantial question of law arises. 8.In a recent order of this Court dated 31.10.2008 in ITA No.505 of 2007 (The Commissioner of Income Tax, Faridabad v. Shri Mahesh Chandra Sharma), dealing with an identical issue, it was observed:- “9.The question whether an activity involvesmanufacture, has been gone into in several judgments ofthe Hon’ble Supreme Court includingUnion of India v.Delhi Cloth and General Mills, AIR 1963 SC 791, para14, Deputy Commissioner of Sales Tax (Law), Boardof Revenue (Taxes) v. M/s. PIO Food Packers, AIR1980 SC 1227, Empire Industries Limited v.Union ofIndia, AIR 1986 SC 662 andM/s Ujagar Prints etc. v.Union of India and others ,AIR 1989 SC 516. 10. In absence of any definition in the Act, theword ‘manufacture’ used in section 80-IB has to be givenordinary meaning. 11.In N.C.Budhiraja(supra), the Hon’bleSupreme Court considered earlier judgment in M/s PIOFood Packers(supra), particularly the observation thatwhere commodity retained substantial identity, nomanufacturing was involved. In the said judgment, thequestion involved was whether manufacturing wasinvolved in construction of a dam so as to avail of benefitunder section 80HH(1) of the Act. It was held that theword ‘article’ or ‘thing’ mentioned in section 80HH couldnot cover dam, bridge, building, road, canal and so on.Construction of dam was, thus, held not to bemanufacture. Though the dam comprised of variousarticles, it was observed that end product could not beheld to be an article or thing. Dam was constructed andnot manufactured. 12. Commonly accepted meaning given to theword ‘manufacture’ as held in the judgments of theHon’ble Supreme Court is when a new and differentarticle emerges having distinctive name, character or use.In the present case, the Tribunal applying the tests laiddown in the judgments of the Hon’ble Supreme Court, held that distinct article with distinctive name, characterand use emerged. The tests laid down in the judgments ofthe Hon’ble Supreme Court have to be applied from caseto case. The Tribunal has arrived at a finding of fact in thepresent case.” 9.Thus, the question raised cannot be held to be a substantialquestion of law. 12. Commonly accepted meaning given to theword ‘manufacture’ as held in the judgments of theHon’ble Supreme Court is when a new and differentarticle emerges having distinctive name, character or use.In the present case, the Tribunal applying the tests laiddown in the judgments of the Hon’ble Supreme Court, held that distinct article with distinctive name, characterand use emerged. The tests laid down in the judgments ofthe Hon’ble Supreme Court have to be applied from caseto case. The Tribunal has arrived at a finding of fact in thepresent case.” 9.Thus, the question raised cannot be held to be a substantialquestion of law. 8.Dismissed. (Adarsh Kumar Goel)Judge December 9, 2008‘gs’ (L.N.Mittal)Judge