The Principal Commissioner Of Income Tax 2, Vadodara v. Tonira Pharma Ltd

C/TAXAP/1283/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1283 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE DR.JUSTICE A. P. THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?as to the interpretation of the Constitution of India or any order made thereunder ? ================================================================THE PRINCIPAL COMMISSIONER OF INCOME TAX 2, VADODARAVersus TONIRA PHARMA LTD ================================================================ Appearance:MR.VARUN K.PATEL(3802) for the PETITIONERMR B S SOPARKAR(6851) for the RESPONDENT ================================================================ CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANIand HONOURABLE DR.JUSTICE A. P. THAKER Date : 11/12/2018 ORAL JUDGMENT (PER : HONOURABLE MS.JUSTICE HARSHA DEVANI) 1.Heard Mr. Varun Patel, learned Senior Standing Counsel for the appellant and Mr. B. S. Soparkar, learned advocate for the respondent. 2.Having regard to the submissions advanced by the learned advocates for the respective parties, the court is of the view that the matter requires consideration. Hence, ADMIT. The following substantial questions of law arise for consideration: “[A] Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in allowing deduction under section 10B of the Income Tax Act, 1961 in respect of Benzarone Pure? [B]Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in allowing deduction under section 10B of the Income Tax Act, 1961 in respect of BFX-P?” 3.Since the learned advocates for the respective parties were heard at length, with the consent of the learned advocates, the matter was taken up for final hearing. 4.The assessee is a listed company engaged in the business of manufacturing and export of bulk drugs, drug intermediates and fine chemicals (organic and inorganic). During the year under consideration, the assessee claimed deduction of Rs.1,54,60,676/- under section 80B of the Act. The assessee had shown total export sales of Ankleshwar EOU is shown at Rs.25,22,87,369/- and had stated that the Ankleshwar EOU enjoyed a gross profit margin of 28.34%. The Assessing Officer was of the view that it can therefore be said that the cost of goods sold by the Ankleshwar EOU was Rs.19,65,77,348/-. Out of the total sale of Rs.14,66,72,339/- by the General Unit of Ankleshwar, sale of Work in Progress (WIP) of Rs.8,35,84,056/- was shown to have been made to the Ankleshwar EOU. According to the Assessing Officer, the work in progress was nothing but semi-finished goods and hence, it could not be said that what has been exported by Ankleshwar EOU was also manufactured by it. The Assessing Officer held that the entire work in progress transferred to the EOU was almost a final product and disallowed the deduction under section 80B of the Act. Assessing Officer was of the view that it can therefore be said that the cost of goods sold by the Ankleshwar EOU was Rs.19,65,77,348/-. Out of the total sale of Rs.14,66,72,339/- by the General Unit of Ankleshwar, sale of Work in Progress (WIP) of Rs.8,35,84,056/- was shown to have been made to the Ankleshwar EOU. According to the Assessing Officer, the work in progress was nothing but semi-finished goods and hence, it could not be said that what has been exported by Ankleshwar EOU was also manufactured by it. The Assessing Officer held that the entire work in progress transferred to the EOU was almost a final product and disallowed the deduction under section 80B of the Act. 5.The assessee carried the matter in appeal before the Commissioner (Appeals), who found that while the Assessing Officer had held that the entire work in progress transferred to EOU was almost a final product, no analysis had been made in the assessment order as to whether the conversion of this work in progress into final product by the EOU amounts to manufacture or production of an article or not, and to determine whether the profit related to sale of such products earned by EOU can be said to be eligible for profit under section 10B of the Act. During the course of the appellate proceedings, complete details of the work in progress transferred to the EOU and subsequent conversion of such work in progress to final product by the EOU which came to be filed. From the detailed chart given by the assessee, the Commissioner (Appeals) noted that the physical and chemical differences between work in progress and the final product had also been filed which give the molecular formula, structural formula, difference in chemical and physical properties and chemical use of the work in progress and the final products. On a perusal of all the details, the Commissioner (Appeals) was of the view that except for conversion of Benzarone Crude to Benzarone Pure, in all other processes involving conversion of work in progress to final products, a new product results and such conversion amounts to manufacture or production of a new article or thing and hence, the deduction under section 80IB of the Act was allowable to that extent. However, insofar as the conversion of Benzarone Crude into Benzarone Pure is concerned, according to the Commissioner (Appeals), the process involved is only the purification of the crude product into final product, and that, when Benzarone Crude is manufactured, the final product is already obtained except that some impurities are left therein. The Commissioner (Appeals) noted that the chemical and structural formula of Benzarone Crude and Benzarone Pure are the same and all the processes involved in purifying Benzarone Crude to Benzarone Pure are physical processes and no chemical conversion takes place. He, accordingly, held that the assessee is not eligible for deduction under section 10B of the Act on account of conversion of Benzarone Crude to Benzarone Pure. The assessee had not provided any details for BFX-P and therefore, the Commissioner (Appeals) held that it is not eligible for deduction under section 10B of the Act on account of this item also. 6.The assessee carried the matter in appeal before the Tribunal. By the impugned order, the Tribunal held that the controversy is now well settled by the decision of the Supreme Court in the case of Income Tax Officer, Udaipur v. Arihant Tiles and Marbles Private Limited, (2010) 320 ITR 79 (SC), 6.The assessee carried the matter in appeal before the Tribunal. By the impugned order, the Tribunal held that the controversy is now well settled by the decision of the Supreme Court in the case of Income Tax Officer, Udaipur v. Arihant Tiles and Marbles Private Limited, (2010) 320 ITR 79 (SC), wherein it is held that even conversion of marble blocks by sawing them into slabs and tiles and polishing amounts to “manufacture or production of article or thing” and that the products as inputs and as outputs were different for all practical purposes of their use and application. The Tribunal held that even a purification process, or removal of impurities, as long as the end product has different usage, value and applications does amount to a new product coming into existence. It, accordingly, modified the order passed by the Commissioner (Appeals) in respect of exclusion of profits in respect of the two products, viz., Benzarone Pure and Di Acid and held that the profits in respect of these products will also be eligible for benefit under section 10B of the Act. 7.Mr. Varun Patel, learned Senior Standing Counsel for the appellant invited the attention of the court to the findings recorded by the Commissioner (Appeals), to submit that the Commissioner (Appeals) after detailed analysis of the process that is carried out, has concluded that the conversion of Benzarone Crude to Benzarone Pure does not amount to manufacture and accordingly, did not grant the benefit of deduction under section 10B of the Act to the assessee. It was submitted that insofar as BFX-P is concerned, the assessee had not produced the process carried out in respect thereof and hence, the Commissioner (Appeals) was wholly justified in holding that no process of manufacture or production had been carried out and hence, the assessee was not entitled to the benefit of deduction under section 10B of the Act in respect of the said product. 7.1Referring to the impugned order passed by the Tribunal, it was submitted that the Tribunal has not disturbed the findings of fact recorded by the Commissioner (Appeals), but by mainly placing reliance upon the decision of the Supreme Court which was rendered in the context of a totally different product, has held that the conversion of Benzarone Crude to Benzarone Pure amounts to manufacture. It was submitted that the Tribunal has not even taken into notice the fact that the assessee had not produced any details with regard to the manufacturing process in respect of BFX-P. Reference was made to the decision of the Supreme Court in the case of Commissioner of Central Excise, Vadodara v. Vadilal Gases Ltd., 2017 (346) ELT 161 (SC), wherein the court held that mixing of gases and making them available to consumers in smaller cylinders, did not amount to manufacture. They did not chemically mix/react with each other, and retained their character, without any new commodity being created. 7.2Reliance was also placed upon the decision of the Tribunal, Ahmedabad Bench “C” rendered in Tonira Pharma Ltd. v. Assistant Commissioner of Income Tax, Bharuch Circle, Bharuch, (2010) 39 DOT 28 (Ahmedabad), wherein the Tribunal found that what was put into the processing as raw material was ascorbic acid food Grade IV. It was refined by removing some contents of iron or lead, if any, and ascorbic acid IP was resulted. The Tribunal observed that it was an undisputed fact that it was ascorbic acid which was imported and put for processing and what was resulted was also ascorbic acid but of finer quality. The Tribunal noted that despite repeatedly asking, the Authorized Representative was unable to show whether ascorbic acid FCC Grade IV could or could not be used in place where ascorbic acid IP is used or where use of ascorbic acid FCC Grade IV is prohibited by law or regulation in cases where ascorbic acid IP is used. The Tribunal held that in the absence of any material to the effect that the use of ascorbic acid FCC Grade IV and ascorbic acid IP are different and ascorbic acid FCC Grade IV could not be used in place where ascorbic acid IP is used, the contention of the Authorized Representative that it is undertaking the manufacturing or production of finished goods namely ascorbic acid IP cannot be accepted. The Tribunal, accordingly, held that no manufacturing or production of any new article or thing has taken place from import of finished goods of ascorbic acid FCC Grade IV. Mr. Patel, accordingly, urged that the appeal requires to be allowed by answering the questions in favour of the revenue and against the assessee. 8.Opposing the appeal, Mr. B. S. Soparkar, learned advocate for the respondent produced before the court the process flow chart for Benzarone as produced before the Tribunal. It was pointed out that Benzarone Crude at Stage-3 is transferred to the Ankleshwar EOU and further process is carried out thereon for obtaining Benzarone Pure. It was pointed out that several processes are carried out on the Benzarone Crude (BZB-D) as reflected in Stage-III of the manufacturing process flow chart which results into production of Benzarone Pure (BZN-P), which is a marketable product. Reference was made to the decision of this court in the case of Commissioner of Income Tax v. Mitesh Impex, (2014) 367 ITR 85, wherein the court was dealing with the question as to whether treating the processes employed by the assessee in segregating the metal scrap from cable scrap was “manufacture or produce” within the meaning of section 10B of the Income Tax Act. The court, after going through the process of the final product, found that the raw material of the assessee is of no use in foundry or industries and that the final products being the scrap of specific metal/non-metal material had distinct identity, use, character and name. The final products had been obtained after applying one or more process may be manually or mechanically and thereafter, the different commodity had come into existence. Therefore, the process employed by the assessee unit was falling in the four corners of manufacture or produce. It was submitted that the above decision would be squarely applicable to the facts of the present case and that the process carried out of Benzarone Crude for the purpose of production of Benzarone Pure would fall within the meaning of expression of “manufacturing and production” and therefore, the assessee is entitled to the benefit under section 10B of the Act in respect of the said item. 8.1Insofar as BFX-P is concerned, the learned advocate for the respondent is not in a position to produce any flow chart showing the process involved in conversion of the work in progress to final product. 9.The question that arises for consideration in this appeal is as to whether the conversion of work in progress, namely, Benzarone Crude to Benzarone Pure and work in progress to BFX-P amounts to “manufacture or production” within the meaning of such expression as envisaged under section 10B of the Act. 10.A perusal of the record of the case reveals that insofar as the Assessing Officer is concerned, he has not carried out any detailed inquiry as regards the process carried out on the work in progress to examine as to whether the process would amount to manufacture or production. Such exercise, however, has been carried out at the stage of appeal before the Commissioner (Appeals). 9.The question that arises for consideration in this appeal is as to whether the conversion of work in progress, namely, Benzarone Crude to Benzarone Pure and work in progress to BFX-P amounts to “manufacture or production” within the meaning of such expression as envisaged under section 10B of the Act. 10.A perusal of the record of the case reveals that insofar as the Assessing Officer is concerned, he has not carried out any detailed inquiry as regards the process carried out on the work in progress to examine as to whether the process would amount to manufacture or production. Such exercise, however, has been carried out at the stage of appeal before the Commissioner (Appeals). 11.Before the Commissioner (Appeals), the assessee had produced flow chart of various products right from the inception till the stage of final product. A perusal of the flow chart in respect of Benzarone shows that Stage-I results in the production of “2-Ethyl Coumarone (BZB-B); Stage-II relates to conversion of 2-Ethyl Coumarone (BZB-B) into Benzarone Crude (BZB-D). This Benzarone Crude (BZB-D) is the “work in progress” for the Ankleshwar EOU and in Stage III such Benzarone Crude (BZB-D) is converted into the final product viz., Benzarone Pure (BZN-P). A perusal of the manufacturing process flow chart reveals that Benzarone Crude is subjected to various processes, which finally results into the production of Benzarone Pure (BZN-P). 12.The assessee has brought to the notice of the Commissioner (Appeals) the difference between BZB-B and Benzarone, which indicates that Benzarone Crude has got no commercial use, whereas Benzarone has got medicinal use having commercial value. It is the case of the assessee that Benzarone Pure is used for manufacturing medicines for human consumption and is derived by removing impurities from Benzarone Crude and it is necessary for medical purpose and human consumption. For bringing desired purity level in Benzarone Pure, the company has to follow a long drawn process. Further, Benzarone Crude is not marketable as such until and unless the same is being converted into Benzarone Pure. Hence, Benzarone Pure is a commercially distinct product from Benzarone Crude. The process carried out on Benzarone Crude makes it a commodity fit for use for which it would not be otherwise be fit. The manufacturing process carried out on Benzarone Crude brings into existence Benzarone Pure which is a new article or thing distinct in identity and character. The Commissioner (Appeals), in his order dated 23.02.2012, has referred to the stages involved after the transfer of work in progress to the General Unit. He, however, found that the chemical and structural formula of Benzarone Crude and Benzarone Pure are one and the same and all processes involved in purifying Benzarone Crude to Benzarone Pure are physical processes and no chemical conversion takes place. He, therefore, was of the view that merely purification of the Benzarone Crude into final product cannot be said to amount to manufacture and, accordingly, disallowed the deduction under section 10B of the Act in respect of Benzarone Pure. 13.The Tribunal, in the impugned order, without going into the process of purification or the flow chart, has by merely placing reliance upon the decision of the Supreme Court in Income Tax Officer, Udaipur v. Arihant Tiles and Marbles Private Limited (supra), allowed the appeal. 14.A perusal of the flow chart produced on record by the assessee, it is clear that the process of manufacture of Benzarone Pure is in three stages. The first stage result in production of 2-Ethyl Coumarone (BZB-B) and the second stage results in the production of Benzarone Crude (BZB-D). The first two stages are carried out by the General Unit Ankleshwar and Benzarone Crude is work in progress for that unit. This work in 13.The Tribunal, in the impugned order, without going into the process of purification or the flow chart, has by merely placing reliance upon the decision of the Supreme Court in Income Tax Officer, Udaipur v. Arihant Tiles and Marbles Private Limited (supra), allowed the appeal. 14.A perusal of the flow chart produced on record by the assessee, it is clear that the process of manufacture of Benzarone Pure is in three stages. The first stage result in production of 2-Ethyl Coumarone (BZB-B) and the second stage results in the production of Benzarone Crude (BZB-D). The first two stages are carried out by the General Unit Ankleshwar and Benzarone Crude is work in progress for that unit. This work in progress viz. Benzarone Crude is transferred to the EOU where the same is subjected to a series of processes and is converted in Benzarone Pure (BZN-P) in the third stage. The question that arises for consideration is whether the third stage in the process is a manufacturing process. A perusal of the third stage process shows that Benzarone Crude is placed in a reactor and is subjected to heating and cooling processes and is thereafter centrifuged. It is then repeatedly subjected to such processes and then vacuum dried and subjected to milling and then sifted and the resultant BZN-P Benzarone Pure is then packed. While the processes carried out on Benzarone Crude may be physical processes which do not result in any change in the structural and chemical formula, Benzarone Crude as such is not marketable. It is only after it is subjected to various processes resulting in the production of Benzarone Pure, that it becomes a commercially marketable product. 15.This court in the case of Commissioner of Income Tax v. Mitesh Impex (supra) has recorded that the courts have accepted the principle of fairly universal application that where the change or 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, recognised as a distinct and new article that has emerged as a result of the process, it would amount to manufacture of an article or thing. 16.The Tribunal in Tonira Pharma Ltd. v. Assistant Commissioner of Income Tax, Bharuck Circle, Bharuch (supra), has observed that the provisions of section 10B would be applicable to an industry which is manufacturing or producing any article or thing. The foremost condition is that such 100 per cent export oriented unit should manufacture or produce any article or thing or computer software that fulfills all other conditions as stipulated in sub-section (2). The essence of manufacturing is the change from one object to another for the purpose of making it a different marketable commodity. Every change in the raw material could not be called as manufacturing unless a new product which has a separate commercial identity in the market comes into existence. The transformation to the raw material should be of such a nature that a new and different article or thing emerges which is distinct in name, character and use. The essence of determining whether new article or thing is manufactured or produced lies in the identity and use of the commodity before undergoing the processing and after the processing. If the identity and character remain the same, then there is no manufacturing or production, but where identity and character get transformed, then it would be a manufacturing or production of new article or thing. In the facts of the said case, the Tribunal held against the assessee in view of the fact that no material had been brought to its notice to the effect that the use of ascorbic acid FCC Grade IV and ascorbic acid IP are different and ascorbic acid FCC Grade IV could not be used in place where ascorbic acid IP is used. 17.In the facts of the present case, it is the specific case of the assessee that Benzarone Pure is derived by removing impurities from Benzarone Crude; Benzarone Crude is not marketable as such unless and until it is converted into Benzarone Pure; and that Benzarone Pure is necessary for medicinal purposes and human consumption. Therefore, the facts of the present case are different from the facts in the petitioner’s own case in respect of ascorbic acid FCC Grade IV referred to by the Tribunal in the above referred decision. 18.The Supreme Court in Income Tax Officer, Udaipur v. Arihant Tiles and Marbles Private Limited(supra), on which reliance has been placed by the Tribunal, has referred to its earlier decision in the case of Commissioner of Income Tax v. N.C. Budharaja & Co., (1993) 204 ITR 412, wherein it has held that the test for determining whether “manufacture” can be said to have taken place is whether the commodity, which is subjected to a process can no longer be regarded as the original commodity but is recognised in trade as a new and distinct commodity. The word “production”, when used in juxtaposition with the word “manufacture” takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word “production” takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. Applying the said decision, the Supreme Court held that blocks converted into polished slabs and tiles after undergoing the process indicated therein certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. 19.In the opinion of this court, considering the process which Benzarone Crude is subjected to for the purpose of converting it into Benzarone Pure as well as considering the fact that the Benzarone Pure is a distinct marketable commodity, different from Benzarone Crude which is not capable of being used as such, the conversion of Benzarone Crude to Benzarone Pure would fall within the ambit of the expression “manufacture or produce” as contemplated under section 10B of the Act. The Tribunal was, therefore, justified in holding that the assessee is entitled to deduction under section 10B of the Act in respect of the said product. 20.Insofar as the second question regarding deduction under section 10B of the Act in respect of BFX-P is concerned, it is an admitted position that no manufacturing process in respect of the said product has been brought on record either before the Commissioner (Appeals) or even before this court. The chart referred to by the Commissioner (Appeals) in his order shows that except for the work in progress being shown as BFX-P, no further details have been provided regarding the final product or the chemical formula. In the absence of any material having been placed on record to indicate the process carried out on BFX-P, it cannot be said that any process of manufacture or production has taken place so as to entitle the assessee to deduction under section 10B of the Act in respect of the said product. The Tribunal was, therefore, not justified in allowing the deduction under section 10B of the Act in respect of BFX-P. 21.In the light of the above discussion, the question “A” stands answered in favour of the assessee and against the revenue, whereas the question “B” stands answered in favour of the revenue and against the assessee. The impugned order dated 02.01.2018 passed by the Tribunal is hereby quashed and set aside to the extent the Tribunal has allowed deduction under section 10B of the Income Tax Act, 1961 in respect of BFX-P. C/TAXAP/1283/2018 JUDGMENT 22.The appeal stands partly allowed to the aforesaid extent. (HARSHA DEVANI, J) B.U. PARMAR (A. P. THAKER, J)