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Durandel Foods (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Reported in(1983)6ITD207(Hyd.)
AppellantDurandel Foods (P.) Ltd.
Respondentincome-tax Officer
.....representative, shri s.r. deshpande, on the other hand, contended that the assessee was merely packing horlicks powder supplied to it. this was also done for another party. it was not doing on its own account. it received a paltry amount of 15 and 22 paise per bottle which is probably being sold at about rs. 15 and rs. 20, respectively. he claimed that the small fraction represents the addition made to the value of horlicks by way of packing service. he countered the assessee's claim on the ground that the assessee itself is not a manufacturer, even if packing is considered to be tantamount to manufacturing service. besides, he claimed that packing by itself could never amount to manufacture. he pointed out that horlicks powder, whether it was in bulk in a drum or in a bottle, was.....
1. This is an appeal filed by Durandel Foods (P.) Ltd. of Hyderabad against the order of the Commissioner (Appeals) for the assessment year 1981-82.

2. The assessee is a company engaged in the business of bottling Horlicks. The assessee claimed investment allowance of Rs. 55,000 in respect of some purchase of machinery. This was disallowed on the ground that the assessee was doing merely packing service and that too on account of HMM Ltd. In first appeal, the Commissioner (Appeals) agreed with the ITO. He was of the view that the assessee had not manufactured any article or thing. He also cited some authorities where some actitvities were held to be not manufacture. According to him, the assessee's activity was comparable to those held to be not manufacture.

The assessee has, therefore, come up in second appeal.

3. The learned counsel for the assessee, Shri P. Murali Krishna, claimed that the description given to the assessee's activity as mere packing is an oversimplification. The assessee entered into an agreement with HMM Ltd. for packing malted milk food with the brand name 'Horlicks'. This agreement dated 29-1-1981 contemplates supply of malted milk food in bulk in drums besides bottles, caps, labels, cartons and other packing materials separately. The assessee had only to have his own material for adhesive gum, lined paper tape, talcum power, fevicol, etc. It was for the assessee to pack them in the manner required and supply the same to HMM Ltd. for marketing in the area. It was the assessee who was to be liable under the Central and State law relating to the Factories Act, 1948, the Adulteration Act, the Weights and Measures Act, etc. The assessee had to ensure minimum yield as to the number of bottles per drum supplied. There was a rigid procedure formulae, specifications, standards, and other instructions which were listed in the schedule to the agreement. Such regulations related to ensuring of (1) hygienic conditions by way of cleanliness for the premises and personnel by fumigation, wet cleaning, etc., periodically as specified, and (2) precise control by way of random weighing, first-in-first-out in dealing with the drums, checking for infestation or any other abnormality, checking of bottles, caps, etc., filling in the specified manner and entoletion of weevil infested powder and packing in the prescribed manner, besides sampling test in respect of filled bottles, sample quality control by sending random samples to the quality control office of the supplier at Nabha, proper humidity control in the premises and checking up of the norms regarding the packing standards. The assessee has machinery worth about Rs. 2.5 lakhs and engages its own labourers for packing. The assessee is an industrial establishment for the purposes of the Factories Act and is also liable to excise check inasmuch as excise is being paid at the assessee's end after packing, on the full value of the bottles including the value added by way of packing. The assessee no doubt gets only 14 and 22 paise per bottle depending upon the size, but it has undertaken to bottle a minimum quantity of 16.5 lakh kgs. of bulk powder during a year. It is the assessee's case that the assessee is entitled to investment allowance as an industrial undertaking engaged in the manufacture of an article or thing under Section 32A of the Income-tax Act, 1961 ('the Act'). On behalf of the assessee, a number of authorities were cited and the authorities cited by the revenue were sought to be distinguished.

4. The learned departmental representative, Shri S.R. Deshpande, on the other hand, contended that the assessee was merely packing Horlicks powder supplied to it. This was also done for another party. It was not doing on its own account. It received a paltry amount of 15 and 22 paise per bottle which is probably being sold at about Rs. 15 and Rs. 20, respectively. He claimed that the small fraction represents the addition made to the value of Horlicks by way of packing service. He countered the assessee's claim on the ground that the assessee itself is not a manufacturer, even if packing is considered to be tantamount to manufacturing service. Besides, he claimed that packing by itself could never amount to manufacture. He pointed out that Horlicks powder, whether it was in bulk in a drum or in a bottle, was one and the same physically, chemically and otherwise. 'Manufacture' involves production of a different commodity. It was not so here. He relied upon the authorities cited by the Commissioner (Appeals). He also took us over the decisions on 'manufacture' under central excise, sales tax and income-tax law and cited a number of activities which were shown to be not amounting to 'manufacture'. He sought to distinguish the citations given by the learned counsel for the assessee.

5. The learned counsel for the assessee pointed out that even finishing was considered to amount to manufacture in some cases. He also pointed out that the fact that the assessee did manufacture on behalf of somebody did not disentitle the assessee. He strongly relied upon the decision of this Tribunal in the case of First Leasing Co. of India Ltd. v. ITO [1983] 3 ITD 808 (Mad.) wherein this Tribunal pointed out that investment allowance is granted on the machinery and that it would be allowable even if such machinery had been used by another. The assessee's facts are stronger as the assessee owns the machinery and uses it itself. He further pointed out that the learned departmental representative was not justified in assuming that the value added by packing was limited to the packing charges received by the assessee.

The entire cost of the packing materials should also be considered as value added, at the stage of packing. Packing charges are only one of the ingredients of packing. It is for this purpose that the Central excise awaits packing before excise duty is levied.

6. We have carefully considered the records as well as the arguments.

Section 32A authorises investment allowance on any new machinery or plant installed after 31-3-1976 'in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing ; or in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule'. It is not in dispute that the assessee is a small-scale industrial undertaking as defined in the Explanation to Sub-section (2) of Section 32A. The assessee even otherwise does not produce any of the prohibited items in the Eleventh Schedule. Hence, the entire question whether the assessee would be entitled to investment allowance on the machinery in its business would depend upon the question whether the assessee is an 'industrial undertaking for the purpose of business of manufacture or production of any article or thing'. The assessee has substantial machinery and runs a factory with a number of labourers. The assessee has furnished certain photographs showing a number of labourers engaged in packing. The premises are air-conditioned and there is elaborate and sophisticated machinery employed by the assessee to ensure that there is no contamination or exposure to foreign materials at the stage of packing. It is, no doubt, true that the assessee is engaged only in packing. We can also understand the anxiety of the revenue that packing by itself should not ordinarily be considered as an industrial activity. However, it is not possible to accept the view that the word 'packing' by itself would be a taboo for considering whether the packing activity in any particular case would constitute manufacture or not. The proper course is to consider the assessee's packing activity in the light of the established tests as to what constitutes 'manufacture' and consider whether the assessee is an industrial undertaking which manufactures or produces an article or thing.

7. Fortunately, considerable guidance is available as to what constitutes manufacture. The statute itself does not define 'manufacture'. The Courts have pointed out that the word 'manufacture' has various shades of meaning and ordinarily involves application of some labour resulting in a final product which is commercially different from the article to which the labour was applied. An article is said to be commercially different if it has 'distinct character, name and use after the process to which it is subjected'. Sometimes, the article may remain the same, but it is commercially different as, for example, printed or dyed cloth from the cloth before it was printed or dyed. If a new form or quality is given to a pre-existing article on application of hand labour or machinery, it may well amount to manufacture. A mere assembling of various parts to form a whole may constitute manufacture. Sometimes, a different quality may be ensured by mere process of goods. But, processing does not always mean that there is manufacture. While manufacture involves processing, processing by itself may not tantamount to manufacture. These are propositions on which there is really no dispute between the parties. These propositions emerge in a number of decisions of the Courts in matters of sales tax, central excise and income-tax law. We do not, therefore, consider it necessary to cite all the decisions cited by either party as to general principles as there is really no dispute on these matters. It is agreed that mere processing cannot help a taxpayer to get investment allowance though it may be enough for some other reliefs under the statute.

8. The last of the cases dealing with definition of 'manufacture' was under the Transfer of Property Act, 1882 in the case of Idandas v.Anant Ramchandra Phadke AIR 1982 SC 127 where the Supreme Court mentioned three tests as to what constitutes manufacture while holding that running a flour mill was used for manufacturing process under Section 106 of the Transfer of Property Act, 1882. The three tests were (i) a certain commodity should have been produced ; (ii) the process of production must involve either labour or machinery ; and (in) the end product should have a distinct character, name and use. It quoted with approval a decision of the Calcutta High Court which pointed out that even a manufactured commodity may constitute a material for working it up into a different product as, for example, both a tanner and a shoemaker could be manufacturers though the material processed is one and the same. The Supreme Court also referred to the definition in Shorter Oxford English Dictionary laying stress on deployment of 'physical labour or mechancial power'.

9. However, the application of these accepted principles may give rise to disputes in a particular case. The revenue would like to point out that the preparation of food articles in a hotel, roasting of cashewnuts, blending of iron ore, addition of scent to hair oil and repacking of glucose were some of the activities which were considered to be not constituting 'manufacture' though some of these activities were treated as 'processing'. Great emphasis was laid on the case of Ramesh Chemical Industries v. Union of India 1980 Tax. LR 2327 (MP), wherein repacking of glucose was involved.

10. On the other hand, the learned representative for the assessee would try to show that these activities are not comparable. In the case of preparation of articles of food in CIT v. Casino (P.) Ltd. [1973] 91 ITR 289 the Kerala High Court found that the hotel activity was essentially a trading activity and that manufacture was incidental to such trade. It was under these circumstances that change in form of prepared food from the raw materials did not make the hotel a manufacturer. The other cases rested on their own facts and the definition under the law under which they were considered. As for glucose case strongly relied upon by the revenue, it was pointed out that it was a case of repacking and not original packing as in the assessee's case. This alone, it was claimed, would justify distinction.

Further, it was a case where glucose was available in bulk commercially even otherwise. Furthermore, it was contended that both glucose and preparations thereof, came under the same entry, viz., tariff item IE under the Central Excises and Salt Act, 1944, and that decided the issue.

11. The revenue had also strongly relied upon the DCM case where cut-pieces were considered to be not commercially different from the textiles manufactured by the company. It was claimed that the assessee's case is different as, again, textiles were available for sale before being cut as well. It was pointed out that the Orissa High Court in State of Orissa v. Patel Saw Mill [1976] 37 STC 392, distinguished this case while pointing out that logs cut into pieces would constitute a new article amounting to manufacture.

12. We do find that it is difficult to compare (he facts of one case with those of the other. With the guidance available as to the general law, it is possible to come to a definite conclusion on the facts of the assessee's case.

13. It is a significant fact that Horlicks is not sold except in bottles of specified sizes under the licence obtained by HMM Ltd. for distribution in India of the patented product from Horlicks Ltd., a sterling company. Though this patented malted food made out of milk and barley is sold internationally, it cannot be disputed that it is available only in bottles. Hence, Horlicks powder in drums is not an article which is commercially available. It is not sold in drums anywhere. In fact it cannot be so sold under the licence which HMM Ltd. holds. It is sold only in bottles. Hence, when Horlicks powder in drums is transferred into Horlicks powder in bottles, though the operation involved is only of unpacking of drums and packing the contents in bottles, such operation results in production of a commercially different article. It was not so in the glucose case relied upon by the revenue. Though the glucose case, as pointed out by the learned counsel, turns on other distinguishable facts as well, we do find that it is possible to say, in the assessee's case, that Horlicks comes into commercial existence only after it is bottled. Hence, the assessee's contention that Horlicks in a commercial form is manufactured or, at least, gets produced only at the stage after which it is bottled has to be accepted. It must also be remembered that the assessee employs sophisticated techniques of packing in view of the delicate item involved in handling. The photographs supplied by the assessee bear ample testimony to the claim. The premises are air-conditioned and humidified. Several processes are done to ensure cleanliness at each stage from the stage of opening the drums to the final stage of release of the goods after packing. Some of the processes like entoletion of weevil infested powder are highly technical. Though we would ordinarily agree with the revenue that normal packing and repacking can hardly constitute manufacture, we are unable to say that it does not constitute so in the facts and circumstances of the assessee's case.

The assessee has a factory, labourers and expensive machinery. The labourers operate the machinery. There could be manufacture only by labour or only by machinery. Here there are both. Central excise authorities consider the stage of production to be complete only after packing. In fact, the revenue would have had no misgivings about the granting of investment allowance in case the machinery had been set up and the entire process including packing was completed at Nabha where Horlicks powder is manufactured and put in drums. Could it be different merely because a part of the operation is carried on at Hyderabad ?- No doubt, if the operation is so insignificant or by itself does not constitute manufacture, the assessee would be helpless. We are unable to agree that the value added at Hyderabad has to be judged merely with reference to the remuneration per bottle fixed for the assessee.

Packing involves the addition of entire value of bottles, caps, labels, etc., as it is commercially marketable only after all these steps have been completed. This is the view of the central excise authorities considering when fixing the cost of the excisable article as including the packaging. There cannot be a different view for income-tax purposes even when packaging is taken up independently in the facts of the assessee's case. If Horlicks was being marketed in drums as well, there might have been some difficulty or doubt in accepting the assessee's claim. Since Horlicks is not being marketed in drums, we are of the view that the assessee does manufacture, or at any rate produce, a commercially different article in respect of bottled Horlicks.

14. The only other objection is that the assessee does it for somebody else and not on its own. We do not consider that this is a requirement at all for purposes of relief under Section 32A. Relief is granted on machinery even as pointed out in an elaborate order by the Madras Tribunal in the case of First Leasing Co. of India Ltd. (supra) The assessee's facts are much stronger. The assessee uses the machinery itself. It undertakes manufacturing activity in the view that the assessee's activity constitutes manufacture. We are unable to understand the argument of the revenue that unless the assessee had purchased Horlicks in drums and had sold the bottled Horlicks itself, it cannot be stated that the assessee is a manufacturer. This Tribunal has consistently taken the view that it is enough if the assessee owns the machinery or undertakes manufacture whether on its own or on behalf of somebody else. Similar arguments of the revenue in respect of wealth-tax exemption under Section 5(1) of the Wealth-tax Act, 1957 were rejected by the Madras High Court in CWT v. K. Lakshmi [1983] 142 ITR 656. It was pointed out though in the limited context for the purposes of wealth-tax, where the assessee had to be an industrial undertaking, 'it may not be necessary that the assessee himself should be personally engaged, but it is enough that he employs his own labourers'. It was also held that where the assessee has its own looms, the assessee was entitled to be treated as an industrial undertaking even if the looms were used by others. In other words, what was required was ownership of machinery or engagement of labour by the assessee. In the assessee's case both are available. It is, therefore, an industrial undertaking. Further as pointed out by the Madras Tribunal in the case of First Leasing Co. of India Ltd. {supra), the entire scheme of investment allowance contemplates relief in respect of machinery used in manufacture or production of an article or thing by a small-scale industrial undertaking or any other undertaking not producing the prohibited articles under the Eleventh Schedule. Since we have found that the machinery is used for production of a commercially different article or manufacture thereof, the machinery is entitled to investment allowance. In the view we have taken, it is not necessary for us to consider the further argument in detail on behalf of the assessee that even if the article before and after processing is considered to be the same, it would amount to production of an article or thing though not manufacture thereof.

15. We are, therefore, of the view that the assessee is entitled to investment allowance as claimed. However, the authorities have not gone into the claim in any detail in the view they held in law. Subject to this verification, we hold that the assessee is entitled to the investment allowance.

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