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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Amarjit Singh (JM)
These are appeals by the assessee against respective orders of learned CIT(A). Since the issues are common and connected and appeals were heard together, these are being disposed of by this common order, for the sake of convenience.
The one common issue raised in these appeals is treatment of activity of the assessee as not manufacture or production and consequently denying deduction u/s. 80IB of the I.T. Act and claim of additional depreciation.
We have heard both the counsel and perused the records. At the outset, learned Counsel of the assessee stated that this issue is covered in favour of 2 M/s. Indagro Foods Limited the assessee by the decision of this ITAT in to 7344 /Mum/2008 vide common order dated 26.4.2019 for A.Ys. 2002-04, 2004-05 & 2005-06. Learned counsel submitted that in this decision, the ITAT has elaborately considered the issue and has concluded that the assessee fulfilled requisite requirement i.e. manufacturing and producing an article or thing for the purpose of section 80IB of the Act. Hence, learned counsel pleaded that the issue should be decided in favour of the assessee.
Per contra, learned Departmental Representative submitted that the aforesaid decision of ITAT has not considered the decision of Hon'ble Apex Court in the case of Sterling Foods (1986 AIR 1809) and decision of Hon'ble Delhi High Court in the case of CIT Vs. Gitwako Farma (I)(P) Ltd. (10 taxmann.com 261, ITAT Hyderabad decision in the case of Ventak…….. Vs. ACIT (22 Taxmann.com 234).
In the rejoinder, learned Counsel of the assessee stated that the ITAT has decided the issue after considering a large number of decisions including number of decisions from Hon'ble Apex Court. He further submitted that decisions referred by learned Departmental Representative are not applicable on the facts of the case.
Upon careful consideration, we find ourselves in agreement with the submissions of learned counsel of the assessee. This ITAT in assessee’s own case has considered this issue elaborately and had placed reliance upon catena of case laws. We have gainfully referred to the decision of the ITAT on this issue as under :-
We have considered the rival submission of the parties and have gone through the orders of authorities below. The Assessing Officer disallowed the deduction under section 80IB holding that the assessee's activities undertaken at industrial unit at District-Unnao, State of U.P. does not fall in the category of 'manufacturing' or 'production'. The ld. CIT(A) while deciding the appeal held that in the entire process involved in converting Carcass into meat, there is no difference in between input and the output in the name, character and use. Merely deployment of considerable capital outlet, sophisticated machinery and engagement of skill labour, no significant
3 M/s. Indagro Foods Limited degree of value addition to the end-product. The process carried out by assessee does not result into different marketable product. We have noted that the ld. AR of the assessee has explained that the end-use product manufactured by assessee is distinct and entirely different from the original raw-material (Buffalo's Carcasses), which has been discarded by ld. CIT(A) holding that assessee is not carrying or manufacturing or producing of articles or things. The ld. AR has also explained that in integrated industrial undertaking the assessee is manufacturing the frozen boneless buffalo meat, frozen and dried inedible products, meat and boneless meal, tallow and gel bone chips. The products are manufactured from buffalo carcasses received at assessee's factory/establishment. The various product manufactured by assessee at different and distinct end use. The product manufactured by the assessee is separate and independent marketable product. The end-use product is used for human consumption, frozen/dried cartilages for Pharma Industries, Meat and Bone Meal for Poultry Industry, Tallow for Soaps/Lubricants/Textiles/Industries and Gel-bone Chips for Gelatine Industry. The Veterinary Doctors check prescribed health perform prescribed health checks of Buffalo Livestock at the approved slaughter Houses. After ante-mortem inspection under the supervision of assessee company personnel and the Buffalo Carcasses cleared by Veterinary Doctors on post- mortem inspection by sellers at the Chiller plant in the factory. Carcasses mean meat with bones, fats, tissues and inedible portions, cartilages; tendons etc. produce at the Slaughter House activity. We have noted that the ld. AR of the assessee has explained the different stage of process for converting the Buffalo Carcasses for end-use of consumption not only for human need but also for the various industrial purposes. We have also noted that certain postmortem changes also take place in the muscles during the chilling activity like (i) Rigor Mortis, (ii) Tenderization, (iii) Water Holding Capacity, (iv) Fatty Acids, (v) Colour, (vi) Shrinkage & (vii) Microbiological Composition. The aforesaid activities in the chiller and the control postmortem changes during the course of these activities complete the process of conversion of muscles in the Carcasses into meat. We have also noted that chilled Carcasses are subject to three different manufacturing processes with deboning, for the production of (i) Frozen Boneless Meat, (ii) Chilled Vacuum Packed Meat and (iii) Minced Meat. During the deboning activity Costal Cartilages which are small bent bones like cartilages from ribs, Shoulder Cartilages are collected. The ld. AR explained that by passing through all the aforesaid activities, the assessee is actually producing various products which are commercially radically different from the raw material used and which are actually sued and consumed in different industries. A new and different and distinctive names, characters and uses have emerged as a result of the above activities. The Assessing Officer discarded the contention of assessee without discussing the production activities at different stage undertaken by the assessee. We have further noted that the facts brought in our notice and different activities undertaken by assessee are not disputed by ld. DR for the revenue, while replying the submission of ld. AR of the assessee. The assessee has also filed copy of the order 30 dated 22.08.2008 (for I/ Year 2003-04) passed under section 9(2) read with section of U.P. Trade Tax Act, passed by Dy Commercial Tax Unnao, U.P. wherein the assessee is recognized as manufacturer and its business is for 4 M/s. Indagro Foods Limited manufacture and sale of food stuff and its by product is hides, MBM and tallow.
To sum up, we find that in the instant case the "Classification of Industries by NSS and Revised Classification by CSO, Ministry of Planning" indicating the activity of the assessee under the broad head "Manufacture of food products". Also, the Central Sales Tax (CST) and Bombay Sales Tax (BST) registration certificates indicate the nature of business as "manufacture". Also, the classification of meat products as excisable is shown under Excise Tariff List. The Central Excise Registration Certificate indicates that the company is registered for manufacturer of excisable goods. In the order u/s 9(2) read with Section 30 of the UP Trade Tax Act, passed by the Deputy Commissioner (Assessment) dated 22.08.2008, it is held that the assessee dealer is manufacturer and its business is for manufacture and sale of food stuff. Also it is held therein that the processed frozen food stuff was manufactured and ultimately sold.
The Hon'ble Supreme Court in DCIT Sale Tax vs. A.B. Ismail (supra) held that the slaughter of the animals and their conversion into meat is the consequence of consumption of the animals in the legal sense. In such conversion, a process of manufactures can also be inferred. Lifeless meat is by any standard 'other goods', different from (Goat and Sheep). Further, the Hon'ble Apex Court in DCIT Sale Tax vs. K.M. Mohammad Ali (supra) by following the decision of A.B. Ismail (supra) held that lifeless meat is different from the Goat and Sheep for the purpose of purchase tax under section 5A of Kerala General Sale Tax Act.
The Hon'ble Kerala High Court in into meat by slaughtering does not involved any manufacturing process, the Hon'ble High Court while relying upon the decision of Supreme Court in A.B. Ismail (supra) held that it can no longer be contended that Sheep, Goat and Pig on the one hand and the meat of the said live stock obtained after slaughtering than are one and the same commodity.
14. The Hon'ble Supreme Court in CIT vs. Emptee Poly-Yarn (P.) Ltd. (supra) held that Partially Oriented Yarn (POY) by using Thermo Mechanical Process, which converts POY into texture yard amounts to manufacture in term of section 80IA. The Hon'ble Apex Court further held that the definition of the word 'manufacture' is made explicit by 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 article 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 bring 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 product are indicia to be taken into account while deciding the question whether the process is a manufacture or not.
5 M/s. Indagro Foods Limited
15. The Hon'ble Apex Court in Aspinwall and Co Ltd Vs CIT (supra) held that the process is manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which results in the production of a commercially different article. If a commercially different article or commodity results after processing, then it would be a manufacturing activity. The assessee after processing the raw berries converted them into coffee beans which is a commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity.
The Hon'ble Apex Court in CIT vs. Hindustan Petroleum Corporation Ltd. (supra) while considering the question of law "whether bottling of LPG, as undertaken by the assessee, is a process which amounts to 'production' or 'manufacture' for the purposes of Sections 80HH, 80-I and 80-IA of the Act?; and if so, whether the respondents/assessees are entitled to claim the benefit of deduction under the aforesaid provisions while computing their taxable income". The Hon'ble Court held that the when bottling activities at the assessee's' plants, LPG is stored in cylinders in liquefied form under pressure. When the cylinder valve is opened and the gas is withdrawn from the cylinder, the pressure falls and the liquid boils to return to gaseous state. This is how LPG is made suitable for domestic use by customers who will not be able to use LPG in its vapour form as produced in the oil refinery. It, therefore, becomes apparent that the LPG obtained from the refinery undergoes a complex technical process in the assessee's plants and was clearly distinguishable from the LPG bottled in cylinders and cleared from these plants for domestic use by customers. It may be relevant to point out that keeping in view the aforesaid process; the Tribunal arrived at the specific findings in support of its decision, which are (a) There was no dispute that the LPG produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety. (b) LPG bottling was a highly technical and complex activity which requires precise functions of machines operated by technically expert personnel. (c) Bottling of LPG is an essential process for rendering the product marketable and usable for the end customer. (d) The word 'production' has a wider connotation in comparison to 'manufacture', and any activity which brings a commercially new product into existence constitutes production. The process of bottling of LPG renders it capable of being marketed as a domestic, kitchen fuel and, thereby, makes it a viable commercial product.
17. The co-ordinate bench of Tribunal in ITO vs. Shri Swasan Chemicals (M) P. Ltd. (supra) held that the assessee who was involved in production of specialized polymer alloys in powder form that were commercially different from polymer granules. The process of production itself involved a number of step and process. The result was that final polymer alloys in powder work not the same as original product. The final product and application in various industries. The raw-material could not be substituted for the final product. The production process resulted not only in qualitative changes but also gave the product a distinct appearance and character which was so 6 M/s. Indagro Foods Limited
recognized in the trade. Hence, production process resulted in a commercially different product having specific characteristic and qualities through a series of steps and process. The assessee, therefore, satisfied the requirement that it manufactured or produced an article of things for the purpose of section 80IB of the Act.
Considering the above referred factual and legal discussion, we are of the view that the final product produced by the assessee-company is commercially different from the raw-material (Buffalo Carcasses), the process of production involved a number of steps and processes. The raw- material used by the assessee cannot be substituted by the final product. The production process as explained by assessee resulted not only in qualitative changes, but also a distinct product for end-use of the consumer. Thus, in our considered view, the assessee fulfilled the requisite requirement i.e. manufacturing or producing an article of things for the purpose of section 80IB of the Act. In the result, ground no.1 of the appeal raised by assessee is allowed.
From the above we find that the ITAT had categorically held that the assessee’s activity falls under realm of manufacture or producing an article or thing. In this view of the act, assessee is entitled to deduction u/s. 80IB for the relevant assessment year. Furthermore, denial of additional depreciation on the ground that the assessee is not involved in manufacturing activity also needs to be set aside in view of the ITAT decision in assessee’s own case as above. Accordingly, we set aside the orders of the authorities below and hold that the assessee will be entitled for deduction u/s. 80IB of the Act and claim of additional depreciation as the assessee’s activity has been held to be coming under the realm of manufacturing or production activity by the ITAT in assessee’s own case.
One issue raised for A.Y. 2006-07 & 2007-08 relates to challenging the reopening. However, learned Counsel of the assessee stated that he was not pressing for this ground. Hence, challenging to reopening for A.Y. 2006-07 & 2007-08 is dismissed as not pressed.
For A.Y. 2009-10 one issue raised relates to disallowance u/s. 14A. In this regard the assessee has submitted proposition that when no exempt dividend income is earned, no disallowance u/s. 14A is permissible.
7 M/s. Indagro Foods Limited Furthermore, he pleaded the proposition that 14A disallowance have also to be limited to exempt dividend income earned.
10. We find that above submission of learned counsel is supported by the decisions from Hon'ble Jurisdictional High Court and Hon'ble Apex Court. Hon'ble Apex court in the case of Maxopp Investment Ltd vs CIT, (Civil Appeal 104-109 of 2015 dated 12.02.2018) has confirmed the decision of Hon'ble P&H High Court in the case of State Bank of Patiala, wherein disallowance u/s. 14A was limited to dividend income earned. Furthermore, Hon'ble Jurisdictional High Court in the case of Ballarpur Industries Ltd. (Income Tax Appeal No. 51 OF 2016 dated 13.10.2016) have affirmed the proposition that when no exempt dividend income is earned no disallowance u/s.14A is permitted. The ITAT Special Bench in the case of Vireet Investment has also taken the same view. Accordingly, we hold that disallowance u/s. 14A should be limited to exempt income. If no exempt income has been earned no disallowance is called for.
11. One issue raised for A.Y. 2008-09 relates to adjudication of ground relating to disallowance u/s. 36(1)(va) of the Act on account of delay payment of Employees’ Provident Fund but within grace period.
12. We find that this ground was duly raised before learned CIT(A) as ground No. 3 before him. But the same has not been adjudicated. We remit this issue to the file of learned CIT(A) to adjudicate the same.
13. One issue raised for A.Y. 2009-10 is confirmation of disallowance u/s. 50C without considering assessee’s objection to the valuation by the DVO.
14. We find that this issue has been decided by learned CIT(A) by holding as under :-
“The AO has made the addition on the basis of DVO report. The DVO has made the valuation on the basis of circle rate notified by the District Authorities and given 20% weightage for the big size/irregular
8 M/s. Indagro Foods Limited shape/surroundings and having kuccha road approach etc etc. The appellant has also not been able to give any comparable case whereby it could disprove that the circle rates adopted by DVO for valuation purposes. The appellant has merely stated that the rate is higher vis-a- vis ascertained by them from local investigations/inquiry in the neighbourhood. However, no exact instance(s) have been given by the appellant.
Under these facts and circumstances, the valuation made by AO based on the DVO's report is upheld, (which has given the due weightage to adverse factors also as stated aforesaid)”
15. We find that learned CIT(A) has decided the issue against the assessee by holding that the assessee has not been able to give any comparable case which disproves the circle rates adopted by DVO. Now learned counsel has stated that this ITAT in the case of M/s. Frigorifico Allana Ltd. for A.Y. 2009- 10 vide order dated 16.12.2015 has decided upon the sale of adjacent plot and has granted substantial relief to the assessee by observing as under :
Thus, it can be seen that assessee’s Valuation Officer has reported the rate for Plot No. 14/1 at Rs. 272/-per Sq. mtr and for Plot No. 177 at Rs. 261/- per Sq. mtr. The same has been taken by the DVO at Rs. 623/- and Rs. 722/- per Sq. mtr respectively. A perusal of both the Valuation Report shows that none of the report is based on comparable cases being sale deeds in or near the impugned properties. Thus, there is no sale incidence to support the value taken by the respective valuation authorities. No doubt, the DVOs report is based on the circle rate but then the stamp duty is also assessed on the circle rate. So the DVOs report cannot be accepted at its face value. As mentioned elsewhere, the valuation report furnished by the assessee is also devoid of any sample sale in or around impugned property, therefore the value taken by the Valuation Officer also cannot be accepted. 14.1. In our considered opinion, such litigation should come to an end and therefore to put an end to the litigation, the value for plot No. 14/1 taken by the DVO at Rs. 623/- is to be reduced by 40%, the value now should be adopted is Rs. 374/-. Similarly, the value adopted for Plot No. 177 at Rs. 722/- is to be reduced by 35%, the value now should be adopted is Rs. 470/-. The AO is accordingly directed to consider these two values and recompute the Short term capital gains as per the provisions of the law.
In the result, the appeal filed by the assessee in is partly allowed and ITA No. 1442/M/13 is allowed.
9 M/s. Indagro Foods Limited
16. We note that this additional evidence was not available before learned CIT(A) when he was passed the order Accordingly, we deem it appropriate to remit this issue to the file of learned CIT(A) to consider the issue afresh.
In the result, assessee’s appeals are allowed as above.
Order has been pronounced in the Court on 15.7.2019.