C I T vs. MAHESH CHANDRA SHARMA

The revenue has preferred this appeal under Section 260-A of the Income Tax Act, 1961 (in short, ‘the Act’), against the order dated 16.3.2007 passed by the Income Tax Appellate Tribunal, Delhi Bench ‘I’, New Delhi in ITA No.83/DEL/2005 for the assessment year 2001-02, proposing to raise following substantial questions of law:- “a) Whether, on the facts and circumstances of the case, the Hon’ble ITAT was right in law in directing the AO to allow deduction under section 80IA whereas the question before ITAT was related to deduction under section 80-IB? b) Whether, on the facts and circumstances of the case, the Hon’ble ITAT was right in law in holding that process of assembling carried out by the assessee is to be understood as amounting to ‘manufacture’ or production of an article?”

The assessee claimed deduction under section 80IB which was disallowed by the Assessing Officer on the ground that assembling/job work done by the assessee did not amount to manufacturing activity, which was a condition for claiming deduction under section 80IB of the Act. The CIT(A) upheld the claim of the assessee, which has been affirmed by the ITAT.

We have heard learned counsel for the parties and perused the record.

In para 2 of the appeal itself, it has been stated that the claim of the assessee was under section 80-IB of the Act. If claim falls under section 80-IB of the Act, the same cannot be disallowed on the ground that Tribunal erroneously made reference to section 80-IA. Question (a) cannot, thus, held to be substantial question of law.

With regard to Question (b), the finding recorded by the Tribunal is as under:- “6. We have considered the rival submission carefully. The crux of the dispute before us is to establish whether or not the assessee is engaged in the manufacture or production of an article or thing so as to qualify for deduction under section 80IA of the Act with respect to unit-I. Before we proceed to dilate on the legal position, it would be appropriate to understand the fact position with regard to the process being carried out in Unit-I by the assessee. The finished product of the assessee is motorcycle wheel. The raw materials/components used are:-

The finished product of the assessee is motorcycle wheel which is supplied to the motorcycle manufacturer Bajaj Auto Limited.

Having noted the process which is involved we have to examine whether the activity carried out by the assessee amounts to manufacture and if yes, then what does it manufacture. From the process noted above, it is seen that the assessee brings together the various raw materials, components and by carrying intermittent processes, assembles them together so that they can work as one equipment which is termed as a motorcycle wheel. The final product which is achieved is a result of an assembling process. The final product is distinct in character and use than each of the components used. This is for the reason that none of the components or the raw material used can partake the character of or be a substitute for the functioning or the commercial value attributable to the final product.

The moot question is whether assembling of different components, which gives rise to an article which is totally different from the parts, amounts to ‘manufacture’ or not? This proposition has been directly answered by the Hon’ble Bombay High Court in the case of Tata Locomotices & Enggg. Co.Limited, 68ITR 325. The following extract of the head note of the judgment is worthy of notice. “The word “manufacture” has a wider and also a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power, and the word “manufacturer” in ordinary parlance would mean a person who makes fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning, which is the narrower meaning, implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus, both the words “manufacture” and “produce” apply to the bringing into existence of something which is different from its components. Whether one takes into account the wider or narrower meaning of the word “manufacture”, assembling of automotive bus or truck chassis from imported parts in a ‘knocked down’ condition, would give rise to an article which is totally different from the parts and would amount to manufacture. This is so even though the component parts from which the automotive chassis is made, retain their individual identity in the whole article which is thus manufactured or produced.”

We may also gainfully refer to the decisions of the Apex Court in the case of Gramophone company (I) Limited v. Collector of Customs, (2000) 1 SCC 549 and UOI v. Delhi Cloth & General Mils Co.Limited, (1963) (SUPP) SCR 586 wherein the expression ‘manufacture’ has been understood to mean transformation of the goods into a new commodity commercially distinct and separate having its own character, use and name whether it be the result of one or several processes.

Considered in this light, factually speaking in the instant case the various parts assembled by the assessee using its machinery results in achieving of a final product. The parts or components utilized by the assessee in its assembling process undergo a transformation and result into a product namely motorcycle wheel, which is distinct and separate commodity in character, name and use than each of the parts or components. Therefore, on the basis of the principles referred to above, in the instant case, it is safe to deduce that the process of assembling carried out by the assessee is to be understood as amounting to ‘manufacture’ or production of an article. Therefore, the profits derived from each activity is eligible for the claim of benefit under section 80IA of the Act.”

It is clear that the assessee assembles wheel from the raw material/components which are Rim, Tyre, Tube, Bearing, Drum, Spoke, Nipple and Coller, by the process which has been discussed in the extracted part of judgment of the Tribunal. ‘Wheel’ is certainly a different item from the components which are used in the process.

Learned counsel for the revenue relied upon judgment of the Hon’ble Supreme Court in Commr. of Income-tax, Orissa v. M/s. N. C. Budharaja and Company, (1993) 204 ITR 412, para 7, to submit that unless the commodity subjected to process of manufacture can be regarded as new and distinct commodity and can no longer be regarded as original commodity, no manufacture was involved. In the present case, the product in question was ‘wheel’ and continued to be wheel and the original commodity continued to be as it was and thus, no manufacture was involved.

We are unable to accept the submission made on behalf of the revenue.

The question whether an activity involves manufacture, has been gone into in several judgments of the Hon’ble Supreme Court including Union of India v. Delhi Cloth and General Mills, AIR 1963 SC 791, para 14, Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes) v. M/s. PIO Food Packers, AIR 1980 SC 1227, Empire Industries Limited v.Union of India, AIR 1986 SC 662 and M/s Ujagar Prints etc. v. Union of India and others ,AIR 1989 SC 516. 10. In absence of any definition in the Act, the word ‘manufacture’ used in section 80-IB has to be given ordinary meaning.

In N.C.Budhiraja (supra), the Hon’ble Supreme Court considered earlier judgment in M/s PIO Food Packers (supra), particularly the observation that where commodity retained substantial identity, no manufacturing was involved. In the said judgment, the question involved was whether manufacturing was involved in construction of a dam so as to avail of benefit under section 80HH(1) of the Act. It was held that the word ‘article’ or ‘thing’ mentioned in section 80HH could not cover dam, bridge, building, road, canal and so on. Construction of dam was, thus, held not to be manufacture. Though the dam comprised of various articles, it was observed that end product could not be held to be an article or thing. Dam was constructed and not manufactured.

Commonly accepted meaning given to the word ‘manufacture’ as held in the judgments of the Hon’ble Supreme Court is when a new and different article emerges having distinctive name, character or use. In the present case, the Tribunal applying the tests laid down in the judgments of the Hon’ble Supreme Court, held that distinct article with distinctive name, character and use emerged. The tests laid down in the judgments of the Hon’ble Supreme Court have to be applied from case to case. The Tribunal has arrived at a finding of fact in the present case.

Question raised by the revenue cannot, thus, be held to be substantial question of law.

The appeal is dismissed. (Adarsh Kumar Goel) Judge (L.N.Mittal) October 31, 2008 Judge ‘gs’ 10