Whether when the word 'manufacture' has not been defined, common parlance meaning can be resorted to and Sec 10B benefits cannot be denied - YES: HC

THE issues before the Bench are - Whether the activities of moulding, cleaning, grading and undertaking a detailed line of processing for exporting dried plants and potpourri involves any manufacturing; Whether deduction u/s 10B can be claimed, when the final product was created through an irreversible process giving rise to a product commercially different from the raw materials; Whether in the absence of specific definition of manufacture in section 10B, common
parlance can be relied on; Whether the mere presence of three of the Directors of the company as partners in the assessee firm, by itself, would make the firm as one, split up from the company, although they dealt in different line of products and Whether further when some workers are working both for the company and the assessee firm, it suggests that the firm was formed through splitting of the company. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is a partnership firm and had claimed deduction u/s 10B of the Income Tax Act in respect of the income earned on the export of handicraft items of dried flowers and parts of plants. The assessee is a 100% EOU having three units at Mananjery, Kunrathur and Moonramkattalai. There is also a closely held private limited company in Kolkata, by name, M/s.Dry De Fashions Private Limited, in which three of the partners in the assessee firm are Directors. It is stated that the company also carries on business on the same line, namely, manufacturing and exporting dry flower and potpourri. The assessee submitted detailed process of the manufacturing activity undertaken for export of handicraft items of dried parts of plants. On going through the nature of activity undertaken, the AO observed that the raw materials used as per the assessee's flow chart showed plant parts, sea shells and stone; perfumes, processing chemicals, bleaching and cleaning liquid and bonding materials, glitters and metallic powders. In the background of the nature of activity, particularly in making bouquets, Potpourri, Wreaths, Bunches, Garlands and Hobby bags, the AO came to the conclusion that there was no manufacturing of any goods, to qualify for 100% deduction u/s 10B.

Further, the AO held that the firm was constituted through the division and splitting up of a business already in existence. He held that the workers in the pay rolls of the company were also employees of the assessee firm; and the assets of the company were utilised by the assessee firm. He rejected the contention of the assessee that the assessee was dealing in premium products whereas the company was dealing in base or low category products.

On appeal both the CIT(A) and the Tribunal accepted the contentions of the assessee. Both the authorities agreed that on going through the provisions of Section 10B of the Income Tax Act, there being no definition given to the word 'manufacture', Explanation 4 to Section 10B being added only under the Finance Act, 2003, the law as it existed relevant to the AY alone could be adopted; consequently, in the absence of any definition of the word 'manufacture', the word has to be given a meaning as given in common parlance. They agreed that the final product was commercially different from the ingredients of the ram materials used. Regarding the splitting of the existing business, it was held that the products manufactured by the company and the firm were totally different and the constitution of the firm was made out of capital contribution by partners from their personal funds, the conclusion drawn by the AO was unfounded.

Still aggrieved, the Revenue has filed this appeal before the High Court.

The Departmental Representative contended that the items exported were more of assembling the basic materials procured and in the absence of anything to show that there was manufacturing activity, the assessee was not entitled to any relief. Further, he argued that mere laquering or painting of the plants, by itself, would not result in manufacture.

On the other hand, the AR counter argued that the final product involved detailed manufacturing process like bunching, moulding, cleaning, bleaching, colouring and laquer is applied at a very later stage. Thus the end product is a totally different one from what was purchased as raw material. He further argued that if the nature of activity involved was just cleaning and grading or sizing up and mere processing thereon, then the Revenue must prove the same to test the requirement of law on the issue of manufacture. Regarding the other allegation, the AR reiterated the submissions as raised before the other authorities. He also clarified that the mere existence of some of the partners in the company being the Directors of the firm, per se, would not lead to inference that there was a splitting up of a company to a partnership firm.

Having heard the parties, the High Court held that,

Whether manufacture or not

++ ++ we agree with the contentions made by the senior counsel appearing for the assessee that the process which the assessee had undertaken satisfies the test of manufacture to qualify for relief under Section 10B of the Income Tax Act. As already narrated in the preceding paragraph, the emphasis of the Revenue is that in the absence of any definition under the Act as to what 'manufacture' is, the decision of the Apex Court in CIT V. Tara Agencies would squarely apply. It is contended that every change is not 'manufacture' and every change in an article as the result of treatment, per se, would not result in 'manufacture'. There is no dispute on this broad principle. However, it is not denied by the Revenue that apart from cleaning and grading, the assessee had taken further processing; that what is purchased as raw material and what is exported as a product for export are totally different items. The process that the assessee had undertaken clearly points out the irreversible nature of the final end product from a raw material purchased and given the above said fact, which the Revenue does not deny, we have no hesitation in accepting the contention of the assessee that there was, in fact, 'manufacture';

++ we accept the contention of the assessee in this regard drawing support from the decision of the Apex Court reported in Aspinwall & Co. Ltd. V. Commissioner of Income Tax (Appeals) that the word 'manufacture' has to be understood in common parlance, there being no definition of the word 'manufacture' in the Act. The Apex Court pointed out that if the commodity can no longer be regarded as the original commodity but instead is recognized as a new and distinct article, then the activity of manufacture can be said to have taken place;

Splitting of existing business

++ the Commissioner of Income Tax (Appeals) as well as the Tribunal had looked into the facts of the case and ultimately came to the conclusion that the mere presence of three of the Directors as partners, by itself, would not make the firm as one, split up from the company and both the entities deal in different graded products and they were one and the same while the company dealt with low end products, the assessee deals with high end products. Thus, we do not find neither the presence of the partners not the products dealt with would be of any guidance to decide the issue raised by the assessee. So too the workmen working in the assessee's business and in the company. In the absence of any material to substantiate the contention of the Revenue that the firm was constituted by splitting up of the company, we have no hesitation in rejecting the plea of the Revenue.