ITO WD 3(4), THANE vs. ULHAS GOPAL KARLE, THANE

This appeal by the Revenue is directed against the order of the CIT(A)- 2, Thane dated 16.01.2015 for A.Y. 2011-12.

2. The facts of the case, briefly, are as under: - 2.1 The assessee, Prop. M/s. Organochem Products (HP) based at Village Ambota, Dist. Solon, Parwanoo, Himachal Pradesh is engaged in the business of manufacture and sale of nutritional food supplements, agro products, veterinary feed supplements, etc. For A.Y. 2011-12 the assessee filed his return of income on 29.09.2011 declaring income of `12,70,164/- after claiming deduction of `94,43,597/- under section 80IC of the Income Tax Act, 1961 (in short 'the Act'). The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 02.01.2014 wherein the assessee’s income was determined at `1,07,13,762/-, in view of the Assessing Officer (AO) disallowing the Shri Ulhas Gopal Karle assessee’s claim for deduction of `94,43,597/- under section 80IC of the Act, as he was of the view that the activities carried out by the assessee in its unit at Himachal Pradesh did not amount to manufacturing activity as envisaged by the provisions of section 80IC of the Act and the business carried out in its Unit at Himachal Pradesh was due to the re-construction of its already existing business at Badlapur Unit. 2.2 Aggrieved by the order of assessment dated 01.01.2014 for A.Y. 2011- 12, the assessee preferred an appeal before the CIT(A)-2, Thane. The learned CIT(A) allowed the assessee’s appeal vide the impugned order dated 16.01.2015, by holding that, since the unit at Parwanoo, Himachal Pradesh was carrying on ‘manufacturing activities’ and also that this unit was ‘not set up by reconstitution/splitting up of the existing business of the assessee, the assessee was entitled to the deduction claimed under section 80-IC of the Act. 3.1 Revenue, being aggrieved by the order of the CIT(A)-2, Thane dated 16.01.2015 for A.Y. 2011-12, has preferred this appeal raising the following grounds: - “

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Thane has erred in allowing the deduction u/s 80IC of the I.T. Act, overlooking the fact that the conditions laid down in Section 80IC of I.T. Act are not satisfied by the assessee.

2. The appellant prays the order of the Ld. CIT(A)-2, Thane may be vacated and that of the Assessing Officer be restored.

3. The appellant craves leave to add, amend or alter any ground/grounds, which may be necessary.” 3.2.1 From a perusal of the ground raised (supra), we find that the only issue before us for adjudication in this appeal is whether or not the assessee is entitled to be allowed deduction claimed under section 80-IC of the Act. In this regard, we have heard both parties in the matter and it has been fairly agreed to that this issue has been considered by a Coordinate Bench of the Tribunal in the assessee’s own case for assessment years 2009-10 and 2010-11 and the Coordinate Bench in its order in and 973/Mum/2014 dated 08.10.2015 has decided this issue in favour of the assessee, i.e. that the assessee was entitled to be Shri Ulhas Gopal Karle allowed deduction under section 80IC of the Act since the Unit at Parwanoo, Himachal Pradesh was carrying on ‘manufacturing activities’ and also that ‘this unit at Parwanoo was not set up by reconstruction/ splitting up of the existing business of the assessee’. In its order (supra) the Coordinate Bench has decided the issue as under: - 2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee, an individual, is a proprietor of M/s. Organochem Products (HP) at Parwanoo in the state of Himachal Pradesh. The concern of the assessee is engaged in manufacturing and sale of nutritional food supplements, agro products and veterinary feed supplements, etc. The assessee claimed Rs.2,55,90,230/- as deduction u/s 80IC of the Act, in respect of profit earned from manufacturing activities. The ld. Assessing Officer disallowed the claimed deduction on following grounds:- (a) That there is no manufacturing activity carried out by the assessee as the assessee is merely mixing up the ingredients/raw material. (b) The enterprise is formed by splitting up or reconstruction of an existing business and thus, has not fulfilled the conditions provided for claiming deduction u/s 80IC of the Act. In view of the above, the ld. Assessing Officer disallowed the claimed deduction u/s 80IC of the Act by observing that the assessee is merely mixes various ingredients, required for final products, with the help of machineries and the final product/finish product is filled in pouches, thus, no manufacturing process in involved, thereby the assessee is not entitled for the claimed deduction. 2.2. On appeal before the ld. Commissioner of Income Tax (Appeals), the claim of the assessee was allowed and the whole process was held to be manufacturing, against which the Revenue is aggrieved and is in appeal before this Tribunal. Since, identical issues are involved in both the appeals, therefore, these can be disposed off by this common and consolidated order. Before coming to any conclusion, we are expected to analyze the process adopted by the assessee, which is reproduced/ summarized hereunder:-

The above process of the assessee needs analysis which is further elaborated as under:- 1) "Naturamore Protein supplement (Vanilla Flavour)" "These materials are charged in the ribbon blender and mixed thoroughly for about 30 minutes to get a uniform Premix. " "Excipients like maltodextrin, soya protein isolate, premix, sugar are weighed using blalance, as per the formula. " "Weighed Excipients are charged in the blender and mixed thoroughly, 15 minutes in each direction (total 30 minutes)." "Sieved blend is then sent to packaging line where it is filled manually in pouches and weighed as per requirement."

Shri Ulhas Gopal Karle 2) "Gayatri 's Aloevera Juice (non fibrous) Manufacturing process no.1 " "The mixture is mixed thoroughly for 20 mins with a homogenizer so that the powders dissolve completely in the water" "1 kg of Aloevera 200 x powder ie. Spray dried aloevera extract is added to the vessel and stirred well with the homogenizer for 20 mins" "The Aloevera juice is then filled manually in plastic bottles, foiled by heat sealing labelled manually, shrinkwrapped in the shrink tunnel, put in master cartons. Cartons are then strapped with nylon tapes and Bopp tapes. " 3) "Gayatri's Aloevera Juice (fibrous) Manufacturing process no.2" "The mixture is mixed thoroughly for 20 mins with a homogenizer so that the powders dissolve completely in the water" "The mixture is then heated for 20 mins at 70 degree C to kill microbes. It is then allowed to cool and then 200g of citric acid are added to it. The mixture is then mixed with a homogenizerfor 20 minutes. " "The fibrous Aloevera juice is then filled manually in plastic bottles, foiled by heat sealing labelled manually, shrinkwrapped in the shrink tunnel, put in master cartons. Cartons are then strapped with nylon tapes and Bopp tapes. " 4) "Herbomineral powder for pets" "The mixture is mixed thoroughly for 20 mins in a ribbon blender" "The blended mixture is then sieved for eliminating any foreign particles and collected in a storage vessel. " "The pouches are ,filled in plastic jars which are labeled manually, shrinkwrapped in the shrink tunnel, put in shipper cartons which are finally strapped with nylon tapes and bopp tapes manually " 5) "Biofit Bio-95 adjuvant" "The mixture is mixed thoroughly for 30 mins with a homogenizer so that the material gets dissolve completely so as to get a uniform blend" "The blended material is then filled in plastic bottles with a liquid filling machine. The bottles are capped manually and labeled manually" "The bottles are then passed through shrink tunnel and packed in cartons. The Cartons are then strapped manually with nylon tapes and Bopp tapes. " 6) "Biofit cattle feed concentrate (Biofit CFC) "

Shri Ulhas Gopal Karle "These materials are charged in a ribbon blender and mixed thoroughly for about 30 mins to get uniform premix" "Excipients like dicalcium phosphate, herbs, talc and soya powder and premix are weighed using balance, as per formula" "Weighed Excipients and the premix are charged in the blender and mixed thoroughly, 15 minutes in each direction (total 30 minutes). " "The final resultant blend is then collected in storage vessel and sent Jor sieving to eliminating any foreign particles. " "Sieved blend is then sent to packaging line where it is filled manually in printed pouches and weighed as per requirement. " The pouches are then put in shipper cartons which are finally strapped with nylon tapes and bopp tapes manually"

7. The appellant in response to this disallowance has filed detailed submissions on the manufacturing process undertaken by him. Extracts of the submissions are reproduced as under- Input- Manufacturing Process- Output After setting up the manufacturing unit as aforesaid, the assessee actually carried out manufacture/production of items by employing a process which is given in detail (summarized above) Note on Manufacturing Activities 1. The above mentioned finished products are scientifically well balanced formulations and have been widely accepted by several customers as branded products as they have shown excellent results.

Shri Ulhas Gopal Karle 5. The usage of the final product is comprehensive and no single ingredient can give this comprehensive broad spectrum of results which the final product is intended to give.

Shri Ulhas Gopal Karle 2.3. So far as, the contention of ld. DR and also objection of the ld. Assessing Officer that there was no new enterprise was set up by the assessee and old machinery was used is concerned, as mentioned earlier, we are not agreeing with this assertion of the ld. DR, as explained by the ld. counsel for the assessee that earlier product was limited and the assessee was carrying out manufacturing only in one product i.e. nutramore by manually blending and employing two or three workers at a rented factory premises at Badlapur and used to produce 80 Kgs of finished product per day. That unit was closed down in the year 2006 and all the assets were scraped, possession of the factory premises was handed over to the landlord and thereafter new unit was set up on an industrial plot at Parwanoo (Himachal Pradesh) after obtaining necessary fresh licence form the State Government. The entire staff was newly recruited and neither any staff/machinery from the old unit was transferred to the new unit at Parwanoo. It was explained that in the new unit, the final product is produced around 600 kg per day. Except for arguing that old machinery was used, no evidence was produced either before the ld. Commissioner of Income Tax (Appeals) or before this Tribunal by the Revenue evidencing that any old machinery was used, therefore, we find no substance in the assertion of the ld. Assessing Officer/DR, thus, from this angle also, the Revenue has no case at all. 2.4. So far as, the general tests for manufacture/ production are concerned, we find that manufacturing and processing are not clearly demarcated field. The test of manufacture lies in the answer to the question whether what is processed or produced as end product is commercially known as a different product from the material out of which it was so produced. Therefore, if the product has a different name and identified by the buyers and seller as a different product and is sold as a different product from its raw material one can say that it is a manufactured product. The case of the assessee find support from the ratio laid down in the case of R.M. Chemicals Pvt. Ltd. (ITA No.111/Indore/2012) (Assessment Year 2003-04) order dated 11/05/2012 (wherein, one of us i.e., Judicial Member, is signatory to the order). The relevant portion from the aforesaid order is reproduced hereunder for ready reference:- “3.5 For claiming deduction u/s 80IB of the Act, as per subsection (2), the any industrial undertaking has to fulfil the conditions mentioned in the section. As per sub-clause (iii) the article so manufactured should not be in the list of the Eleventh Schedule and the product should be from a small scale industrial undertaking or an industrial undertaking referred to in subsection (4). On Perusal of record, undisputedly, from the inception stage itself, the assessee was registered as a small scale industry by the Director of Industries on 26.6.1995 (page 32 of the paper book) and continued as such as is evident from acknowledgment dated Shri Ulhas Gopal Karle 15.4.2010 (paper book page 52), therefore, this condition of the section is also satisfied by the assessee. 3.6 The dictionary meaning of the two terms i.e. soaps and detergent are also different items. There is a generic unity in these terms and the distinct genus or category present in these terms in their application. Therefore, it can be said that soaps and detergent are two different items and more so detergent is not included in Schedule 11, consequently, deduction should not have been denied to the assessee. Our view is fortified by the ratio laid down in the case of General Marketing & Mfg. Co. Vs. State of Tamil Nadu; 86 SCT 434 (Mad.), Amar Polyfab Pvt. Ltd. V.ACIT(2003) 1 SOT 426 (Chd.). It is pertinent to mention here that the word synthetic detergent was omitted from the 11th Schedule w.e.f.1982. In view of these facts, the assessee is eligible for deduction u/s 80IB of the Act. The appeal of the assessee is allowed.” 2.5. Now, we shall deal with the issue of manufacturing with the help of certain cases which are analyzed hereunder:- i. Ms Delna Rushtam Boyce (2009) 318 ITR 455 (AAR) New Delhi, wherein the assessee was deriving profit from business of squeezing of juice from fruits and vegetables and etc was eligible for deduction u/s 80IB of the Act to be holding the same to be manufacturing. ii. Identically Esquire Transland Industries 344 ITR 308 (Mad.), wherein, conversion of electric steel in to lamination was held to be manufacturing for the purposes of section 80IB of the Act. iii. Likewise, Hon’ble Gujarat High Court in Innovative Industries (2012) 207 taxman 189 (Guj.) held that process undertaken by assessee in producing air freshener would amount to manufacturing. iv. In CIT vs Business information processing services (2012) 345 ITR 548 (Raj.) held that computer data processing and sale of computer stationery amounts to manufacturing. v. The Hon’ble Punjab & Haryana High Court in CIT vs HSED Corporation Ltd. held that activity of manufacturing of voter identity card amounts to manufacture. vi. Likewise, in CIT vs Zainav Trading pvt. Ltd. 333 ITR 144 (Mad.) conversion of paper corrugated sheets into paper boxes was held to be manufacturing. vii. Likewise, the Hon’ble Apex Court in CIT vs Vinbros & Company (2012) 210 taxman 252 (SC) held that blending and bottling Indian manufacture foreign liquor would amount to manufacturing. viii. Identically, Hon’ble Apex Court, in CIT vs Emptee Poly Yarn (P.) Ltd. held that twisting of yarn amounts to manufacturing. ix. Hon’ble Madras High Court in CIT vs Balaji Hotels & Enterprises Ltd. 311 ITR 389 held that printing of paper labeles constitutes manufacturing. x. The Hon’ble Apex Court in India Cine Agencies vs DCIT 210 taxman 253 (SC) held that even cutting of jumbo film roles into small marketable sizes amounts to manufacturing. xi. Hon’ble Allahabad High Court in CIT vs Shiv Oil & Dal Mill 153 taxman 127 held that refining of oil amounts to manufacturing. xii. Even, buying tendu lives and tobacco and thereafter making bidi amounts to manufacturing (CIT vs Prabhudas Kishoredas Tobacco Products) 154 taxman 404 (Guj.). xiii. Tobacco curing was held to be manufacturing in CIT vs Premier Tobacco Packers Pvt. Ltd. 284 ITR 222 (Mad.). xiv. Hon’ble Madras High Court in CIT vs P Damodaran (2006) 282 ITR 466 (Mad.) held that cable joining kit is manufacturing. xv. Hon’ble Apex Court in Vijay Ship Breaking Corporation vs CIT 175 taxman 77 held that even ship breaking activity would entitle to deduction u/s 80 HH & 80IA of the Act. xvi. The Hon’ble Karnataka High Court in CIT vs Darshak Ltd. 247 ITR 489 held that conversion of plain glass ware into decorative glass ware amounts to manufacture. xvii. Hon’ble Calcutta High Court in Addl. CIT vs A Mukherjee & Company Ltd.113 ITR 718 even held that book publishing activity amounts to manufacturing. xviii. In CIT vs Tata Locomotive and Engineering Company Ltd. (1968) 68 ITR 325 (Bom.) held that assembling works amounts to manufacturing. xix. In CIT vs Kanam Letex Industries Pvt. Ltd. 221 ITR 1 held that conversion of natural latex into preserved latex amounts to manufacturing. xx. In Tarai Development Corporation 120 ITR 342 Hon’ble Allahabad High Court even held that processing of seeds is a process which amounts to manufacture or production. xxi. Hon’ble Apex Court in ITO vs Arihant Tiles & Marvels Pvt. Ltd. (2010) 186 taxman 439 held that conversion of marvels blocks into slabs and tiles amounts to manufacturing. xxii. Likewise, in CIT vs Janakraj Bansal 229 CTR (HP) 89 conversion of lime stone into lime powder was held to be manufacturing activity. xxiii. In CIT vs M R Gopal 58 ITR 598 (Mad.) held that conversion of boulders into stones is a manufacturing. xxiv. Even in Punam Chandra Prem Raj vs CIT 207 ITR 895 (Raj.) High Court held that ginning of cotton is process, thus entitled to deduction. 2.6. There are certain contra decisions also, which are discussed hereunder:- a) Addl. CIT vs Southern Structural Ltd. 110 ITR 164 (mad.) wherein it was held that production of proto type will not amount to manufacturing. b) Hon’ble Apex Court in Tamilnadu State Transport Corporation Ltd. vs CIT 252 ITR 883 (SC) held that tyre retreading is not manufacturing. c) In Appeejy Pvt. Ltd. vs CIT 77 taxman 208 (Cal.) it was held that packing of tea is not manufacturing thus not entitle to relief. d) Foundation work was not held to be characterized as production or manufacture in CIT vs N.C. Buddha Raja and Company 204 ITR 412 (SC) e) In CIT vs Hindustan metal refining works Pvt. Ltd. 128 ITR 472 (Cal.) it was held that galvanization is not covered within the meaning of manufacturing and thus not entitled to the deduction. f) Rearing of Chicks was not held to be industrial undertaking and thus not entitled to deduction in CIT vs Venkateshawara Hatcheries Pvt. Ltd 237 ITR 174 (SC), Indian Poultry vs CIT 116 Taxman 493 (SC) and CIT vs JD Farms (2010) 187 taxman 151 (Del.) g) In CIT vs Relish Foods 237 ITR 59 (SC) held that processing of Shrimps could not be said to be manufacturing or production. h) Likewise in Bhatsons Acquatic Products vs ACIT 329 ITR 67 (Ker.) held that fish processing does not amount to manufacture or production. i) Likewise in CIT vs Gitwako Pharma (I.)(P) Ltd. (2011) 10 taxman.com 261 (Del.) held that converting raw fish into tinned fish does not amount to manufacturing. j) Likewise preparation of food stuffs/food packet by hotel does not amount to manufacture in India Hotels Company Ltd. vs ITO 245 ITR 538 (SC). k) Likewise conversion of Chicory Roots into Chicory powder was held to be not manufacturing in Sacs Eagles Chicory vs CIT 255 ITR 178 (SC). If the aforementioned judicial pronouncements and the facts available on record are kept in juxtaposition and analyzed with the processing activity done by the assessee, we find that the resultant end product is commercially known differently in the trading world,