Whether activity of embroidery work on sarees constitutes manufacturing activity as character of saree changes and it does not remain original grey synthetic cloth - YES: ITAT

THE issue is - Whether activity of embroidery work on the sarees constitutes manufacturing activity as the character of saree changes and it does not remain the original grey synthetic cloth. YES is the answer.

Facts of the case

The assessee is a firm engaged in the business of embroidery work on grey synthetics cloth. It filed return for relevant AY. The case of the assessee was selected for scrutiny assessment and notice u/s 143(2) was issued which was duly served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee had claimed depreciation on the plant & machinery. But AO disallowed the claim of the assessee on the ground that it was engaged in the job work activity of embroidery work on the sarees. According to the AO, saree remained saree whether or not the embroidery work being done on the same. Its name and basic features also not changed. The only change effected in it was, in terms of value. Thus, the embroidery work did not constitute any manufacturing activity. On appeal, the CIT(A) allowed the claim of the assessee. Aggrieved Revenue filed appeal before Tribunal.

After hearing parties, Tribunal held that,

++ See Empire Industries Ltd. v. Union of India [1985] In this case, assessee was carrying on business of conversion of Jumbo Rolls of photographic films into small flats and rolls in desired sizes. It claimed deduction under sec. 80-HH and 80-I as well as investment allowance under sec. 32AB. The controversy arose whether conversion of jumbo rolls into small sizes amounts to manufacture or production, eligible for deduction under sec. 32AB or deduction under sections 80-HH and 80-I of the Income-tax Act, 1961. Supreme Court has held that this activity amounts to manufacture or production. Thus, we think it is not necessary to recapitulate and recite all the decision on the construction expression "manufacture". But suffice to say that core of all the decisions of the Supreme Court or High Court is to the effect that broadly manufacture is a transformation of an article, which is commercially different from the one which is converted. It is a change of one object to another for the purpose of marketability. It brings something into existence, which is different from that, which originally existed. The new product is a different commodity physically as well as commercially. The Court also explained broader test to determine whether manufacture is there or not, it is propounded that when a change or series of changes are brought out by application of processes which take the commodity to the point where, commercially, it cannot be regarded as the original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process. Thus, in our opinion, the moment the assessee has carried the embroidery work, the character of sari had changed. It does not remain the original grey synthetic cloth. It has its independent market and value in the market other than the grey synthetic cloth. Thus, the AO failed to appreciate this aspect. We further, find that the First Appellate Authority has appreciated the controversy in right perspective as well as followed the order of the ITAT, wherein, it has been held that the embroidery work is an activity of manufacture. In view of the above discussion, we do not find any merit in the appeal of the Revenue. It is dismissed.