IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "D" NEW DELHI
BEFORE SHRI GEORGE GEORGE K. : JUDICIAL MEMBER
AND
SHRI B.C. MEENA : ACCOUNTANT MEMBER
ITA No. 3643/Del/2013
Asstt. Yr: 2009-10
DCIT, Cir 4(1), Vs Legancy Foods Pvt. Ltd.,
New Delhi. C-48, Kailash Apartment,
Kailash Colony, New Delhi.
PAN/GIR No. AAACL 9887 F
( Appellant ) ( Respondent )
Appellant by : Shri S.N. Bhatia DR
Respondent by: Dr. Rakesh Gupta Adv.
ORDER
Per B.C. Meena, A.M:-
This is department's appeal assailing the CIT(A)-VIII, New Delhi's
order dated 28-3-2013 relating to A.Y. 2009-10. The sole effective ground
raised is as under:
"Whether in the facts and circumstances of the case, the Ld
CIT(A) erred in deleting the addition of Rs. 6,58,66,937/- made
by the A.O. by disallowing the claim of the assessee u/s 80IC"
2. Brief facts of the case are that the assessee had set up a unit at Baddi
in Himachal Pradesh for packaging of Horlics, Boost for Glaxo Smithkline
Consumer Healthcare Ltd. The assessee filed its return of income claiming
deduction u/s 80IC of Rs. 6,59,69,287/- @ 100% on the profits of the
eligible business alleging that it was engaged in the activity of
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manufacturing of Horlics & Boost. The AO disallowed the claim of
deduction u/s 80IC, inter alia, by observing that in from 3 CD of the audit
report the nature of business was shown as "rendering services of job work"
(packaging of Horlics, Boost for M/s Glaxo Smith Kline Consumer
Healthcare Ltd.), which was not the manufacturing activity as defined in sec.
2(29BA) of the I.T. Act. In doing so the AO rejected the explanation of the
assessee that the claim was allowed from the starting of business in 2005-06
and in scrutiny assessments for A.Y. 07-08 & A.Y 08-09.
2.1. In first appeal before the CIT(A), the assessee had filed a petition
under rule 46A requesting for admission of additional evidences in the form
of flow chart of manufacturing process, ledger account of M/s Ridge
Construction, copy of certificate of deduction of sales tax, and other
evidences, which were admitted by the CIT(A) vide order dated. 27.02.2013
and called for the remand report from the AO.
2.2. Before the ld. CIT(A) the assessee, inter alia, submitted that:
(i) It had set up its manufacturing unit at Baddi in the state of
Himachal Pradesh which qualifies for deduction u1s 80IC. The
assessee is into this very business since A.Y. 2005-06 & had been
allowed the deduction u1s 801C in respect of its profits derived
from this very industrial undertaking since then in the year of the
profits, so much so that this claim was examined in Scrutiny
Assessment in A.Y. 2007-08 & thereafter the claim was allowed in
Assessment u/s 143(3). Claim was allowed in A.Y. 2008-09 also.
(ii) The assessee is contract manufacturer and has entered into an
Agreement/MOU with M/s Glaxo Smith Kline Consumer
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Healthcare Ltd (OSKCH) since 13.07.2004 according to which
raw-materials for the manufacturing of Energy Drinks namely
Horliks & Boost were to be supplied by M/s GSKCH &
thereafter the assessee appellant would do processing by using its
own Plant & Machinery followed by packing of final products.
The raw-materials supplied by M/s GSKCH and others, are
Skimmed milk powder, whey powder, Fine crystalline sugar, Dry
vitamin premix. Ascorbic Acid which are raw materials for
Horliks. Raw materials supplied for Boostre Fortified Base, Fine
crystalline sugar, Cocoa powder, Cocoa flavor DC 499, Cocoa
flavor DC 497, Vanilla Flavor De 110. These raw materials upon
processing are converted into Horlicks & Boost. Detailed Note on
manufacturing process was filed before the Ld. A.O. during the
course of assessment proceeding together with copy of Product
Process Flowchart which would show the various stages through
which various types of the raw-materials pass & are subjected to
mechanical processing. These evidences are enclosed in the paper
book also.
(iii) The assessee was registered with Central Excise according to
which also, products manufactured by appellant are treated as
manufacturing. A Fresh process flow chart is enclosed explaining
in greater detail the entire manufacturing process and it may be
appreciated that inputs and outputs are different in all respects viz.
technically & commercially. Sec.80IC is available where the
industrial undertaking manufactures/ produces articles or things. It
means that deduction is available if articles or thing is either
manufactured or produced & the articles or things may not
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necessary be manufactured. It may be seen that the physical
properties, chemical properties & commercial properties of the
main raw materials undergo a change after the processing & once
products are manufactured, items of raw-materials can not be
restored to their original positions. That means all the above
properties undergo change to the extent of irreversibility. Final
product is known technically & commercially by different names
than those of the raw-materials. In fact CBEC vide its circular No.
7/90 dated 07.03.1990 has also explained on the basis of the report
of Chief Chemist that when the above said inputs are mixed, a new
product different from raw-material emerges & it can not be
considered as simply re-packing.
2.3. In support of contentions that it was engaged in manufacturing and
production, the assessee had placed reliance on the ratio of decisions in the
cases of:
(i) Arihant Tiles and Marbles (P) Ltd [2010] 320 ITR 79;
(ii) DCIT vs. Benjamin Cheri an (2011)10 ITR (Trib)521
(Chennai);
(iii) ITO vs. Natural Frangrances (2010) 27 Taxmann.com
292(Del); &
(iv) Deepkiran Foods P. Ltd. vs. ACIT, AIT-2013-26-IT AT
(Ahmd.)
2.4. The ld. CIT(A) allowed the claim of deduction u/s 80IC, by deleting
the addition in question, inter alia, observing as under:
"I have considered the submissions of the appellant, findings of
the AO and the facts on record. The remand report of the AO
and the rejoinder filed by the appellant has also been
considered. Perusal of the remand report shows that the AO
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after considering the additional evidences furnished by the
appellant has again held that the appellant was not entitled for
deduction u/s 80IC, since the appellant could not prove that it
was engaged in manufacturing activity.
The main issue involved is regarding the fact that whether the
activity carried on by the appellant was a manufacturing
activity. In order to avail deduction under section 801C, an
assessee has to fulfill the conditions contemplated in the
section, therefore, it is imperative to take note of the relevant
statutory provisions. The relevant part of section 80-lC, reads
as under:
"Special provisions in respect of certain undertakings or
enterprises in certain special category States.
80IC(1) Where the gross total income of an assessee
includes any profits and gains derived by an undertaking
or an enterprise from any business referred to in sub-
section (2), there shall, in accordance with and subject to
the provisions of this section, be allowed, in computing
the total income of the assessee, a deduction from such
profits and gains, as specified in sub-section (3).
(2) This section applies to any undertaking or enterprise,
(a) which has begun or begins to manufacture or produce
any article or thing, not being any article or thing
specified in the Thirteenth Schedule, or which
manufactures or produces any article or thing, not being
any article or thing specified in the Thirteenth Schedule
and undertakes substantial expansion during the period
beginning (ii) on the 7th day of January, 2003 and
ending before the 1st day of April, 2012, in any Export
Processing Zone or Integrated Infrastructure
Development Centre or Industrial Growth Centre or
Industrial Estate or Industrial Park or Software
Technology Park or Industrial Area or Theme Park, as
notified by the Board in accordance with the scheme
framed and notified by the Central Government in this
regard, in the State of Himachal Pradesh or the State of
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Uttaranchal; or
(b) which has begun or begins to manufacture or produce
any article or thing, specified in the Fourteenth Schedule
or commences any operation specified in that Schedule,
or which manufactures or produces 'any article or thing,
specified in the Fourteenth Schedule or commences any
operation specified in. that Schedule and undertakes
substantial expansion during the period beginning
(ii) on the 7th day of January, 2003 and ending before
the 1st day of April, 2012, in the State of Himachal
Pradesh or the State of Uttaranchal; or
(3) The deduction referred to in sub-section (1) shall be
(i) in the case of any undertaking or enterprise referred
to in sub clauses (i) and (iii) of clause (a)or sub-clauses
(i) and (iii) of clause (b), of sub-section (2), one hundred
per cent of such profits and gains for ten assessment
years commencing with the initial assessment year;
(ii) in the case of any undertaking or enterprise referred
to in sub clause (ii) of clause (a) or sub-clause (ii) of
clause (b), of subsection (2), one hundred per cent of such
profits and gains for five assessment years commencing
with the initial assessment year and thereafter, twenty-
five percent (or thirty per cent where the assessee is a
company) of the profits and gains".
Perusal of the section would reveal that subsection (1) of
section 80IC provides a deduction in respect of profit and
gains derived by an undertaking or enterprises from any
business referred to in sub-section (2), while computing the
total income of an assessee. Sub- section (2) has further sub-
sections and in the case of the appellant, the clause applicable is
80IC (2) (b) which provides that assessee has begun or begins
to manufacture any article or thing, which are not specified in
Thirteenth schedule. It means assessee should not manufacture
any article. or thing which is specified in thirteenth schedule.
Apart from this, the activity of manufacture should commence
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between the period 7th day of Jan 2003 and ending on Ist April
2012. It should be at the place notified by the Board in
accordance with the scheme.
The fact which is essential for examining the case of an
assessee about the admissibility of deduction under sec. 80-IC
is whether it manufactures or produces any article or things.
According to the Assessing Officer, expression "manufacture"
has been defined in section 2(29)(B)(a) which read as under:
"(29BA) "manufacture ". with its grammatical variations,
means a change in a non-living physical object or article
or thing,-
(a) resulting in transformation of the object or article or
thing into a new and distinct object or article or thing
having a different name, character and use; or
(b) bringing into existence of a new and distinct object or
article or thing with a different chemical composition or
integral structure ".
The stand of the AO is that the activity carried out by the
assessee was not manufacturing and there was no chemical
change in the composition of the raw material. The appellant
has placed in the written submissions a flow chart exhibiting
the activities carried out by it before producing altogether
distinct saleable commodity which has its own identification in
the commercial world.
In the case of India Cine Agency, Hon'ble Supreme Court has
considered the judgment rendered in the case of Sesa Goa
(supra) and all other decisions on the point which contemplate
the meaning of expression "manufacture" as well as
"production". The relevant discussion made by the Hon'ble
Court reads as under:
"2. As noted above, the core issue is whether activity
undertaken was manufacture or production.
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3. In Black's Law Dictionary (5th Edition), the word
"manufacture' has been defined as, "the process or
operation of making goods or cipy material produced
by hand, by machinery or by other agency; by the hand,
by machinery; or by art. The production of articles for
use from raw or prepared materials by giving such
materials new forms, qualities, properties or
combinations,
whether by hand labour or machine". Thus by process
of manufacture something is produced and brought into
existence which is different from that, out of which it is
made in the sense that the thing produced is by itself a
commercial commodity capable of being sold or
supplied. The material from which the thing or product
is manufactured may necessarily lose its identity or may
become transformed into the basic or essential
properties. (See Dy. CST (Law), Board of Revenue
(Faxes) Coco Fibres [1992J Supp. l SCC 290).
4. Manufacture implies a change but every change is
not manufacture, yet every change of an article is the
result of treatment, labour and manipulation. Naturally,
manufacture is the end result of one or more processes
through which the original commodities are made to
pass. The nature and extent of processing may vary
from one class to another. There may be several stages
of processing, a different kind of processing at each
stage. With each process suffered, the original
commodity experiences a change. Whenever a
commodity undergoes a change as a result of some
operation performed on it or in regard to it, such
operation would amount to processing of the
commodity. But it is only when the change or a series of
changes takes the commodity to the point where
commercially it can no longer be regarded as the
original commodity but instead is recognized as a new
and distinct article that a manufacture can be said to
take place. Process in manufacture or in relation to
manufacture implies not only the production but also
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various stages through which the raw material is
subjected to change by different operations. it is the
cumulative effect of the various processes to which the
raw material is subjected to that the manufactured
product emerges. Therefore, each step towards such
production would be a process in relation to the
manufacture. Where any particular process is so
integrally connected with the ultimate production of
goods that but for that process processing of goods
would be impossible or commercially inexpedient, that
process is one in relation to the manufacture. (See
Collector of Central Excise v. Rajasthan State Chemical
Works [1991) 4 SCC 473) = (2002-TIOL-66-SC-CX).
7. To put it differently, the test to determine whether a
particular activity amounts to "manufacture' or not is:
Does a new and different good 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
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 Ltd.
v. Union of India [J985)33 SCC 314) = (2002-TIOL-27-
SC-CX)."
In the instant case it is observed that the appellant had entered
into an agreement with M/s Glaxo Smith Kline Consumer
Healthcare Limited (GSKCH) for production of "Boost &
Horlics". Raw material was to be supplied by M/s GSKCH. The
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appellant was to provide for necessary infrastructure,
machinery, labour, & suitable storage space for all the material
and finished products. The raw materials supplied to the
appellant were in the form of skimmed milk powder, fine
crystalline sugar, dry vitamin premix, ascorbic acid & other
raw materials for production of Horlics. For production of
Boost the raw materials supplied were Fortified Base, Fine
crystalline sugar, Cocoa powder, Cocoa flavor DC 499, Cocoa
flavor 497, Vanilla Flavor De 110. After undergoing various
manufacturing processes the raw materials are converted into
the final products. The manufacturing process of Horlics
involves two stages which have been described as under by the
appellant:
"Manufacturing process for sweetened milk powder.
Materials are weighed as per manufacturing formula &
transferred from drums into blender through pneumatic
conveying system. Sequence of addition is-half qty of
Skimmed milk powder, whey powder, total qty of Fine
Crystalline sugar, ascorbic acid, Dey vitamin premix,
finally remaining SMP. After conveying above batch is
mixer, mixing is done for 15 Mins. Composite sample is
collected for analyzing vitamin-C. After completion of
mixing, powder is discharged in plastic drums having
polyliner. Afterwards it is transferred to warehouse for
captive consumption. The mixed powder is named as
Part-B or Sweetened milk powder which is further issued
to production for blending with PartJ4. Part-B itself is
not a saleable product.
ii. Manufacturing process of Horlics:
Materials are weighed as per manufacturing formula &
transferred from drums in to blender through pneumatic
conveying system. Sequence of addition is-186kg Malt based
intermediate (Low fat), 186 kg Malt based intermediate (high
fat) followed by 199 kg sweetened milk powder and then after
186 kg Malt based intermediate (low fat), 186 kg Malt based
intermediate (High fat). Post addition of all the material mixing
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is done for 5 minutes. The finished product is discharged &
flows with gravity through screw conveyor into vibro sieve.
Sieved product is passed through metal separation system. After
wards packing is done in Jars & Pouches by Jar Filling
machine From Auto pack and Pouches by Bosch machine.
As regards the manufacture of Boost the two stages involved
are as under:
i. Manufacture of flavored fortified base
Material are weighed as per manufacturing go formula
& transferred from drums into blender through
pneumatic conveying system. Sequence of addition is 575
kg (5 drums) fortified base for Boost, pre-blend of fine
crystalline sugar, cocoa powder & coca flavor DC-499,
COCA FLAVOR dc-497, vanilla flavor DC-l1 0 and 460
kg (4 durms) of fortified base for Boost. After conveying
one batch is mixer, mixing to be done for 1 minutes at 5.5
RPM Composite sample is collected for analyzing BFC.
Afterwards it is transferred to warehouse for captive
consumption. The mixed powder is named as Part-B or
flavored fortified base for Boost. Part-B itself is not a
saleable product
ii. Manufacturing process of Boost:
Material are weighed as per manufacturing formula &
transferred from drums into blender through pneumatic
conveying system. Sequence of addition is- 460 kg Boost,
237 kg flavored fortified base for boost followed by 4.09
kg glucose granules (yellow) & 4.09 kg glucose granules
(orange) and then after 460 kg Boost Base. Post addition
of all the material, mixing is done for 3 minutes. The
finished product is discharged & flows with gravity
through screwconveyor onto vibro sieve (3x3mesh).
Sieved product is passed through metal separation
system.
After wards packing is done in Jars & Poches by jar
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filling machine from auto pack and pouches by Bosch
machine. "
Perusal of the above facts show that the raw materials acquired
by the appellant after undergoing extensive processes which
involve the use of machinery are converted into Horlics &
Boost. There is a distinct change of one object to another for the
purpose of making it marketable. A new product has been
brought into existence which is distinctly different from the raw
materials which are used and is a commercially different
commodity. A different commodity having a distinct name and
character emerges from the raw material after undergoing
various processes in the form of mixing, blending, sieving etc.
at different temperatures. The final product is entirely different
commercially from the raw material used. The chemical
composition has also undergone change. Labour and machinery
have also been utilized for production of the final product. In
view of the above it is clear that the appellant is engaged in
manufacturing and production. The Hon'ble Supreme Court in
the case of CIT vs Oracle Software India Ltd. has held as under:
"10. In our view, if one examines the above process in the
light of the details given hereinabove, commercial
duplication cannot be compared to home duplication
Complex technical nuances are required to be kept in
mind while deciding issues of the present nature. The
term "manufacture" implies a change, but every change
is not a manufacture, despite the fact that every change
in an article is the result of a treatment of labour and
manipulation. However, this test of manufacture needs to
be seen in the context of the above process. If an
operation/process renders a commodity or article fit for
use for which it is otherwise not fit, the operation/process
falls within the meaning of the word "manufacture".
Applying the above test to the facts of the present case,
we are of the view that, in the present case, we are of the
view that, in the present case, the assessee has under
taken an operation which renders a blank CD fit for use
for which it was otherwise not fit. The blank CD is an
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input. By the duplicating process undertaken by the
assessee, the recordable media which is unit for any
specific use gets converted into the programs which is
embedded in the mastiff media and, thus, the blank CD
gets converted into recorded CD by the afore stated
intricate process. The duplicating process changes the
basic character of a blank CD, dedicating it to a specific
use. Without such processing, blank CDs would be unfit
for their intended purpose. Therefore, processing of
blank CDs would be unfit for their intended purposes.
Therefore, processing of blank CDs dedicating them to a
specific use, constitutes a manufacture in terms of section
80IA(12) read with section 33B of the IT Act"
Similarly, in the case of CIT v. Emptee Poly-Yarn P. Ltd.
(supra), the Hon'ble Supreme Court has followed the decision
in the case of CIT vs. Oracle Software India Ltd (supra), and
held in paragraph 8 as under:
"Applying the above test to the facts of this case, it is
clear that POY simpliciter is not fit for being used in the
manufacture of a fabric. It becomes usable only after it
undergoes the operation/process which is called thermo
mechanical process which converts POY into texturised
yarn, which, in turn, is used for the manufacture of
fabric. One more point needs to be mentioned. Under the
Income Tax act, as amended in 2009, the text given by
this court in Oracle Software's case (2010) (1) Scale
425' has been recognized when the definition of the word
"manufacture" is made explicit by the Finance (No.2)
Act, 2009, which states that "manufacture" shall, inter
alia, mean a change in bringing into existence of a new
and distinct object or articles or thing with a different
chemical composition or integral structure. Applying this
definition to the facts of the present case, it may be
mentioned that the above thermo mechanical process
also beings about a structural change in the yarn itself
which is one of the important tests to be seen while
judging whether the process is manufacture or not. The
structure, the character, the use and the name of the
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product are indicia to be taken into account while
deciding the quest ion whether the process is a
manufacture or not".
Perusal of facts on record also show that the appellant was
registered with the excise department wherein it has been
stated by the excise department that the appellant was
engaged in manufacturing. Perusal of the audit report of the
excise department shows that it has clearly been mentioned
that the appellant was engaged in the manufacture of Malt
Based Foods and was falling within chapter 19 of CETA
attracting central excise duty. The Hon'ble Supreme Court in
the case of Arihant Tiles & Marbles Pvt .Ltd. 320 ITR 79
(SC) has observed that when the activity undertaken by the
assessee involves levy of excise duty then to say that the said
activity does not amount to manufacture or production U/S
80lA will have disastrous consequences. It is also pertinent to
note that the appellant had been allowed deduction U/S 80lC
from A.Y. 2005-06 to A.Y. 2008-09 in respect of the profits
by the AO, therefore in view of consistency also following the
decision of the Hon'ble Supreme Court in the case of
Radhaswami Satsang the deduction claimed by the appellant
is allowable. In view of the findings above that the appellant
is engaged in the process of manufacturing and production
and in view of the judicial decisions on the subject discussed
above and also in view of the fact that the deduction has been
allowed to the appellant in the earlier years it is held that the
appellant is entitled to the claim of deduction under the
provisions of section 80lC. The disallowance made by the AO
is deleted."
3. We have considered rival submissions of both the sides and have gone
through the entire material available on record. The assessing officer
disallowed the claim of deduction u/s 80IC by observing that assessee was
not engaged in manufacturing activity. Therefore, the main issue involved is
whether the activity carried on by the appellant was a manufacturing
activity. To examine whether the assessee had to fulfill the conditions
15
contemplated u/s 80IC, it is imperative to take note of the relevant statutory
provisions. Sub-section (1) of section 80IC provides a deduction in respect
of profit and gains derived by an undertaking or enterprises from any
business referred to in sub-section (2), while computing the total income of
an assessee. Sub- section (2) has further sub-sections and in the case of the
assessee, the clause applicable is 80IC (2) (b) which provides that assessee
has begun or begins to manufacture any article or thing, which are not
specified in Thirteenth schedule. It means assessee should not manufacture
any article. or thing which is specified in thirteenth schedule. Apart from
this, the activity of manufacture should commence between the period 7th
day of Jan 2003 and ending on Ist April 2012. It should be at the place
notified by the Board in accordance with the scheme.
3.1. Admittedly the assessee was registered with the excise department. In
the audit report of the excise department the assessee has been shown to be
engaged in the manufacture of Malt Based Foods, falling within chapter 19
of CETA attracting central excise duty.
3.2. In our considered opinion the ld. CIT(A) in coming to the conclusion
that assessee was engaged in the activity of manufacturing and production,
eligible for deduction u/s 80IC, has drawn support from various judicial
pronouncements and elaborately taken into consideration the facts of the
case. It is also not disputed that assessee has already been allowed deduction
u/s 80IC in earlier years from A.Y. 2005-06 to A.Y. 2008-09. No change in
facts for the assessment year in question has been brought on record. In this
view of the matter we see no reason to interfere in the order of CIT(A) on
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the issue in question. Accordingly, order of CIT(A) is upheld.
4. In the result, revenue's appeal is dismissed.
Order pronounced in open court on 22-08-2014.
Sd/- Sd/-
( GEORGE GEORGE K. ) ( B.C. MEENA )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 22-08-2014.
*MP*
Copy to:
(1) Assessee
(2) AO.
(3) CIT(A)
(4) CIT
(5) CIT(DR)
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