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The Asstt. C.i.T. Vs. National Lamination Industries - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(2007)109ITD181(Ahd.)
AppellantThe Asstt. C.i.T.
RespondentNational Lamination Industries
Excerpt:
1. on account of difference between ld. vice president and judicial member of the income-tax appellate tribunal, ahmedabad bench.ahmedabad, the following question has been referred to me as a third member, under section 255(4) of the income-tax act, 1961: whether, on the facts and in the circumstances of the case, the assessee is engaged in manufacturing article or thing entitled to deduction under section 80ib of the income-tax act, 1961? 2. during the course of hearing, my attention was drawn towards unintentional exclusion of the words "or producing" after the words "manufacture" and before the words "article or thing" in the proposed question. with concurrence of the ld. cit (dr) and the ld. counsels for the assesses, i am of the view that the words "or producing" should be inserted.....
Judgment:
1. On account of difference between ld. Vice President and Judicial Member of the Income-tax Appellate tribunal, Ahmedabad Bench.

Ahmedabad, the following question has been referred to me as a Third Member, under Section 255(4) of the Income-tax Act, 1961: Whether, on the facts and in the circumstances of the case, the assessee is engaged in manufacturing article or thing entitled to deduction under Section 80IB of the Income-tax Act, 1961? 2. During the course of hearing, my attention was drawn towards unintentional exclusion of the words "or producing" after the words "manufacture" and before the words "article or thing" in the proposed question. With concurrence of the ld. CIT (DR) and the ld. Counsels for the assesses, I am of the view that the words "or producing" should be inserted in the proposed question, after the word "manufacture" and before the words "article or thing". Thus the modified question for consideration will read as under: Whether, on the facts and in the circumstances of the case, the assessee is engaged in manufacturing or producing article or thing entitled to deduction under Section 80IB of the Income-tax Act, 1961? 3. The facts giving rise to the above controversy are that the assesses before me in their returns of income for the assessment years under consideration claimed exemption under Section 80IB of the act on the ground that these were engaged in the activity of "manufacture" of transformer core in the specified areas where such exemption was available.

4. Before the Assessing Officer, it was submitted by the assesses that basic raw material for the manufacture of transformer core was Cold Rolled Grain Oriented/Cold Rolled Non-grain Oriented (CRGO/CRNO) Coils.

CRGO coils/sheets were imported, the CRNO sheets were purchased locally. It was explained before the Assessing Officer that assessee's customers are transformer manufacturing concerns, supplying their own design and technical specifications and the assesses, as per their specific requirements manufactured transformer core. It was explained that in the manufacturing of transformer core, a series of processes were involved. When the transformer core is manufactured, the raw material loses its identity and a different identifiable and marketable commodity having different characteristics comes into existence. There was a complete transformation of the raw material into a new product having a different name, form, uses and character. Once the core was manufactured, it cannot be brought back to its original form. It was also explained that the transformer core can be used in the transformer only whereas the CRGO sheets could be used anywhere. A detailed note explaining various processes such as slitting, shearing V-notching, holing, deburring, annealing, core assembling, packing etc. was filed.

Regarding nature and uses of transformer core the literature/write ups from various Indian as well as foreign books and journals were filed.

It was explained that in earlier years, the Assessing Officer himself accepted the claim of some of the assesses that they were engaged in the manufacturing activities and were allowed exemption under Section 80IB of the act vide different Assessing Officer's orders under Section 143(3)/143(1) of the act. In support of their claims, the assessees also filed technical opinions from SAIL, Veer Mata Jijabai Technological Institute (VJTI) and Electrical Research and Development Association (ERDA) who were experts on the subject and were also authorized to give their technical opinion. In all the technical opinions, it was confirmed that the assessees were engaged in the activity of manufacturing of transformer core. In addition to various processes involved in the manufacture of transformer core, the two assesses namely M/s National Lamination Industries and M/s Alfa Lamination Industries were also engaged in additional activity of annealing. A detailed literature was also filed to highlight the activity of annealing and its utility. Reliance was also placed on various case laws and it was claimed that in view of the ratios laid down by various courts, it was submitted that the assessees were engaged in the activity of manufacture of transformer core and were entitled to exemption under Section 80IB of the act.

5. The Assessing Officer did not accept above claim. The perusal of the assessment orders would reveal that though the Assessing Officer accepted that in making the transformer core various processes, as claimed by the assessees, were involved, yet he observed that all these processes would not amount to "manufacture" of the transformer core. He observed that the activity of the assessees in the form of slitting, shearing, V-notching and holding was in the nature of cutting activity.

However, the Assessing Officer admitted that annealing activity and core assembling activity was different activity than cutting. He further observed that annealing processes performed by the two concerns namely M/s National Lamination Industries and M/s Alfa Lamination Industries, though decreases the iron loss of the core and relieves, lamination of plastic and elastic stresses, improves the conductivity and magnetic value of the transformer core, yet it cannot be said that in this process a new product came into existence. He observed that as the exemption under Section 80IB was available to the assessees who were engaged in the activity of manufacture and the assessees were not engaged in the activity of manufacture, the exemption under Section 80IB of the act was not available to them.

6. Aggrieved, by the orders of the Assessing Officers, all the assessees carried the issue in appeal before the ld. CIT (Appeals) who considered various submissions made by the Assessing Officers as well as the assessees. He perused various documents filed before the Assessing Officers as well as the experts opinion filed by the assessees before the Assessing Officers, a copy of which was also filed before him. He also considered the various case laws on which reliance was placed by the Assessing Officers as well as the assessees. Along with the Assessing Officer, he also visited the plants of above mentioned concerns to have proper appreciation of the actual process involved in the manufacture of transformer core. Various observations made by him are given in the order of the ld. CIT (Appeals). These are summarized as under: (1) Registration of the assessees, as manufacturing concern under various other Acts or the Certificate issued by various Institutes were not decisive factors whether the activity of the assessees was of manufacture or not. The issue could be decided considering the facts of the case.

(2) The only case on the very subject was of Jhonson Electric Co. v. Collector of Central Excise , New Delhi. In this case, it was held that the assessee was engaged in the manufacturing activity. The assessees cases were on better footing as these assessees were performing more comprehensive activities than the activities performed by Jhonson Electric Co. (supra). (3) In two cases of M/s National Lamination Industries and Alfa Lamination Industries, the AO while passing the orders has accepted that due to annealing activities there was some structural change in the metal.

These activities increase the iron loss of the core, relieves the lamination of the plastic and elastic stresses and improves the magnetic value of the transformer core. But the present AO has adopted that annealing process does not bring out any structural change in the metal. Admittedly, the present AO has sent his report without verifying as to all the actual effect of annealing which was accepted by the AO who passed the order. Thus after annealing process the quality and structure of the lamination strip used in the transformer core definitely improved and increased.

(4) The CRGO sheets lose their identity to the manufacturing process and a new and different article comes into form which is called transformer core. It is commercially known in different names in the market then CRGO sheets. It is different marketable article compared to the CRGO sheets.

(5) Various cases pressed into the services by the AO were not applicable in these cases of the assessees as in those cases the raw material had not lost its identity even after various processes and no new product had come into existence. But in the case of the assessees the raw material had lost its identity and after various processes a new product having different name had come into existence.

(6) The assessees were engaged in the manufacture of transformer core which was a distinct and commercially different article.

Several cases are given in his order supporting the proposition that the activities of the assessees were manufacturing activity and the assessees were entitled to deduction under Section 80IB of the Act.

6. Being aggrieved, the Revenue carried the matter in appeal before the ITAT. A preliminary objection was raised by the ld. DR to the effect that CIT(A) has not allowed opportunity of further submissions/hearing to the department inspite of a specific request. However, this objection was ruled out by the Bench and there is no difference between the ld. Members on this issue. In the course of hearing before the bench, the ld. DR heavily relied on the statement of facts filed before the Tribunal. He stated that various activities namely testing, slitting, shearing, notching, holing, annealing, deburring, core assembling and packing, performed by the assessees neither brought about any inherent change in the structure or chemical composition of the original commodity nor it brought into existence a new commodity.

He argued that CRGO sheet was also laminated with silicon grains when the same was purchased by the assessees. The assessees only cut it into sheets of different dimensions. Ld. DR also placed reliance on various decisions of Hon. Supreme Court and High Courts in support of the claim that the activities of the assessees did not amount to manufacturing activities.

7. On behalf of the assessees it was submitted that the word "manufacture" has not been defined in the I.T. Act. However, Hon.

Supreme Court and various High Courts in different cases have laid down certain guidelines as to when the activities would amount to "manufacture" and when it cannot be taken to be "manufacture". The reference was made to the decision of Hon Supreme Court in the case of Ashpinwall & Co. Ltd. 251 ITR 323 (SC) wherein it was held that in absence of a definition of the word "manufacture" it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of article or use from raw or prepared material by giving such material new forms, qualities, or combination. If the change made in the article resulted in a new and different article then it can mean the manufacturing activity. Commonly "manufacture" is end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another. There may be several stages of processing and perhaps a different kind of processing at each stage and with each process the original commodity experiences a change but it is only when the change or a series of changes take the commodity to the point where commercially it can no longer be regarded as the original commodity but is recognized as a new and distinct article, that a manufacture can be said to take place. The reliance was also placed on the Corpus Juris Secontum Vol 56 at page 685 and 686 wherein it was held that in determining whether an article is or is not manufacture, or whether a process or operation is not manufacture, one of the important factors is to see the extent of change that has been effected in the original material. While every change in an article is the result of treatment, labour and manipulation, every change is not manufacture. Something more is necessary and the application of labour must be earned out to such an extent that the articles suffer the species of transformation and a new and different article emerges. It was argued that Hon.

Supreme Court in the case of COCO Fibres (1992)(supp) 1 SCC 290 has held that by processes of manufacture something is produced and brought into existence which is different from that which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or become transformed into basic or essential product. It was pleaded that Hon Supreme Court in the case of Kores India Ltd. (2004) 174 ELT 7 has held that manufacture is a transformation of article which is commercially different from the one which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that in manufacture something is brought into existence which is different from that which originally existed in the sense that the thing produced is by itself a commercially different commodity; whereas in the case of processing it is not necessary to produce a commercially different article.

Similarly, Hon Supreme Court in the case of Empire Jute Industries Ltd. Reported in 1985 (3 SCC 314) had observed that to put it differently, the test to determine whether a particular activity amounts to manufacture or not is : Does new and different goods emerged having distinctive name, use and character. The moment there is transformation into new commodity commercially known as a distinct and a separate commodity having its own character, use and name whether it was the result of one process or several processes, manufacture takes place and liability to pay duties arises. The observation of the Hon Supreme Court in the case of N.C. Budhiraja and Co. 204 ITR 412, J.G. Glass Industries 1998 (98 SCC 5) were also relied upon. It was argued that the combined reading of the above Supreme Court decisions makes it amply clear that due to various processes if a different commercial commodity comes into existence or where the identity of the original commodity ceases to exist or where the commodity which is subject to process of manufacture can no longer be regarded as original commodity but is recognized in the trade as a new and distinct commodity, or where there is transformation of an article which is commercially different from the one which is converted or where a new and different goods emerge having distinctive name, uses or character the activity will amount to manufacture. It was pleaded before the Tribunal that in the cases of assessees the raw material was CRGO/CRNO sheets which after various process were converted into transformer core, which has a different name, usage and character. In the commerce and trade circles this core was absolutely commercially different from CRGO sheets.

During various processing the raw material loses its identity and a different identifiable item emerges. Thus all these assessees here were engaged in the manufacturing activities and should be allowed exemption under Section 80IB of the Act.

8. It was also pleaded that the provisions of exemption should be considered liberally. The reliance was placed on the decision of Hon.

Gujarat High Court in the case of Gujarat Alluminium Extrusion (P) Ltd. 263 ITR 453 (Guj) and also Hon Bombay High Court decision in the case of Shipping Scraps Traders 251 ITR 806 (Bom). Hon Bombay High Court while considering the object of enactment of Section 80 HHA and 801 held that the said expression will have to be considered liberally in a broader commercial sense having its object in mind.

9. Reliance was also placed on the experts' opinion of SAIL, VJTI and ERDA as well as literature on various processes including annealing which supported the case of the assessees that they were engaged in the manufacture of transformer core. It was also argued that all the case laws relied on by the Revenue were misplaced as the facts of the assessees were completely different from the facts of the cases relied on by the Revenue.

10. Rival submissions were considered by the Bench. The Bench also perused various documents and literature filed before it. The Bench also took note of the experts' opinion filed by the assessees. The Bench also visited the plant of M/s National Lamination Industries to have a proper appreciation of actual processing involved in making the transformer core. Thereafter a note on various processes was prepared by the Bench which was also sent to the department for its comments.

The Department gave its comments on annealing process and further stated that no comments were required on other processes performed by the assessees. Memorandum note of visit to the plant, duly signed by the Members of the Bench, is part of record.

assessees namely M/s National Lamination Industries and M/s Alfa Lamination Industries were engaged in the activity of manufacturing of transformer core and accordingly the profits earned by them was eligible for exemption under Section 80IB of the Act. The ld. Vice President's observation in the proposed order can be summarised as under: (1) The word "manufacture" has not been defined in the I.T. Act. In absence of the definition of the word "manufacture" it has to be given a meaning as is understood in the common parlance. As per the observations made by the Hon Supreme Court in the cases of Ashpinwall & Co. Ltd. (supra), COCO Fibres (supra), Empire Jute Industries (supra), Kores India Ltd. (supra), N.C. Budhiraja & Co.

(supra), J.G. Glass Industries Ltd. (supra), Lucky Mineral Mart (P) Ltd. 245 ITR 830 (SC), Shipping Scraps Traders (supra), Prabhudas Kishoredas Tobacco Products Ltd. 282 ITR 568 (Guj), if a new and different article emerges from various processes, or where due to various processes the material has been given a new form, quality, property or combination, or where the raw material is transformed into an article which is commercially different from one which is constructed, or where a new and different goods emerge having distinctive name, use and character or where a new commodity commercially known as a distinct and separate commodity having its own character, use and name emerges, it will be a case of "manufacture".

(2) Ld. Vice President observed that the Bench also visited the plant of M/s National Lamination Industries in Daman and prepared a note on the ongoing process in the factory, a copy of which was given to the I.T. Department for its comments. The Department gave comments on annealing processes only and in respect of other processes it is stated that no comments were required.

(3) Ld. Vice President also referred to various literature on transformer core and annealing processes as well as technical opinion from SAIL, VJTI as well as ERDA. These experts' opinion clearly establishes that the assessees were engaged in the manufacture of transformer core.

(4) Ld. Vice President also referred to various cases relied on by the Revenue and observed that ratio laid down in these cases was not applicable to the cases of the present assessees as the facts in those cases were entirely different than the facts of the assessees cases. In the cases of the assessees the raw material lose its identity and a new distinct marketable item emerges whereas in the cases relied on by the Revenue no new and distinct commodity had come into existence even after processing.

(5) The raw material used by the assessees was called CRGO/CRNO coil whereas the product supplied by the assessees to the transformer manufacturers was called transformer core. The end product called transformer core was new and different marketable article having different quality, characteristics due to various processes.

CRGO/CRNO coil loses its existence during the course of various processes. The two products namely CRGO coils and Core Lamination are not only separately classified in the respective commercial market, but also in other legislation like Central Excise, Central and State Sales-tax and Factories Act.

(6) CRGO sheets lose their characters or cutting to particular sizes and design and given structural and qualitative change after annealing process.

(7) The AO himself in the earlier years vide his orders under Section 143(3) and in some other cases under Section 14391) has accepted the claim of the assessees to the effect that these are engaged in the manufacture of transformer core. In this year nothing new has come to the notice of the AO which warranted any reconsideration of the earlier view.

(8) Making of transformer core from CRGO/CRNO coils was manufacturing activity and as the assessees were engaged in the manufacturing activity, the CIT(A) has rightly allowed the relief to them.

(9) The provisions of exemption should be considered liberally keeping in view the object of enactment. Hon Bombay High Court which is a jurisdictional High Court for some of the cases while considering the object of enactment of Section 80HHA and 801 in the case of Shipping Scraps Traders (supra) had laid down the above ratio. Even the Hon Gujarat High Court which is the Jurisdictional High Court for other cases, in the case of Gujarat Alluminium Extrusion (P) Ltd. (supra) expressed the same view. In the cases of the assessees liberal meaning should be applied at the time of giving exemption.

M/s National Lamination Industries and M/s Alfa Lamination Industries.

In other cases also the ld. Vice President, as per separate proposed orders, relied on his observations made in the above two cases and further referred to the technical opinion given by ERDA on the subject which supported the assessees claim for exemption under Section 80IB.He accordingly dismissed the Revenue's appeals, in other cases also.

13. However in all the cases mentioned above, the ld. Judicial Member did not agree with the finding of ld. Vice President to the effect that the assessees were engaged in the activity of manufacture. He was of the view that as the assessees were not engaged in the activity of manufacture, the CIT(A) was not justified in allowing exemption under Section 80IB of the Act. While doing so, the ld. Judicial Member referred to certain cases to explain the meaning of the word "manufacture". He referred to the decision of Hon Supreme Court in the case of Brakes India Ltd. Reported in 1999 (10 SCC 717) by quoting that it will not be safe solely to go by a test as to whether the commodity after the change takes a new name, though in stated circumstances it may be useful to resort to it. This may prove to be deceptive something for it will suit the manufacturer to retain the same name to the end product also. The "character" and "use" test has been given due importance by pronouncement of the Supreme Court. When adopting a particular process if a transformation takes place which makes the product for use of its own which it did not bear earlier then the process would amount to "manufacture". He also referred to the decision of Hon Supreme Court in the case of N.C. Budhiraja & Co. (supra), Ashpinwall & Co. Ltd. (supra), S.R. Tissues (P) Ltd. 107 CTR 437 (SC), Prabhudas Kishoredas Tobacco Product Ltd. (supra) and Delhi Cloth & General Mills Ltd. AIR 1963 SC 791. He held that slitting, shearing, notching holing and deburring, core assembling and packing cannot be held to be the activities of manufacture or production of an article or thing. For taking such view the ld. Judicial Member has relied on the observation made by the Hon Courts in different cases. In para 38 of his order he has quoted the following observations of the Hon Supreme Court in the case of Bake Like HYlam Ltd. (1997) ELT 13 (SC): It is the contention of the Central Excise Department that Industrial Laminates and glass epoxing laminates cannot be considered as electrical insulator, because these sheets are required to be cut in the requisite shape and holes may have to be punched in them before the could be fitted as insulator. However, mere cutting or punching holes does not amount to "manufacture." 14. He also observed that the Hon Supreme Court decision in the case of Gem India Manufacturing Co. (supra) fully supports the case of the Revenue. He referred to the following observations of the Hon Supreme Court in this regard: There can be little difficulty that the raw and uncut diamond is subject to a process of cutting and polishing which yields the polished diamonds but that is not to say that the polished diamond is a new article or thing which is result of manufacture or production.

He also observed that as against the above decision ld. Counsel have pressed into services the test of CEGAT (SB) in the case of Jhonson Electric Co. 1989 43 ELT 274 (Tribunal). He observed that in view of the decision of Hon Supreme Court in the case Bake Lite Hylam (supra), SR Tissues (P) Ltd. 197 CTR (SC) 437 and Gem India Mfg. Co. 249 ITR 307 the decision of CEGAT (SB) being contrary to above Supreme Court decisions cannot be relied upon. He held that the decision of Hon Supreme Court in the case of Bake Lite Hylam (supra) was fully applicable to the assessees cases.

15. Heavily relying on the above ratio, the ld. J.M. observed that process of slitting, shearing, notching and holing done by the assessee on CRGO sheets cannot be termed to be the activity of manufacture or production of an article or thing. Ld. JM also referred to the following observation of Hon Supreme Court in the case S R Tissues (P) Ltd. (supra): The pre-dominant test in such a case is whether the characteristic of the tissue paper in the Jambo Roll enumerated above is different from the characteristics of the tissue paper in the form of table napkin, toilet roll or facial tissue. It will not be safe solely to go by a test as to whether the commodity after the change takes in a new name though in stated circumstances it may be useful to resort to it.... While adopting a particular process if a transformation takes place which makes the product for a character and use of its own which it did not bear earlier then the process would amount to manufacture.

Relying on the above observations, ld. J.M. held that no transformation took place in the case of the assessees. CRGO sheets retained their characteristics even after the activities of cutting, slitting, shearing and v-notching etc. The above ratio laid down by the Hon Supreme Court was fully applicable in the case of the assessees and, therefore, the assessees could not be said to be engaged in the manufacture of transformer core.

16. Ltd. JM also relied on the decision of the ITAT Calcutta (SB) in the case of Shaw Scot Distilleries 76 ITD 89 (cal)(SB) particularly the following observations: Generally manufacture means consumption of one article for production of another but in the instant case, no article or thing is consumed for production of another. Alcohol remains alcohol.

There is only reduction of degree of alcohol content because of addition of water to potable alcohol and stirring it. This again at best can be said to be processing and not manufacturing. There should also be transformation of article or thing if manufacture is involved for the same. But in the instant case no transformation has taken place as alcohol remains alcohol both in the beginning and after processing also. In case of manufacturing the article or thing should be distinct and separate. In the instant case, no new product has come as by-product which can be said as distinct and separate from original one and alcohol remained alcohol with reduced content of alcohol because of addition of water. There is also no change in its basic identity. Generally in the case of manufacture there will be change which is considerable and substantial but in the instant case it is not so.

17. Relying on the above observation of the Bench, ld. JM held that basic characteristic and features of CRGO coils were not changed by the process done by the assessees. There was no considerable or substantial change in the inherent property of CRGO coils. CRGO sheets retain their identity even after they had undergone various processes. Therefore, transformer cores were not new and distinct articles in which CRGO sheets were consumed. He also relied on the following observations of Hon Gujarat High Court in the case of Probhudas Kirshoredas Tobacco Products Ltd. (supra): The test to ascertain whether an activity amounts to manufacture or production of an article or thing have been laid down and reiterated by various decisions of apex court and other High Courts. Broadly, the requirement is that the raw material must be in the first instance, subject to a process of such a nature that it cannot be termed to be the same as the end product after the raw material under goes the process of manufacture.

The ld. JM, therefore, held that as there is no basic change in the characteristics of the raw material and the finished products, the assesses cannot be said to be engaged in the manufacturing activities and held that the CIT(A) was not justified in allowing relief to the assessees.

18. Regarding technical opinions from SAIL, VJTI and ERDA, the Id. JM observed that the issues cannot be decided merely on the basis of opinion given by certain institutes. He observed that even the competence of the person giving opinions was not established. The opinions are mere opinions and no cognizance of the same could be taken. Regarding the order under Section 143(3) and 143(1) in earlier cases when the claim of the assessees were allowed, the ld. JM observed that it was settled law that the principle of res judicata or the estoppel was not applicable to the Income-tax proceedings. In support, the ld. JM has also placed reliance on certain cases mentioned in paragraph 58 of his proposed order.

19. He also observed that the deduction under Section 80IB cannot be allowed on the basis of liberal interpretation. Relying on the decision of Hon Supreme Court in the case of Novapan India Ltd. 73 ELT 769 (SC) in the case of New Shroock Spelling and Mfg. 214 ITR 175 (Bom), in the case of Boot Co. India Ltd. 214 ITR 175 (Bom), in the case of Oudhsagar Milk 222 ITR 726 (Bom) and some other cases, ld. JM observed that as there is no ambiguity in the provisions of the Act, the principles of liberal interpretation in favour of the assessee cannot be applied. He, therefore, held that the assessees do not fulfil the necessary condition of manufacture or production and, therefore, no exemption under Section 80IB was available to them.

20. On account of above difference, the matter has come up before me as a Third Member. The ld. CIT (DR) of the Revenue as well as the ld.Counsels Shri Keshav Prasad, Shri S.N. Soparkar, Shri K.C. Patel and Shri J.P. Shah were heard. While supporting the proposed order of ld.JM, the ld. CIT(DR) Shri Panda submitted that even after various processes done by the assessees there was no substantive change in the basic character of the finished product. Before processing and even after the processing the inherent quality of the raw material continues in the finished product. He also stated that even after the annealing activity there was no quality change in the product. There was no change in the physical form also. Inherent properties continue to be the same.

21. He also relied on various decisions reported in 96 ITD 417 (Ahd), 266 ITR 626 (Mad), 4 SOT 360 (Jd), 285 ITR 84 (Mad) and 283 ITR 486 (Cal) and submitted that as no new item has come into existence the ld.JM has rightly reversed the finding of the CIT(A). He argued that the onus was on the assessees to prove that they were engaged in the manufacturing activities. The assessees have failed to discharge their onus in this regard. He argued that the provisions of the Act were very clear and there being no ambiguity, the question of adopting liberal interpretation did not arise. He heavily relied on the statement of facts filed along with the appeal and also the judicial pronouncements which were pressed into service at the time of arguments before the Bench.

22(a). Mr. Keshav Prasad, ld. Counsel of the assessee has briefly described the factual aspect of the finished product known as CRGO lamination manufactured by the assessees and explained its function and use along with description of raw material known as CRGO and its uses as stated in various treatise of foreign and Indian books and supported by opinion-cumreport by Research Institute known as ERDA being highest authority on the subject along with report of VJTI and SAIL of India both Government recognized institutions.

2. The transformer core Lamination is one of the activity part of transformer and is made of CRGO Lamination from raw material known as CRGO coils and sheets by various engineering process like slitting, shearing, v-notching punching, holing and annealing.

(Reference of technical book page 148 of paper book of M/s Fibro).

3. They are assembled and built to form a transformer core to ensure permeability such as stacking factor, assembly factory, window height and air gap during the process and kept in their optimum threshold. By explicit a priory engineering-cum-manufacturing process based on analysis of final core geometry (Refer part B of last para of ERDA). The main and very important function of transformer core lamination is to carry the magnetic flux linked in a transformer winding (Refer technical page 140 of the paper book of M/s Fibro). In transformer energy is transferred from one electrical circuit to another through magnetic field. The transformer core made of lamination provide magnetic circuit for the flow of magnetic flux mutually linking the electrical circuit (Refer technical book on page 102 of M/s Fibro).

4. The transformer occupies prominent position in the power system being a vital link between the generating station and point of utilization. Since it regulates, restricts and controls power supply from point of generation to point of utilization and the said vital function is carried out by transformer mainly because of transformer core lamination and that is why "transformer core" in power distribution industry is known as heart of transformer.

5. The Cold Rolled Grain Oriented Electrical Steel (CRGO) are iron silicon alloyed, which provides low iron loss and high permeability required for efficiency and economical electrical transformer. CRGO is available in various grades and sizes with superior magnetic properties in a rolling direction. These grain steels are universally used for manufacturing transformer core and lamination.

The CRGO is basically a raw material in form of iron and steel coil/sheet and is used for manufacturing transformer core lamination as a part of transformer and other electrical equipment and appliance and it has its marketable value in metal market.

6. CRGO coil/sheet does not have correct geometrical configuration for being directly used in the transformer core and as such with all its ingredients it can never be used directly as a transformer core lamination as part of transformer unless and otherwise it has undergone various engineering processes as explained. As each and every process individually and collectively contribute to the visible and invisible changes in the material in terms of physical, mechanical and electrical properties (Refer query No 3 of ERDA report and also part B of the last page of ERDA report).

7. Photograph of CRGO basic raw material in their original shape along with final finished product known as transformer core lamination ready to install directly in the transformer without any further process, clearly shows that the two products are totally different and not interchangeable (Refer page 49, 50 & 51 of booklet of Parekh group of companies).

22(b) Ld. Counsel, Shri Keshav Prasad, supporting the proposed finding of the ld. VP submitted that ld. JM in his proposed order has held that slitting, shearing, notching, holing, deburring etc. cannot be said to be the activities of manufacturing or producing an article or thing.

For making these observations the ld. JM has relied on some cases which have been referred by him in his proposed order. He has also heavily relied on the following observation of the Hon Supreme Court in the case of Bake Hylam Ltd. (supra): It is the contention of the Central Excise Department that Industrial Laminates and Glass Epoxy Laminates cannot be considered as electrical insulator because its sheets are required to be cut in the requisite shape and holes may have to be punched in them before they could be fitted as insulator. However, mere cutting or punching hole does not amount to manufacture.

23. He has picked up the words "cutting or punching hole" from the above decision and came to the conclusion that the activity of the assessees were akin to the cutting or punching holes. Shri Prasad argued that though in his proposed order, the ld. JM has put emphasis on the above portion of the decision by underlining them he has not highlighted the subsequent observation of the Hon Court. He argued that ld. JM has completely overlooked significance of the word "mere" used by the court in its order, Hon court had held that "mere cutting or punching holes" does not amount to manufacture. In this case, the issue was as to whether industrial laminates and glass epoxy laminates could be construed as electrical insulator. Hon Supreme Court noted that electrical sheets were already having insulating property and were used as insulator. Thus before the process and after the process the basic characteristic of insulation was present and no new product came into existence. Regarding cutting and punching holes the Hon Supreme Court observed that only because they had to be cut to the requisite shape or a few holes may be required to be punched in them in order that they may be fit into electrical equipments, this could not be taken out of category of electrical insulator. From the observation of Hon Supreme Court it was clear that the activity of cutting and punching holes was not a process of manufacturing activity. The cutting and punching holes was being done so that they could fit in the electrical instruments.

But in the cases of the assessees it was not "mere cutting or punching holes". A lot of other processes were involved in the manufacture of transformer core. The cutting of the sheets or holing process was the process of manufacturing as per the design and technical specification of the customers. Such cutting and punching hole in the case of the assessees was not for the purpose of fitting them into electrical instrument. Thus the ld. JM's reliance on this case was completely out of context.

24. Similarly for supporting his finding the ld. JM has relied on the decision in the case of Gem India Mfg. (supra). In this case the assessee used to purchase uncut diamonds. It used to further cut it and polish it. The question arose as to whether the activity of cutting and polishing could amount to manufacturing or not. Hon Supreme Court held that both these activities did not amount to manufacturing. The ld. JM high lighted the following portion of this judgment and relying on this judgment held that the assessees were not engaged in the activity of manufacture.

There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond. But that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production.

25. While doing so, the ld. JM has overlooked the sentence following the above sentence which reads as under: There is no material on record upon which such conclusion could be reached.

26. From the perusal of the above observation it is clear that there was no material at all to support the claim that the polished diamond was different and new item than the uncut unpolished diamond. But in the case of the assessees, the position was entirely different. In paragraph 59 of his proposed order ld. VP has observed that "there is sufficient material on record to show that transformer core is a new article or thing which is result of various processes of manufacturing." The above finding of the ld. VP has not been controverted or adversely commented by the ld. JM. Therefore, reliance on this case by ld. JM was not of much use. That apart, the finding of Hon Supreme Court was based on the facts of that case. While deciding the issue the Hon Supreme Court had made the following observations before coming to the above conclusion: The Tribunal took the view that it did because in common parlance and commercial raw diamonds are not the same thing as polished and cut diamond. The two are different entities in the commercial world. Though the chemical composition remains the same the physical characteristics of shape and class etc. are substantially different.

It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusion that, either in common or in commercial parlance raw diamonds were not the same thing as polished and cut diamond and that they were different identities in the commercial world.27. The above observation of the Hon Supreme Court makes it abundantly clear that even in common parlance the raw diamond and polished diamonds were the same. There was no evidence that the cut diamond and polished diamonds were not the same entities as uncut and unpolished diamonds. But in the case of the assessees the raw material was CRGO/CRNO sheets. The finished product was transformer core. Therefore, a new distinct identifiable product has emerged due to various processes performed by the assessees. Reliance on this case by the ld.JM was, therefore, misplaced.

28. The ld. JM has also heavily relied on the decision of Hon Supreme Court in the case of S.R. Tissues (P) Ltd. (supra). In his proposed order the ld. JM has quoted the following portion of the order: Tissue paper is base paper which is not subject to any treatment.

The Jumbo Rolls of such tissue are bought by the assessees undergoes process of unbinding, cutting/slitting and packing. It is important to note that the characteristics of the tissue paper are texture, moisture absorption, feel etc. In other words, the characteristics of the table napkin, facial tissue and toilet rolls in terms of texture, moisture, absorption capacity, feel etc. are the same as the tissue paper in the Jumbo Rolls. The said Jumbo roll cannot be conveniently used for household or for sanitary purposes. Therefore, for the sake of convenience the said Jumbo rolls are required to be cut into various shapes and sizes so that they could be conveniently used as table napkin, facial tissue, toilet rolls etc. However, the end use of the tissue paper in the Jumbo roll and the end use of the toilet rolls, table napkin and facial tissues remain the same. The pre-dominant test in such a case is whether the characteristic of tissue paper in Jumbo roll enumerated above is different from the characteristic of the tissue paper.

In this case, the assessee used to purchase tissue paper in Jumbo roll. It used to cut the Jumbo roll in different sizes so that it could be used as table napkin, toilet tissues or facial tissue. The Central Excise Department claimed that it was a case of manufacture.

But the Hon Supreme Court rejected the plea of the department. While doing so the Hon Supreme Court has already indicated the reasoning as to why the cutting of Jumbo rolls in various pieces in the forms of napkin, facial tissues and toilet roll was not manufacturing. The Hon Court also observed that the activity of cutting of the Jumbo rolls was only to facilitate the use of the tissue paper. It was not a part of manufacturing process.

But in the case of the assessees the cutting of CRGO coils was one of the processes of manufacturing along with various comprehensive processes. The use of the raw material and use of the transformer core was completely different. The CRGO sheets can never be used in the transformer. The end product was altogether different in the name, shape, use, characteristics and marketability. Thus reliance on this case by the ld. JM was also misplaced.

of the Tribunal in the case of Shaw Scot Distilleries (supra). In this case, the assessee used to purchase potable spirit from outside. For making Indian made foreign liquor it mixed certain percentage of water, colour and essence. The assessee claimed the above activities to be in the name of manufacturing activity. However, the Special Bench denied the claim of the assessee. While doing so the Bench observed as under: Generally manufacturing means consumption of one article for production of another. But in the instant case no article or thing is consumed for production of another. Alcohol remains alcohol.

There is only reduction of degree of alcohol content because of addition of water to potable alcohol and stirring it. This action at best can be said to be processing and not manufacturing. There should also be transformation of article or thing, if manufacturing is involved for the same. But in the instant case no such transformation has taken place as alcohol remained alcohol both in the beginning and after processing also. In the case of manufacturing also article or thing should be distinct and separate.

In the instant case, no new product has come as a by-product which can be said as distinct and separate from original one and alcohol remained alcohol with reduced content of alcohol because of addition of water. There is also no change in its basic identity. Generally in case of manufacturing there will be change which is considerable and substantial but in the instant case, it is not so.

30. The above observation makes it amply clear that the SB has negated the claim of manufacturing because according to the facts of that case alcohol remained alcohol before and after various processes. Due to various processes there was only reduction in the degree of alcohol.

The Special Bench has given a finding of fact that as prior to manufacturing and after manufacturing there was no change in the name, shape and there was no consumption of raw material, the activity would not amount to manufacture. But in the case of the assessees as mentioned earlier, there was a complete transformation of the raw material into a finished product by which the raw material losses its identity and a different distinct product comes into existence. The reliance by the ld. JM on above case was not right.

31. Similarly, ld. JM has also relied on certain observation made by Hon Gujarat High Court in the case of Prabhudas Kishoredas Tobacco Product Ltd. (supra) in which the Hon High Court observed that to put it differently the final product does not retain the identity of the raw material after it has undergone the process of manufacture. Though the ld. JM has referred to this decision in support of his findings.

However, the observation of the Hon Court supports the assessees case.

In the cases of the assessees the raw material and the finished products were two distinct items having different name, shape, uses or characteristic. Thus this case supports the assessee and not the Revenue.

32. Regarding principle of res judicata it was argued that there was no dispute about the legal proposition. But once the assessment orders in the earlier years were made by the AO and the AOs have accepted the claims that the assessees were engaged in the manufacturing activities, in the year under consideration nothing fresh has come to the knowledge of the AO, principle of judicial consistency should be followed.

33. Regarding liberal interpretation, it was argued that it was not the case of interpretation of the statutes. There was no dispute about the language of the statutes which provide that the assessees engaged in the manufacturing activities alone could claim exemption under Section 80IB of the Act. But the dispute was as to whether various activities performed by the assessee would amount to manufacture or not. The factual position of various processes involved in the manufacture of transformer core, has already been placed before the AO, CIT(A) and the ITAT. The actual activities involved in the manufacture of transformer core clearly establish that the assessees were engaged in the manufacturing activities and, therefore, the question of liberal interpretation did not arise. The observation of the ld. VP in this regard was that even if there were two possible opinions, one favourable to the assessee should be followed. What the ld. VP proposed was that on the basis of detailed notes on the various processes, if there could be two opinions as to whether the same was manufacturing or the same was not manufacturing, one favourable to the assessee should be followed. But as in the instant case, there was no question of interpretation of the statutes, as observed in the proposed order of the ld. Judicial Member.

34. Regarding technical opinions of various institutes it was argued that the ld. JM had sidelined the experts' opinion on the ground that these were only opinion and the issue could not be decided on the basis of opinions and secondly the competence of the persons giving opinion was in doubt. It was argued that the institutions were authorized to give technical opinion and once the same was available, the same could be rebutted only by another experts opinion. All the technical opinions support the cases of the assessees that they were engaged in the manufacturing activities and there being no contrary opinion, such opinion are required to be taken into consideration before deciding the issue.

35. Regarding annealing process it was argued that by such process there was change in the characteristic of the product and the AO himself in his order has accepted this proposition. Contrary comments by the ld. JM, it was submitted, be not accepted as these are not supported with any evidence. While concluding the ld. Counsel pleaded that the order of the ld. VP should be upheld.36. The ld. Counsel Shri S.N. Soparkar argued that ld. JM has picked up some sentences from the observations of the Hon Courts and has emphasized them out of context. He has not considered the entire observations of the Hon Courts. He argued that it was settled law that Judgment as a whole has to be considered and should not be read in piecemeal. A judgment is not to be read as a statute. The judgment must be considered as it has been rendered in accordance with law. For the above proposition Shri Soparkar relied on the decision of Hon Supreme Court in the case of Ramesh Chand Taga v. Rameswari bai . Hon Supreme Court in the case of P.S. Sathappan v.Andhra Bank Ltd. observed that judgment of the court must be read as a whole and the ratio therefrom is required to be culled out from reading the same in its entirety and not only part of it. Similar view was taken by the Hon Supreme Court in the case of N.K.Rajgaria v. Mahavir Plantation Ltd. where the court observed that an order of the court of law in particular the consent order must be read in its entirety for the purpose of understanding its true intent and purposes. He stated that if the judgment relied on by the assessees are seen as a whole there was no doubt that the assessees were engaged in the manufacturing activities. He also argued that the opinion of the expert was also before the ld. JM and he should have given his opinion on the merits of the opinion rather than ignoring it as of no value. He supported the order of the ld. VP in its entirety.

37. Shri K.C. Patel, ld. Counsel stated that the Bench has visited the plant of one of the assessees and had prepared a note for making the proper assessment of the actual activities involved. The note was also given to the department. Thus this document was a very vital document and should have been made the part of the order by way of annexure. He argued that this report was a piece of evidence and admissible under the Evidence Act and has evidentiary value even as per Civil Procedure Court.

38. Shri J.P. Shah, ld. Counsel stated that the ld. JM was not justified in not considering the experts opinion on the subject. He relied on the decision of Hon Supreme Court in the case of Nirlan Synthetic Fibres and Chemicals Ltd. 130 ITR 14 wherein the documentary testimony of the experts in the field was taken into consideration before deciding the issue. He also supported the finding of the ld. VP entirely.

39. I have given careful thought to the proposed orders of ld.Brothers, facts and circumstances of the case, the arguments advanced by rival parties, the case laws relied upon by the Revenue and the ld.Counsels for the assessees, details of various processes including the annealing process involved in making the transformer core from CRGO/CRNO sheets. I have also seen various literature and expert opinion on the subject.

40. As mentioned earlier that the assessees claimed exemption under Section 80IB of the Act on the ground that there were engaged in the activity of manufacture of transformer core, Sub-section (2) of this section prescribes that the assessees who manufacture or produce an article or thing alone will be entitled to such exemption. Thus the dispute in all the cases was limited to only one issue i.e. whether the assessees 'manufacture or produce' any article or thing or not in various processes carried by the assessees.

41. Admittedly the words "manufacturing or producing" have not been defined in the IT Act. However, various courts have laid down certain tests to determine as to whether the activity amounted to manufacturing or producing or not. The ld. VP in paragraphs 48-56 of his proposed order has quoted the relevant portions of various decisions to derive at home the meaning of the words manufacturing or producing. Even the ld. JM in paragraphs 30-35 of his proposed order has quoted the relevant observations of various courts to explain the meaning of the words 'manufacture or production' of an article or thing. The perusal of the various observations of the Hon courts referred to by the ld.Brothers, broadly indicates that the expression "manufacture" involves the concept of changes effected to a basic raw material resulting in the emergence or a transformation into, of new commercial commodity. By process of manufacture something is produced and brought into the existence which is different from that out of which it is made in the sense that the produce is by itself a commercial commodity, capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may be transformed into basic or essential product. Manufacture is a transformation of an article which is commercially different from the one which is converted. In manufacture something is brought into existence which is different from that which originally existed. In other orders the test to determine whether a particular activity amounts to manufacture of thing is : Does new and different goods emerge having distinctive name, use and characteristic? The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name comes into existence, the identity of the original commodity ceases to exist and the commodity coming in to existence will serve no purpose other than the said purpose for which it was manufactured. Manufacture is end result of one or more processes through which the original commodity is made to pass and with each process the original commodity experiences change. But it is only when the change takes the commodity to the point where commercially it can no longer be regarded as the original commodity, but instead is recognized as a new and distinct article that manufacture can be said to take place.

42. However, it will not be safe solely to come by a test as to whether the commodity after the change takes a new name. This may prove to be deceptive sometime. "Character and use" test has been given due importance by pronouncement of the Hon Supreme Court. When adopting a particular process, if a transformation takes place which makes the product for a character and use of its own which it did not bear earlier then the process would amount to manufacture. Broadly the requirement of the manufacture is that the raw material must be in the first instance subject to process of such a nature that it cannot be termed to be the same as the end product after the raw material undergoes the process of manufacture.

43. Keeping in view the above meaning of the word "manufacture" as decided by the Hon courts including the Supreme Court in various cases I have to decide as to whether various process involved in making the transformer core would amount to manufacturing or not. If the activities amounted to manufacture, the assessees will be entitled to exemption under Section 80IB of the Act as they are situated in the areas eligible for such exemption.

44. All the assessees before me were engaged in making of an item named as transformer core which was supplied to the transformer making concerns. Transformer core is one of the active part of the transformer. The main function of the transformer core is to carry the magnetic flux link in a transformer winding. In any transformer the energy is transferred from one electrical circuit to another through magnetic field. The transformer core provides magnetic circuit for the flow of the magnetic flux mutually linking the electrical circuits. A detailed note has been submitted by the assessees indicating various processes involved in making of the transformer core. The raw material for making such transformer core was CRGO/CRNO sheets. The sheets are purchased in Jumbo coils or sheets. These sheets are first tested to find out whether transformer core made from such sheets could conform all the requirements and technical specifications of the customers or not. Various transformer manufacturing concerns provide their own design and technical specifications according to which the core has to be made. As the CRGO/CRNO sheets are purchased in Jumbo roll forms this has to be first cut in different sizes as per requirements of the customers. This process is called slitting. Slitted roll has to be further cut in the trape-zodical shape by employing hydraulically operating guillotine machines. After guillotine operation, the piercing operation takes place in which the holes are punched. During these processes of slitting, cutting and piecing of lamination the cut edges gets some burrs. These burrs are removed by passing the lamination through deburring operation. The presence of burrs impairs, increases the losses. During the course of these processes the mechanical stresses are developed inside the lamination. It is tested to find out as to how much stress have developed and how much losses will be increased. It is done so to find out as to whether with these stresses, the transformer core will give desired result as per technical specification or not. In such a situation the lamination is passed through a temperature of more than 820 degree Celsius which removes the stresses and also improves and increased the quality and structure of the lamination sheet used in a transformer core. This process is called annealing process. The next process is known as core assembly. The core building is done in horizontal position of specifically raised platform. Some of the processes are performed thereafter. A booklet from Parekh group of Industries whose companies are also before me along with various photographs of the processes involved was also filed. This gives picture of the raw material purchased, the physical changes at the end of each process and the new product which comes into existence. Looking to these facts, there cannot be two opinions that the shape of lamination has undergone a complete change after performing various processes. I also find that there was no dispute that the raw material from which the core is made is called CRGO coils whereas the item which has emerged after various processes is called transformer core. It is also undisputed position that the CRGO coils even with few processes cannot be used in a transformer unless all the processes were complete. It is the transformer core only which is end product which could be used in the manufacturing of transformer. Thus there cannot be any dispute that due to various processes the product has distinct name, shape and uses. By these processes the raw material loses its identity and new product comes into existence which is commercially recognized as a new product.

45. I have, therefore, examined as to whether out of various processes performed by the assessees it could be said that the manufacture of transformer core has taken place. I find that during the course of assessment proceedings as well as appellate proceedings, the experts opinion from SAIL, VJTI & ERDA was filed. These institutions are well recognized institutions in the technical fields. Once technical opinion from them was filed the same should have been considered on its merits.

Though the opinion expressed by them was not sacrosanct yet once the same was filed, the same should be accepted or rejected on merits. I have also perused the opinion given by them in the forms of question and answer also. In their opinion they have confirmed that various activities performed by the assessees for making the transformer core was manufacturing activity Nothing has been brought to my notice to take a different view in this regard.

46. I further notice that the ld. JM has observed that the activity of making transformer core cannot be treated as manufacturing activity as no new product has come into existence and there was no substantial change in the characteristic of the product even after various processes have taken place. For this proposition he has relied on certain observation of the courts in different cases, which are referred by him in paragraphs 38-44 of his proposed order.

47. Ld. JM has observed in the proposed order that cutting and punching holes could not amount to manufacturing activities and as the assessees were engaged only in this type of activity they cannot be said to be engaged in manufacturing, producing an article or thing. In order to support this proposition the ld. JM has relied on the observations of the Hon Supreme Court in the case of Bakelite Hylame Ltd. (supra). I have gone through the full text of the decision and found that while holding the activity, not to be in the nature of manufacturing activity, the court had observed that "mere cutting or punching holes" does not amount to manufacturing. But in these cases cutting and punching holes were only part of a comprehensive manufacturing activity. Similarly, the Hon Supreme Court also observed that electrical sheets were already having insulating properties before the process and even after the process. Thus there was no change in the insulating properties even after the processing was done. Hon Court also observed that cutting and punching holes was done so that these could be fitted in the electrical instruments. Admittedly cutting and punching holes were not the processes of manufacturing. But from the notes on various processes of manufacturing the report from the experts it was clear that the cutting and punching holes was some of the processes involved in the manufacturing of transformer core. The facts being different in the assessees cases, the ratio laid down by the Hon court in the case of Bakelite Hylame Ltd. (supra) cannot be applied.

48. Ld. JM has also relied on the decision of Gem India Manufacturing (supra) for the proposition that no new distinct product has emerged out of the various processes. I find that the assessee in the cited case was engaged in cutting and polishing of diamonds. Hon Supreme Court observed that there was nothing on record to suggest that even in common parlance the uncut and unpolished diamond was different than cut and polished diamond. The court had observed that even after the processes of cutting and polishing, there was no change in the name, shape and uses of the property. But in the assessees cases due to various processes a new, distinct commercial product has come into existence. In the commercial world the lamination sheets and transformer core are recognized as different and distinct commodities having different name, shape uses and character. These facts of Gem India Mfg. (supra) being different could not be pressed into the services in the assessees cases.

49. Similarly, the ld. JM's reliance on the decision of Hon Supreme Court in the case of SR Tissues (supra) was also misplaced. In this case, the Hon Supreme Court observed that cutting of Jumbo rolls into smaller sizes was not an activity of manufacturing. Hon Supreme Court has observed that when the assessee purchased tissue papers in Jumbo rolls the same could not be used either as napkin paper, toilet paper or facial paper. In order to facilitate the use of the tissue paper the Jumbo rolls were cut into small pieces and required sizes. The resultant product was napkin, toilet tissues and facial tissues. The court observed that the texture, feel and moisture absorption capacity was the same when the tissue paper was in Jumbo roll and after cutting when it was being used as napkin, toilet or facial tissues. It was under these circumstances that the Hon Court held that the tissue paper in Jumbo roll remained the same and there was no change in the basic paper. All the characteristics of tissue paper in Jumbo roll continued to be the same in the cut tissue paper. Admittedly in such a situation it cannot be said that a napkin, toilet paper facial tissues has been manufactured out of Jumbo rolls of tissue paper. But in these cases there are various documents as well as evidences to prove that the raw material has transferred into a different and distinct article and the raw material has lost its identity after the same was processed and the transformer core was manufactured.

50. Ld. JM has also placed reliance on the decision of ITAT Special Bench in the case of Shaw Scot Distilleries (supra). This decision also cannot be applied to the assessees cases inasmuch as in this case, the assessee was mixing certain percentage of water, colour and essence in the potable spirit. The effect of such blending was that the percentage of alcohol was reduced and no new product had come into existence. It was under these circumstances, that the Bench held that as the alcohol remained alcohol even after processing the activity could not amount to manufacturing activities. But in the assessees cases, the position was altogether different as has been stated earlier.

51. Ld. JM has also relied on certain observations of Hon Gujarat High Court in the case of Prabhudas Kishoredas Tobacco Products (supra).

After perusing this decision I find that the reference in this case was out of context.

It is further seen from record that some of the assessees before me, while manufacturing transformer core do not carry annealing process.

Still core made by them is used in the transformers. In my view annealing process is not essential process for manufacture of transformer core. Only where the assessee finds that there is decrease in the inherent characteristics of the product, which is required to be corrected, this process is adopted. Otherwise even without annealing process, transformer cores have all the qualities, which are essential to use it in the transformer for controlling supply of electricity.

Therefore, in my view this is not essential process of manufacturing.

As regards the suggestion that Bench should annex a Note on various processes involved in the manufacture, I do not think that a separate annexure is required as details of processes undertaken by the assessees have been noted in the proposed order of learned Vice President.

52. As regards the observation of the ld. JM regarding res judicata, I feel that the principle of judicial consistency should be followed where nothing new has come to the notice of the AO. Similarly, as on the facts the activities of the assessees were in the nature of manufacturing activities, the question of liberal interpretation of the statutes does not arise.

53. I also agree with the proposition that the judgment of the court should not be read as a statute. A judgment must be construed upon reading the same as a whole. For the said purpose the attendant circumstances may also be taken consideration. As held by Hon Supreme Court in the case of Ramesh Chand Daga (supra), P.S. Sathappa and N.K.Rajgaria and order of court of law must be read in its entirety for the purposes of ascertaining its true intent and purport. Reliance on the part judgment may do violence to the true intent and purport of the judgment.

54. In my final analysis, I am inclined to agree with the views and observations made by ld. Vice President in his proposed order regarding factual aspects of various processes undertaken by the assessee and its effect which are well supported by treatise from various foreign and Indian books on the subject and especially supported by Research institute known as ERDA which is the highest authority on the subject and approved by the CBDT for giving the technical opinion and ld. VP's analysis of various judicial pronouncements for ascertaining the test for manufacturing activity. From the evidences on record, I am of the opinion that the ld. VP has rightly held that the assessees were engaged in the manufacturing or producing an article or thing and he has rightly allowed the exemption under Section 80IB of the Act.

56. The matter should now be placed before the Regular Bench for disposal in accordance with law.

1. As there is difference of opinion, the matter is being referred to the President, Income Tax Appellate Tribunal, with a request that following question may be referred to third Member or pass such order as the president may deem fit.

Whether on the facts and in the circumstances of the case the assesee is engaded in manufacturing article or thing and is entitled to deduction Under Section 80IB of the Income-tax Act, 1961?(I.P. BANSAL) (R.P. GARG)JUDICIAL MEMBER VICE PRESIDENT 1. These two appeals by the Revenue and two cross objections by the Assessees are directed against the orders of the CIT(Appeal) Valsad.

all for the Assessment year 2001-2002. Since common issues, facts and circumstances, are involved in these appeals, they are being disposed of by this consolidated order, for the sake of convenience. We take up the appeal in the case of M/s. National Lamination Industries, as base appeal for adjudication, and the final outcome/conclusion in that appeal would be applicable to the other one also, i.e. M/s. Alfa Lamination.

2. The revenue is in appeal and the following grounds are raised in these two appeals: 1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not granting opportunity of being heard to the Assessing Officer despite being specifically requested in writing by the Assessing Officer of granting such opportunity, thereby ignoring the basic principles of natural justice as well as denying the right of being heard to the Assessing Officer as provided in Section 250(2)(b) of the Act.

2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in adjudicating the issue without providing the findings and evidences recorded by him during his visit to the factory on the basis of which he has granted benefit to assessee, thereby denying revenue to place its point of view on such findings and evidences and thus the same is in contravention of Rule 46A of the Rules by considering additional evidences and findings recorded by him without giving opportunity to the Assessing Officer 3. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not granting opportunity to make necessary enquiries and cross-examination despite express request by the Assessing Officer in the remand report dated 23.08.2004 in respect of additional evidences regarding technical opinion, certificate from BVQI and opinion from C.A. produced by the assessee before the learned CIT(A).

3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in stating at para : 27 (Para : 36 for ITA No. 3373) of the appeal order that the report of the Assessing Officer will be considered as and when necessary and in fact the learned CIT(A) did not consider the remand report and written submissions by the Assessing Officer [Copy enclosed] 3.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding at para : 18 of the order that the activity of the assessee is manufacturing based on several decisions relied upon by the assessee, though, these decisions were distinguished in the remand report, which, the learned CIT(A) has not considered 4. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not considering the legal opinion submitted by the Assessing Officer regarding the applicability of the judgment of the Hon'ble Apex Court, erroneously holding that it is against the provisions of law, in violation of the basic principles of natural justice.

4.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the legal opinion taken by the Assessing Officer is against the provisions of law, thereby denying the basic right of being heard, to the Assessing Officer or his representative, as provided in Section 250(2)(b) of the Act.

5. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief on facts brought out in the appellate order that are not correct in true sense.

5.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in stating at para 3 of the appellate order that the assessee is engaged in the business of manufacturing of "Transformer core ".

5.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief by considering the arguments of the assessee, at para Nos. 6, 7, 8, 9 & 10 of the order, with respect to heavy machineries, factory license, Sales-tax registration, Central Excise registration, etc. ignoring the counter submissions of the Assessing Officer made in the remand report.

5.3 On the facts and circumstances of the case and in law, the learned CIT(A) has erred at para : 16 in holding the activity of the assessee as manufacturing on the ground that property of material changes after annealing, ignoring the correct fact that change in property is incidental to cutting, if there is any 6. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in stating that the quality and structure of lamination strip improves ignoring the fact that exposing the newly cut CRGO sheet to heat for seconds, only repairs the original damage that occurred to the CRGO material at the time of transporting, handling and cutting.

6.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief on the ground of change in quality ignoring the fact that there cannot be any change in characteristics or quality nor intended to have such change.

6.2 On the facts and circumstances of the case and in law, the learned CAT(A) has erred in granting relief ignoring the fact that such quality and characteristics are inbuilt in the material, failing which, the lamination does not work for the purpose of transformer, whereby large amount of heat generates.

6.3 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief ignoring the fact that the process does not allow the CRGO material to absorb substantial heat, otherwise the worker could not hold it with bare hands, hence character or quality does not change by virtue of the same.

6.4 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief ignoring the fact that in the case of CIT v. Meenakshi Asphalts (2004) 266 ITR 0626, the heat treatment is of manifold in terms of duration and absorption.

6.5 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief to the assessee by applying to the case of the assessee the decision of the Hon'ble Madras High Court in the case of CIT v. Tamilnadu Heat Treatment Fitting Services (P) Ltd. 238 ITR 529, ignoring and not distinguishing the decision of the same Hon'ble High Court in the case of CIT v. Meenakshi Asphalts , specifically brought to the notice of the learned CIT(A), squarely applicable to the case of the assessee.

7. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief in the background of contradictory observations and opinion and thus failed to make a speaking order.

7.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred by contradicting himself at para : 38 that registration certificates under various Acts are not the decisive factor whether the activity of the appellant is manufacturing or not, whereas, the observations, logic, reasoning and opinion formed at paras : 44, 65, 66, 67, 68 and 73 are contrary to it.

7.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred by contradicting himself with respect to what was earlier held by him at paras : 6, 7, 8, 9 and 10 of the appellate order.

7.3 On the facts and circumstances of the case and in law, the learned CIT(A) has erred by contradicting himself at para : 36 (Para: 46 for ITA No. 3373), by reproducing selective portion of decision of CEGAT 43 ELT 274, though at para : 34 (Para : 44 for ITA No. 3 37 3), the learned CIT(A) himself has held that he has not come across any decision of any Tribunal on the issue of transformer core or transformer lamination.

8. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding at para : 29 (Para : 38 for ITA No. 3373) that the report of the Assessing Officer is factually incorrect despite bringing several decisions to the notice of the learned CIT(A) in the remand report proving that an activity which is manufacturing under other Acts need not be manufacturing under the Income-tax Act.

8.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding at para:29(Para: 38 for ITA No.3373) that the Assessing Officer has relied upon decision of Sales Tax and Central Excise, without understanding the correct fact that these decisions were referred to only to understand the term "manufacturing/production" broadly, whereas, the disallowance is deduction Under Section 80IB is made by the Assessing Officer in the assessment order only on the basis of decisions related to Income-tax.

9. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in stating at para : 37 (Para : 47 for ITA No. 3373) of the order that the Assessing Officer could not bring any favorable decision delivered by any of the CIT(A) or Tribunal or High Courts though several 3 member bench decisions of the Hon'ble Apex Court delivered under the Income-tax Act, a decision under the Excise Laws CCE v. Bakelite Hylam Ltd. 10 SCC 350 and a decision of the Hon'ble Madras High Court in the case of CIT v. Meenakshi Asphalts were specifically brought to the notice of the learned CIT(A), the ratio of which was found applicable to the case of the assessee.

10. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief in the background of erroneous observations, at para : 12, 38, 39 and 40 (Para : 12, 48, 49 and 50 for ITA No. 3373) of the appellate order, that the Assessing Officer has not disputed the manufacturing process carried on by the assessee and he has indirectly accepted the activity of the assessee as manufacturing, ignoring the correct fact that the Assessing Officer has held the activity of the assessee as a non-manufacturing activity for the purposes of Section 80IB of the Act.

11. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief in the background of informal consultation with the Assessing Officer who had passed the assessment order, the contents and nature of such informal consultation not brought on records and not made known to the revenue ignoring the fact that the Assessing Officer has disallowed the claim of deduction Under Section 80IB of the Act.

12. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding at para : 65 of the appellate order that if the finding of the Rajastan High Court, as affirmed by the Hon'ble Supreme Court, is applied to the case of the assessee, then the activity of the assessee will definitely be manufacturing activity.

12.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the three member bench of the Hon'ble Apex Court in the case of CIT v. Gem India Manufacturing Co. 249 ITR 307 is not applicable to the case of the assessee.

12.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the three member bench of the Hon'ble Apex Court in the case of CIT v. Relish Foods 273 ITR is not applicable to the case of the assessee.

12.3 On the facts and circumstances of the case and in law, the learned CIT(A) has erred at para : 75 in holding that if the view expressed by the Hon'ble Bombay High Court, in the case of Ship Scrap Traders v. CIT 251 ITR 806 is applied to the case of the assessee, then there is no doubt in accepting the activity of the assessee as manufacturing activity.

13. On the facts and circumstances of the case and in law, the learned CIT(A) has erred at para : 70 of the appellate order in rejecting the reliance placed by the Assessing Officer on the decisions in the cases of TELCO v. Union of India 89 ELT 36 (Bom) and Computer Graphics Pvt. Ltd. v. Union of India 52 ELT 491 (Mad.) on the ground that these decisions were not brought on record, ignoring the fact that these decisions were specifically brought to the notice of the learned CIT(A) in the remand report.

13.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief relying upon the decision of CEGAT, Special Bench, New Delhi, though the same was not brought on records by the assessee during assessment proceedings and neither it was provided by the learned CIT(A) to the Assessing Officer, to distinguish.

13.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief to the assessee by applying the decision of CEGAT, Special Bench, New Delhi, given under Central Excise Law, to the case of the assessee though disputed from Income-tax angle.

14. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not making a speaking order and in not following the procedure in appeal by not stating all the points for determination and thus the decision thereon and the reason for the decision, as provided in Section 250(6) of the Act.

14.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred at para : 14 in not stating that the correct fact that a V-shape is cut by notching and that a hole is cut by holing.

14.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not making a speaking order whether slitting, shearing, V-notching and holing are all different types of cutting or not.

14.3 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not making a speaking order whether cutting is not manufacturing as held by the Hon'ble Apex court.

14.4 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief without considering and distinguishing the Judgment of the Hon'ble Apex Court in the case of CCE v. Bakelite Hylam Ltd. , relied upon by the Assessing Officer in the remand report, the ratio of which is applicable to the case of the assessee for the process of cutting done by the assessee.

14.5 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not making a speaking order whether the process of heating named as annealing by the assessee, that does not change any structure or character, is not manufacturing as held by the Hon'ble Madras High Court in the case of CIT v. Meenakshi Asphalts .

14.6 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not making a speaking order whether catting is not manufacturing as held by the Hon'ble Apex court in the cases relied by the Assessing Officer and heating that does not change any structure or character is not manufacturing as held by the Hon'ble Madras High court in the case of CIT v. Meenakshi Asphalts .

15. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in agreeing to liberal interpretation of the provisions on the basis of decisions relied upon by the assessee ignoring the decisions of the Hon'ble Apex Court in the cases of CIT v. N.C. Budharaja & Co. (1993) 114 CTR 420 (SC) and Pandian Chemicals Ltd. v. CIT 16. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in allowing benefit to the assessee even after expressly forming a decision at para : 50 of the appellate order that he has no doubt that the activity of the assessee is not a manufacturing activity 17. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in granting relief to the assessee by holding that the activity of the assessee is manufacturing.

16. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the ratio laid down in the cases of CIT v. Abdul Ahmad Najar and ITO v. AMD Corporation fully supports the case of the assessee, ignoring the fact that these decisions were clearly distinguished by the Assessing Officer in the remand report and thus not applicable to the case of the assessee.

4. The assessee-company is engaged in the activities of making "CRGO Core Lamination", which is a very vital part of various kinds and types of transformers used in Power and Distribution Transformer manufacturing market i.e., (i) Power transformer ranging from 5 MVA till 315 MVA; (ii) Distribution transformer ranging from 15 KVA till 5 MVA and (iii) Dry type transformer - oil free transformer for distribution. The Core Lamination is made, by using the raw material known as Cold Rolled Grain Oriented Electrical Steel shortly known as C.R.G.O. This Grain Oriented Steel is universally used for manufacturing Transformer Core and Lamination. This core electrical steel is normally made and supplied in the form of coil. The process of making starts with selection of the coils with respective technical performance required by the design of the transformer. After selecting the right grade of the coil, the process starts. As per various processes of manufacturing of transformer core lamination is to shape CRGO into desired shapes, by a highly technical, precise and most demanding activity in the engineering and power industry.

5. Before processing the raw material, testing is done to measure their core and watt loss to ensure to select the appropriate raw material with respect to the technical performance required for the purpose.

These processes are stated to be - Slitting, Shearing, V-Notching, Punching and Holing, Annealing, Testing of laminations, Core stacking, Core assembling, Testing of assembled core and packing and forwarding.

On the basis of the above stated factual function of various processes that each and every manufacturing process brings changes in the shape and size the raw material (CRGO) and that the process contributes towards technological improvement to make the end product usable as vital part of very sensitive and sophisticated 'transformers' used for power and distribution industry. After above processes, a totally new and different end-product emerges which has distinct new marketable product, having different name, classification, end-use and application. The raw material known as CRGO can never be used as such in transformers, without processing them under as above stated engineering process.

6. It is stated that the assessee is required to manufacture the said product as per the designs/drawing and technical specification required by the customer as per their purchase order, which specify mainly following steps and conditions i.e., (i) Grade, (ii) Core Dimension, (iii) Leg Length, (iv) Lamination thickness, (v) Duct in Core, (vi) Leg Centers and (vii) Total weight, etc. The length and thickness of the core varies from size 22 mm to 800 mm width and 550 mm to 4000 mm length as per the requirements of different customers. The most important condition of the customer is to maintain total watt loss/load loss per kg. and tolerance power in thickness, width and length.

In-house software developed by qualified I.T. professionals in assistance of designed personnel are used to assure the reliability and accuracy of design and to incorporate specific requirements of customer, if any and translating their needs into product specification. While undertaking various manufacturing process, extreme care has to be taken for technical requirements known as (i) Magnetic/electrical properties of raw material exist in rolling direction, (ii) It is absolutely necessary to constrain the same in rolling direction during various processes and (iii) To undertake all processes in a scientific and systematic way to see that stress and strain of raw material are maintained as per watt/load loss as per the technical specification of the customer along with tolerance power in thickness, width and length as per the requirement of customer. It was explained that the processing of CRGO Core Lamination appears to be a simple engineering process to shape CRGO into desired shape, but it is in reality a highly technical precised activity. The assessee has adopted universally tested and approved procedure of processing and manufacturing transformer core lamination with the use of latest technology, finest machinery and quality control techniques. After these processes, a different commercial product is claimed to come into existence and identity of raw material ceased to exist. The result product known as "CRGO Core Lamination" against raw material known as "CRGO Electrical Steel" is separately identifiable and is having different name, function and use in power industry and also under the Excise laws for the purposes of levy of excise duty on the manufacture.

The end product known as CRGO Core Lamination is used as vital part of transformer manufacturing activities.

7. The Assessing Officer held that the assessee has not fulfilled the condition provided Under Section 80IB(2)(iii) of the Act and the activity carried out by the assessee is not the manufacturing activity and denied the claim of the assessee for deduction at 100% Under Section 80IB of the Act, by relying decisions in the cases of (i) Lucky Minmat Pvt. Ltd. 245 ITR 830 (SC), (ii) Gem India Mfg. Co. 249 ITR 307 (SC), (iii) Relish Foods 237 ITR 59 (SC), and (iv) George Maijo 250 ITR 440 (Mad.).

8. The assessee came in appeal and the A.O. in a suo moto representation to the CIT(A) further stated that "The exact activity of the assessee consists of purchasing of CRGO (cold rolled grain oriented) rolls and cutting them into sheets of various sizes, employing the following methods of cutting and activities:(a) Testing -wherein, material to be cut is tested.(b) Slitting -wherein, CRGO rolls/coils are cut to required width.(c) Shearing -wherein, it is cut to required length.(d) Notching -wherein, a v. shape is cut on sheets.(e) Holing -wherein, a hole is cut on the sheets.(f) Annealing -wherein, the cut sheets are passed through electric furnace(g) Deburring -wherein, burrs formed on the edges of sheets while cutting is removed.(h) Core assembling -wherein, the cut CRGO sheets of various dimensions are stacked one over the other 9. He observed that these activities performed by the assessee neither brings about any inherent change in the structure or chemical composition of the original commodity nor does it brings into existence a new commodity. Annealing process performed by the assessee though decreases the iron loss of the core and relieves the laminations of plastic and elastic stresses and improves the conductivity and magnetic value of the transformer core, it cannot, according to him, be said that simply because of this process, a new product comes into existence. From the 3 decisions of the Supreme Court, relied upon by the Assessing Officer; a ratio that can be culled out is that "cutting" couldn't give rise to a new commodity. It has also been opined by the Standing Counsel of the Income-tax Department, Gujarat, that the ratio laid down in these decisions are squarely applicable to the case of the assessee. In fact, the word 'lamination' used by the assessee itself is misleading. The assessee is not performing any activity of laminating any sheet. The CRGO roll is already laminated with silicon grains when the same is purchased by the assessee. The assessee only cuts it into sheets of specific dimensions. The assessee is not manufacturing any transformers.

10. The assessee also submitted a detailed representation before the CIT(A). On the basis of these representations, the A.O. was asked to submit a combined report in the case of the both the assessee, latest by 3.8.2004. It was specifically brought to the notice of the A.O. that if any new thing is required, the same may be submitted separately. The A.O. submitted his reports one on 24.8.2004 and other on 22.9.2004.

11. The CIT(A) considered the submissions of the parties, perused the assessment order and also visited the factory premises of the assessee to inspect the process on the spot. He held that the final production in the case of the assessee is totally different in electrical properties in comparison to the raw coils. CRGO raw material can be used in other electrical applications whereas CRGO laminations can be used only in different types of Transformers. The CRGO material is in coil and sheet form whereas after process it is converted into Transformer core, which consists of number of pieces stacked. Each CRGO lamination produced is specific to the customer's requirements and cannot be used by other customers. He referred to a decision of the CEGAT Special Bench 'B1" New Delhi in the case of Jhonson Electric Co.

v. Collector of Central Excise , a similar case relating to manufacturing of stampings or laminations. In that case that the appellant have Imported Cold Rolled Grain Oriented Electrical Grade Silicon Steel sheet, which after cutting in particular forms straight away went into transformers as stampings or laminations. In this case, the cut laminated strips can be used only for the purpose of placement as a cave in a transformer and not for any other purpose. It would indicate that the manufacture of this cut strips was with a view to manufacture electrical stampings; that when the manufacture is for particular utility, namely, lamination for transformers, the manufacturing activity would be established. It is the effect of the operations that is mattering for deciding the issue; that there is a substantial and basic change in the product in view of the processes of cutting and the design involved. The steel sheets or strips, which are subject to cutting would no longer be sheets but become stampings or laminations for use in the transformer. Thus, it is a new product compared with a steel sheet or laminated sheets. After cutting to particular shapes, the strips left their character of strips, plane and simple and became laminations or stampings. The strips that have been formed, shaped and worked upon would never be strips again to be used as such. Thus, cutting of the strips amounts to manufacture." He also observed that, "The annealing process has been explained during the course of assessment proceedings. During the course of hearing, a copy of the table showing iron loss and magnetizing current loss before and after the annealing process was given. This table was also submitted before the Assessing Officer. After going through this table, the CIT(A) was convinced of a definite reduction in iron loss and magnetizing current loss after the annealing process. The percentage reduction in iron loss at 1.5T is 14.5 -19.5 and at 1.7T is 19.5 - 32.4. The percentage reduction in magnetizing current loss at 1.5T is 54 - 84.6 and at 1.7% is 120 - 244. Some report was submitted by the then Assessing Officer that annealing process does not bring about any structural changes in the metal but he did not agree with that and said that 'In the assessment order itself, the Assessing Officer has given the finding that the annealing process performed by the assessee though decreases the iron loss of the core and relieves the laminations of plastic and elastic stresses and improves the conductivity and magnetic value of the transformer core, it cannot be said that simply because of this process, a new product comes into existence.' Based on the figures in the table of reduction of iron and magnetizing loss and the process of annealing, the CIT(A) was of the opinion that after the annealing process, the quality and structure of the lamination strips, used in the transformer core are definitely improved and increased. Considering the various processing stages of the of the assessee's activity including the design and drawing involved, the annealing process, the assembling process, the test certificate given and packing in wooden pallet he expressed no doubt that the activity of the assessee was a manufacturing activity. The CRGO coils/sheets, he observed, loose their identity during the manufacturing process and a new and different article comes into form which is called transformer lamination core. It is commercially known in different name in the market than CRGO coils/sheets. It is a different marketable article compared to the CRGO coils/sheets. The CRGO coils/sheets loose their character while cutting to particular shape and size and get structural and qualitative change after annealing process. After assembling process, it becomes the transformer lamination core, entirely a different article.

12. The CIT(A) held the activity of assessee to be the manufacturing activity. He found that one set of lamination core is having five separate bases, called outer limb plates-two, one middle limb plate and yoke plates-two. As per the specific drawing various such sets are required for the transformer in which, every set is of different size.

The assembled transformer core is looks like five pyramids made up of outer limb, middle limb and yoke. It is covered in a water proof sheet and packed. The raw material used by the assessee is called the CRGO coil whereas the product supplied by the assessee to the transformer manufacturers is called transformer core. This name is found place in the sale invoices of the assessee. It is accepted by the Central Excise department and excise duty @16% is charged. The same is also accepted by the Sales Tax department as assessment orders were passed by giving benefit of tax free sales. Thus, he held that there is a change in the name of the final product; that the CRGO transformer core is definitely a new and different marketable article having different qualitative characteristic due to annealing and assembling processes; that the CRGO coil in itself cannot be used in the transformer and the transformer core can only be used in the transformer; that the CRGO coil is different marketable commodity and transformer core is different marketable commodity; that the CRGO coil looses its existence during the course of various processes; that even the iron loss and magnetizing loss is reduced during the annealing process; that the cutting with specific drawing, testing, annealing and assembling processes are involved in assessee's activities which are absent in marble cutting.

13. The ratio laid down in Supreme Court in the case of Gem India Manufacturing Co. (supra), he observed could not be applied in the case of the assessee as there is sufficient material on record to show that transformer core is a new article or thing, which is the result of various processes of manufacturing. The transformer core is a different commercial commodity and known in the trade as such. The Central Excise department is charging excise duty only on account of different article. The Sales Tax department accepts the sales of the assessee in this name. There is qualitative change in the raw material due to annealing process as accepted by the Assessing Officer in para-5.14 of the assessment order.

14. As regards the decision of the Supreme Court in the case of Relish Foods (supra) and the decision of the Madras High Court in the case of George Maijo (supra) he observed that the processed or frozen shrimps and prawns are commercially regarded as the same commodity as raw shrimps and prawns whereas the transformer core is commercially regarded as a different commodity compared to the raw material CRGO coil/sheets. In common parlance they remain known as shrimps and prawns whereas the transformer core is known by its own name and not known as CRGO coil/sheets.

15. As regards Madras High Court decision in the case of CIT v. Sri Meenakshi Asphalts 266 ITR 626 (Mad.), relied upon by AO in her report he observed that in that case the court held that no new product emerged from the process employed. What was bitumen continued to be bitumen. But in the case of the assessee CRGO coil/sheet looses its existence. For the decisions in the case of TELCO v. Union of India 89 ELT 436 (Bom.) and Computer Graphics Pvt Ltd v. Union of India 52 ELT 491 (Mad) he stated that how the Assessing Officer tried to rely on excise cases when she was of the opinion that the term 'manufacture' is differently treated in Income-tax Act and Central Excise Act. If inference has to be drawn from the decisions delivered in Excise Law, then he observed that there is a direct decision of the CEGAT, Special bench, New Delhi referred to above.

16. As regards the opinion of Shri Ramesh J. Trivedi, the Standing Counsel of the Income-Tax Department, Gujarat sent vide his letter dated 05.05.04 the CIT(A) stated that there is no provision in the Act, which empowers the Assessing Officer to refer the matter to the Standing Counsel to seek his express opinion. Even, the reference to the Valuation Officer for determining the cost of construction of a property has been annulled by the Supreme Court in the familiar case of Amiya Bala Paul 262 ITR 407 (SC) even though, the Valuation Officer is a Departmental Officer on deputation and is a technical hand. How an Advocate by profession, he observed, can decide the issue of manufacturing of a product on which even the High Courts and Supreme Court have not came to a definite and similar conclusion. The reference to the Standing Counsel is against the provisions of law. He therefore did not accept the opinion given by the Standing Counsel as decisive.

17. Referring to the decision of the Supreme Court in the case of Aspinwall and Co. Ltd. v. CIT 251 ITR 323 (SC) he noted that in the absence of a definition of the word "manufacture" it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such material new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity. The raw materials used by the assessee, he said, is the CRGO coil whereas the products supplied by the assessee to the transformer manufacturers is called transformer core and that a new and different article is clearly emerged from the various processes carried out by the assessee. The existence of new and different article is found place in the sale invoices of the assessee. The existence of new and different article is accepted by the Central Excise department and by the Sales Tax department. The CRGO transformer core is definitely a new and different marketable article having different qualitative characteristic due to annealing and assembling processes; that the CRGO coil looses its existence during the course of various processes and that even the iron loss and magnetizing loss is reduced during the annealing process as accepted by the Assessing Officer in his order.

18. He observed that in the decision of the Madras High Court in the case of CIT v. Tamilnadu Heat Treatment and Petting Services (P.) Ltd. 238 ITR 529 (Mad.), it was held that process of heat treatment was absolutely essential for rendering the article marketable. The automobile parts to be subjected to heat treatment to increase wear and tear resistance to remove the inordinate stress and increase tensile strength. The Assessing Officer in the assessment order has admitted that the annealing process performed by the assessee decreases the iron loss of the core and relieves the laminations of plastic and elastic stresses and improves the conductivity and magnetic value of the transformer core. Thus, as far as the annealing process is concerned, this decision is clearly applicable in the case of the assessee.

19. In view of the above the CIT(A) held that the assessee-company was engaged in the manufacturing of transformer core, a distinct and commercially different article. The activity of the assessee-company is therefore, held to be as "manufacturing activity" and therefore, the assessee is entitled to deduction available Under Section 80IB of the Act and directed the Assessing Officer to allow the deduction as claimed by the assessee.

20. Shri Banwarilal, the learned D.R appearing on behalf of the revenue referred to AO's detailed submissions. He contented that the assessee had filed a submission before the CIT(A), based upon which remand report was called for from the Assessing Officer. The remand report, based on arguments put forth by the assessee, was submitted by the Assessing Officer vide letter No. ACIT/VC/Remand Report/AL & NLJ/2004-05 dated 23rd August 2004. In the said remand report, all decisions relied upon by the assessee were clearly distinguished, inspite of the fact that the assessee could not distinguish any of the decisions relied upon by the Assessing Officer. In the said submission, the assessee had also placed an opinion given in some other cases from Veermata Jijabai Technical Institute, Mumbai, opinion from a Chartered Accountant and a certificate from BVQI. It was clearly explained in the remand report as to how these certificates/documents could not form a basis to decide as to whether the activity of the assessee is manufacture/production or not. Further submission in the case was given by the Assessing Officer vide letter No. ACIT/VC/Report/2004-05 dated 22.09.2004. These reports were supplied by the CIT(A) to the assessee who in turn furnished their comments. However, the CIT(A) did not supply copy of the comments of the assessee to the Assessing Officer for counter comments. Vide his office letter dated 22.09.2004, the AO specifically requested for an opportunity to appear personally before him to represent the case. However, the CIT(A) denied this right of being heard to the Assessing Officer, despite being requested specifically. The revenue has not been heard properly and access to the comments of the assessee was denied to the revenue, which is in violation of the principles of natural justice. The CIT(A) has thereby denied right of being heard to the Assessing Officer in violation of the provisions of Section 250(2)(b) of the Act. He submitted that proper opportunity was not given by the CIT(A) to explain the matter in detail with reference to submissions of the assessee. He also submitted that Here the Revenue's contention is that during the course of appellate proceedings, the CIT(A) had visited the factory premises of the assessee and inspected the activities of the assessee stage by stage, right from storage of raw material i.e. CRGO coils to the stage of packing of cut CRGO sheets i.e. laminations. He did not provide any such recordings or evidences to the Assessing Officer for counter comments, before granting relief to the assessee. This is in violation of the provisions of Section 250(6) of the Act and the provisions of Rule 46A of the Rules. As a result, various points arising out of the same has not been discussed in the body of the appellate order, examples of some of such critical unanswered points are: 1. The Assessing Officer has held that heat treatment is giver for seconds and that the CRGO sheet does not absorb so much of heal because the sheets coming out of furnace are held by the worker; with bare hands. The CIT(A) on the contrary held that heat treatment was given for minutes.

2. If what has been held by the CIT(A) is correct, then the transformer would fail after a very short time because when transformer is used, it generates lot of heat, which would totally alter the properties of CRGO sheets/laminations therein. However, it is not the case and a transformer works continuously for years together.

3. If annealing can improve the properties as held CIT(A), then why is the assessee purchasing CRGO coils with specific properties for specific transformers, which is tested on Franklin Tester? 4. The learned CIT(A) has held that the heat treatment improves various properties of CRGO sheets but failed to clarify as to whether this change in properties is decided on the difference between raw uncut CRGO coils and annealed CRGO sheets or between cut CRGO sheets and annealed CRGO sheets. In other words, even after his personal visit he has failed to bring on records the fact that the properties of CRGO sheet changes during cutting and that annealing reverts these properties to the original state.

5. Why annealing/heat treatment is done at the last and not in the beginning? 21. On merits, the learned DR reiterated the submissions made by the Assessing Officer before the CIT(A) and submitted that there was no manufacture at all. Except cutting process, he submitted that the assessee did nothing and on cutting also the sheet remained the sheet, though after cutting it was of a smaller size of sheet as against the sheet in roll but that does not bring into existence any new commercially known different item. Annealing only restored the loss on cutting and did not add anything to call it a manufacture. He referred to the following decisions in support of his contention: 22. Sh. Keshav Prasad, the learned Counsel of the assessee, on the other hand, submitted that the order of CIT(A) is challenged by the revenue in the grounds of appeal on two counts- i) Denial of natural justice by not affording opportunity specifically called for, and ii) on merits against holding the process to be the manufacture. As regards first, he submitted that there was no specific request in the remand reports submitted by AO on 21.9.2004 (23/9/04) with a copy to the assessee. Comments of the assessee alleged to have not been given to AO, is wrong. No copy of the Remand Report was given to the assessee therefore, no comments and consequently there is no question of opportunity to be given to AO. On merits he submitted that CIT(A) has inspected the process in the factory along with the AO and found that objection of AO that employees were handling bare handed, the sheets which passed through 820cc temperature was wrong as the employees were wearing heat proof glause after it came through cooling room having 80 - 100cc temperature after 4 stages of cooling zone. No such objection was raised in the Report of 21/9/2004. The Bench has also inspected the process. Technical reports submitted by the assessee are not discussed nor relied upon, by CIT(A) even though they provide expert evaluation of things. In any case A.O. cannot have any grievance over that.

Standing Counsel's opinion is not a judgment, it can at best be an argument and that has been considered by the CIT(A) and therefore and therefore AO cannot have an objection.

23. On merits the assessee's counsel referred to Section 80IB(2)(iii) requiring manufacture or production of articles or things not specified in XI Schedule and then carried us through various process starting from raw material to final product like testing cutting, searing, nothing, holing, annealing which according to him improve the quality as discussed by the CIT(A) in paragraph 44 of his order. The learned counsel of the assessee has also given written submission and submitted that the word 'manufacturing' or 'production' have nor been defined in the Income-tax Act. These words also appear in the Section 32A, 80HH, 801 and 80J of the Act. However, the various Courts have laid down certain tests to determine as whether the activity amounts to manufacturing/production or not. In support of its argument, the assessee has relied upon the following decisions, which are reproduced above. The assessee has also submitted, vide its written submission, the lads findings of the judgments relied upon the Revenue in comparison with the assessee's ease and submitted that they are not decisive of the issue in assessee's case. He relied upon the following decisions: (V) Black's Law Dictionary 5^th edition, defining the word 'manufacture'; (XII) Anil Steel Traders v. DCIT in ITA No. 739, 740 and 741/Ahd/2004.

24. The learned Counsel appearing for the assessee also submitted various literatures and treatises from books of foreign and Indian authors relatable to the qualitative change being brought about by heat treatment practices and also the opinions of SAIL and Veermata Institute.

25. It is also submitted that assessees' are is engaged in the business of manufacturing of "Transformer Core" with effect from December, 1999 and in the past it claimed deduction Under Section 80IB in respect of the income derived from manufacturing activity, and it having fulfilled the requisite conditions the deduction has been granted Under Section 80IB of the Act as claimed by the assessee. Copies of assessment orders for A Y 1994-95 and 1995-96as an evidence of this are filed.

26. On 26^th May, 2006 the bench also visited the factory premises at H/1-2 & G-3 Mahatma Gandhi Udyog Nagar Indl. Estate, Dabel, Nani Daman - 396 210 for inspection of the process applied by the assessees for making CRGO Core Lamination, in the presence of Addl. Commissioner of Income-tax Shri D.A. Sheldekar, Vapi Range, Vapi, Shri Keshav Prasad, the learned Counsel of the assessee, Shri Varkhedkar, Production manager of the assessee firm and Shri Mahendra Parekh. The reports were signed and also given to the parties. It is reproduce hereunder: 2. On entry of the factory of the assessee, we have been given copy of the purchase order from the customers giving reference of Grade, Core Dimension, Leg Length, Lamination thickness, Duct in Core, Leg Centers, Total weight etc. ranging 25M to 800 M width 550 M 4000M length, copy of which is annexed. The roll is thereafter selected from the purchase made by the assessee and tested according to specification supplied by manufacturers from Germany and Russia, etc., with the requirement of the assessee in the purchase order.

3. After the selection of the relevant material, the roll is cut in various sized and this process is called as slitting. The process of slitting is done on a slitting lines maintaining two loops system which ensures that the grains are not strained and stretched during the process. We have been shown four equipments/machines which are used for these processes, these are slitting line, coil winders, overhead cranes, epstien tester. A loop is stated to have been taken to minimise edge burr to prevent roughness on the edges.

4. The next process, which we saw was shearing process, which is at 45 degree or 90 degree as per the requirement of the customer. Where also strict tolerances are maintained and a unique three-point location method ensures accuracy in dimension in terms of angle and length. There also four equipments and machinery were being used viz., Tredal Shears machines, Coils winder, Measuring scale, Overhead cranes. These are given in Annexure A and Annexure B. 5. The third process, which was shown to us is V-Notching that is cutting the sheet in various sizes and position of V-Notch plates.

Three equipments and machines were being used for this process -V-Notching Power Presses, Measuring scale, Vernier caliper. The shape given by this process is as reflected in Annexure - C. 6. We were also informed that as per customers drawing and cutting instructions sometime holes are punched on to the yoke plates, which are even be off centre with respect to the longitudinal axis of the limb. These holes are for the purpose of bolting and assembling the core lamination. The two equipments/machineries were in use for holing and punching power presses and measuring scale. This process is reflected in Annexure-D. After the every single and individual plate is prepared, a further process to restore and/or improve its quality characteristics is carried out. This is exhibited in Exhibit E. 7. Thereafter Annealing process is carried out to de-burr and relieve the stress and strains on the limbs/plates through a roller hearth annealing furnace. As per the mill's specification at a temperature of 820 degree for 72 to 90 seconds depending upon the thickness and grade of material. This process of annealing is stated restore and improve the magnetic and electrical properties of lamination. The equipment and machinery used for this purpose are Roller Hearth Furnace and Overhead cranes. This is exhibited in Annexure F. 8. After this process are carried out the lamination sheets are physically inspected and verified to ensure the length, width, thickness, mitering, holing notching and physical appearances are verified and examined during this process and to certify and verify that the annealing process has restored or improved the magnetic and electrical properties of the lamination, a test is conducted by Franklin Power Tester and Epstein square tester. The other equipments for this purposes are Sokena iron loss tester, Vernier caliper, Micro-meter, Measuring scale. This process is shown in Annexure G. 9. After these processes are carried out core laminations are stacked as per the requirement of the customer in such a fashion that minimum manhandling is occured while assembling, packaging or transporting the core. This is called core stacking process and it requires the equipments/machinery - Over head cranes, Vernier caliper, Micro-meter and Measuring scale. This process is shown in Annexure H. 10. All the limps/plates are interleaved in mitered joints in order to facilitate the passage of the magnetic/electrical flux and to avoid hot spots and reduce no load losses, no load current and low noise level and during building the core and ensure that stacking factor, building factor, window height, air gapping and other technical aspects are within technical limitations/details. The machinery used for this purpose are Overhead cranes, Vernier caliper Micro-meter, Measuring scale. This core assembling process is shown in Annexure - 1.

11. After assembling the building core the built core again tested and certified for no load loss to ensure the technical results are within the limits as specified by the customer. The machinery used for this purpose are EMCO no load tester and Overhead cranes. This process is shown in Annexure N. 12. The cores are to be assembled for packing. In a horizontally laid down onto wooded skids then securely wrapped with jute cloth and plastic covers. This is to ensure and prevent any damages or disturbances to the material during transportation. This is called Pyramid style of packing the liminations which is advantageous during core assembly. The equipment and machinery used are Overhead cranes, Jute cloth, Plastic sheets. The specimen of this packaging is given in Annexure-A. 13. A question was asked during our inspection to the Production Manager as to what is the use of the sheets cut in the different sizes and why a single sheet cannot be used. The answer given was that cutting was to be in different sizes as per the specifications and drawings given by the respective parties which give the details of material, thickness, total weight and watt loss. It is for better transmission of the electricity.

14. The Production manager was also asked how the respective customer decides that they require a particular value of watts loss.

He answered that this machine helps in testing the Iron Loss of the material provided to be used in the final product. On the said machine, the samples are tested at 1.5 and 1.7 tesla. Watt loss is given by the respective parties in their design. As regards the particular value watts loss/different ratings of transformers mainly depends upon the line which is installed by the Electricity Board [11 KBV/22 KV/33 KV].

15. To explain the process of V-Notching, a question was asked as to what the use of the waste of V-Notching and how the other angles being cut. The answer was From the V-notch angle, small transformer parts can be mad which can be used in TV, Computers, Radio, Tubelight chocks etc. The other angles are being cut on shearing machine.

16. With regard to annealing process, a question was asked what is the change due to annealing. The answer is due to this process, burr on edges of raw material will be removed.

17. Regarding assembling the product, a question was asked whether the laminations assembled will be dismantled by the respective parties. The answer was 'no'. The respective parties remove the top yoke and put the copper coils on the three limbs and then put the top yoke.

27. From revenues side, the following comments are stated with regard to the inspection: Kind reference is invited to your letter bearing F. No. Sr.

AR-II/ITA T/B-Bench dated 30.05.06 forwarding therewith the Inspection report prepared by the Hon'ble Bench of the ITAT. In para-1, it is mentioned that the Inspection of the process carried on by the asses see for making CRGO Core Lamination was carried out in the presence of the undersigned. In this regard, it is brought to your kind notice that the undersigned was present in the factory premises as per the directions of the Honorary Bench to make arrangements for the necessary inspection and as a protocol.

In para-7, it is observed that the annealing process is carried out to de-burr and relieve the stress and strains on the limps/plates through a roller hearth annealing furnace. It is further mentioned that this process of annealing is stated restore and improve the magnetic and electrical properties of lamination. In this regard, reference is invited to report submitted by the undersigned vide letter dated 2 7.05.06 in which relevant comments under the head annealing are offered which are reproduced below for the sake of convenience: In the appellate order, the learned CFT(A) has held the activity of the assessee as a manufacturing activity on the ground that property of material changes after annealing. In fact, change in property is incidental to cutting. CRGO sheet is an highly impact sensitive material. The same is evident from the observation of the learned CIT(A) made at para : 14, wherein, he has staled that property of the CRGO material changes when CRGO coils are stored or handled. If the property changes just by storing and handling, it can be thought of as to - what would happen when numerous types of cutting activities are performed upon it by huge and heavy plant and machineries.

Scientifically speaking, there is a lamination of silicon grains on the material, which is oriented in a random direction. That is why the material is called cold rolled grain oriented rolls. Now when the material is subjected to impact, just like at the time of transporting, at the time of cutting or at the time of dropping down, etc., the silicon grain orientation on the surface of the material gets disturbed, which, in turn, affects the electrical properties of the material The electrical properties of the material are well integrated into it, when companies like SAIL manufacture it. Thus, in order to bring the grain orientation to normalcy, which was disturbed while handling the material, heating is done by some process? Not all of them do heating or named as annealing. Annealing or Heating enables the material to revert to its original property, which was minutely disturbed while cutting.

Heating or Annealing done by the assessee means passing the CRGO sheets through electric furnace for a few seconds. It is a scientifically established fact that unless and until heat is substantially absorbed; there can be no structural change. The annealing done by the assessee only regularizes the disturbed orientation of silicon grains on the surface of the material The furnace of the assessee is such that it has a conveyor belt, which runs constantly. The CRGO sheet is put on the conveyor belt and in few seconds, the CRGO sheet comes out from the other end.

Real annealing process is such that the metal should be heated at high temperature and it is to be cooled very slowly. Only in such cases would characteristic change occur on the metal and it would get hardened. The decision of the learned CTT(A) that annealing changes the property of the CRGO material is far from reality as well as principles of science. If the argument of the learned CIT(A) would have been correct, then, transformers, where these lamination are used, which also generates lot of heat for years together, would not have performed for such long periods, because the heating would have totally altered the properties of the lamination, making it unfit.

Though the learned CIT(A) has personally visited the factory of the assesses and even though he had got the annealed CRGO sheets tested, the learned CIT(A) failed to examine the following: 3. Whether there is any substantial difference in parameter of raw uncut CRGO sheet and cut-annealed CRGO sheet.

4. Whether the parameters that were observed in the CRGO sheet after annealing was the requirement of the customers of the assessee i.e.

whether the assessee receives orders from its clients with such specification.

The picture would have become more clear if the learned CFT(A) had compared the parameters of the cut and annealed CRGO sheet with the original CRGO material in coil form purchased by it (before cutting). After this process which is termed as a manufacturing, there is no change in the physical form of the CRGO sheets nor there any chemical change. If the assessee could make characteristics changes to the CRGO sheet on its own, then, there was no need to use particular specified CRGO sheet for its activities, as submitted by the assessee while explaining its process. For the sake of brevity, the relevant portion of the submission of the assessee is reproduced herein under: transformer were to be made of mild steel use as core material, the core loss would be approx. 16 to 17 w/kg. At 1.5T/50Hz and the size of the transformer would be approx. 18 to 20 times the size of a transformer manufactured with CRGO steel.

It may be mentioned further that the process of deburring need not be carried out through the annealing process.

No comments are considered necessary on para-8. In para-9, it is mentioned that the after these processes are carried out core laminations are stacked as per the requirement of the customers. It may be mentioned here that the lamination sheets do not become core lamination because of the above processes. When these are put in the transformers, then only they can be termed as core laminations. The Instruments used for stacking process such as Vernier Caliper, Micro Meter and Measuring Scale are ordinary instruments which are used in all the workshops wherever any mechanical job work is done.

No comments are considered necessary in respect of Para - 10, 11, 12, 13, 14 and 15. In para-16, it is mentioned that what is the change due to annealing? It is mentioned that because of this process, burr on edges of raw material is removed. The necessary In para-17, it is mentioned that whether the laminations assembled are dismantled by the respective parties? The answer given was No. In this regard, it is mentioned that the assembled laminations whether suitable to the respective parties for end use or not would be decided by these parlies only and in some cases the assembled laminations would be dismantled also.

28. We have heard the parties and considered the rival submissions. On preliminary objections we do not find any force in this contention of the Revenue. The reports were made available to the AO and he submitted the Remand Report and at the end of the report it is stated that if any further information is required an opportunity be given mentioning that "if necessary, opportunity may be given". That is not a request and therefore there is no violation of Section 250(2)(b) of the Act. The ground is accordingly rejected. In our opinion there is also no violation of the provisions of Section 250(6) of the Act read with the provisions of Rule 46A of the Rules. The CIT(A) has visited the factory premises along with the AO and whatever findings he has recorded was in the presence of the AO at the time of their joint visit. The AO was present at the time of visit and remained with the CIT(A), from the beginning to the end. No independent evidences were collected by the CIT(A) and no fresh evidence was taken by him. We noted that as per the mill's specification at a temperature of 820 degree for 72 to 90 seconds depending upon the thickness and grade of material. The inspection report is reproduced above in the order.

29. As regards certificate and report filed by the assessee CIT(A) in the order of Alfa Lamination specifically states that he has not taken any cognizance thereof, hence question of cross examining them does not arise. Revenues contention that during the course of appellate proceedings, legal opinion taken from the High Court Standing Counsel of the Income-tax Department, Gujarat by elaborate discussion and reasoning running into more than 50 pages, it was opined that the ratio of all the decisions relied upon by the Assessing Officer were applicable to the case of the assessee and that in the light of those decisions and several other decisions quoted by him, suo-moto, the activity of the assessee was not manufacturing activity. He had viewed the case from the angle of Central Excise also. Copy of this legal opinion was supplied to the learned CIT(A) for his consideration. The CIT(A) has not considered the opinion of Standing Counsel of the Department by relying upon the Supreme Court decision in Ameya & Bala Paul 262 ITR 407 (SC). This is only an opinion and has in any case is to be considered as an argument in holding whether there was a manufacture. These issues, material and submissions in any case are being discussed in the proceedings before us and there nothing much turns on that because in substance the CIT(A) has discussed everything stated in the opinion by way of a proposition. No principles of natural justice are violated by him in disposing the appeal.

30. Revenue's contention that finding of the CIT(A) that the assessee had all along in the past claimed deduction Under Section 80IB and that the same was granted to it was not correct as the case of the assessee was selected for scrutiny for the first time, for the year under consideration, wherein, the department realized that the activity of the assessee is not manufacturing/production and hence not eligible for benefits of deduction Under Section 80IB of the Act. The returns of income of the assessee for the earlier years were processed either Under Section 143(1)(a) or 143(1), wherein, the Assessing Officer did not have any such powers and he could not even ascertain as to exactly what was the activity being done by the assessee. We however do not find any basis of this statement as the two ordes quted by us above are the orders of AO Under Section 143(3) of the Act and not Under Section 143(1) as stated by the AO.31. The term 'manufacture' has not been defined in the Act, and we may refer to in this connection the Supreme Court decision in the case of Aspinwall and Co. Ltd. (supra) wherein it is held that in the absence of a definition of the word "manufacture" which has not been defined in the Act, it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such material new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity. We have ourselves visited the factory and were explained various stages of making the laminations. These processes are: I - SLITTING; Slitting process a high precision computerized constitutes the first important manufacturing activity and fundamental in order to obtain the final product. The quality and accuracy of the process, largely determines the quality of the final product. The slitting is done on the slitting lines (machines) maintaining 'two loops' system which ensures that the grains are not strained or stretched during the process. The loop before and after slitting also ensure the paralleblity of the slits and minimum edge camber to prevent roughness on the edges. All the slitting blades are made of fully hardened and ground alloy steel to ensure sharpness and durability particularly to remove camber (waviness), is taken to keep the edge burr under control, within the specific tolerances.

II - SHEARING : The second stage of the process is "Shearing" at 45 or 90 as required by the customers. Strict tolerances are maintained and a unique three point location method to ensure accuracy in dimension in terms of angle and length. Burrs are controlled by ensuring the blades are always sharp. Continuous line inspection exists to ensure that all parameter are strictly maintained within the acceptable limits.

III - V- NOTCHING : The third and important step of the manufacturing process is the requirement of "V-Notch" which is per the customer's design and position of centre limbs. Accuracy is of utmost importance during individual V- Notching operations. During step lap, the size and position of V-Notch will differ due to different sizes of plates.

IV - PUNCHING AND HOLING: The fourth step of the process is known as "Punching and Holing" of limbs and plates. As per customer's drawings and cutting instructions holes are punched on to the yoke plates. The york plates are kept under the holing power press machines to achieve the desired position of holes. The position of holes may even be off centre with respect to the longitudinal axis of the limb. During step lap, punching of holes varies according to different sizes of plates. These holes are utilized during bolting and assembling the core lamination.

All Limbs/Plates or Laminations : After the above processes, physically all the limbs or plates are prepared, however every single and individual plate is yet to be further processed to restore or improve its quality characteristics.

V - ANNEALING : The fifth and one of the most important step of the process is the annealing process. This process is undertaken to de-burr and relieve the stress and strains on the limbs/plates through a roller hearth annealing furnace, CRGO electrical steel and core laminations develop stress, strains and burrs during shipment transit and processing which affects its quality. Annealing process is done as per the mill's specification at a temperature of 820 for 72 to 90 seconds depending upon the thickness and grade of material.

This process of annealing is to restore and improve the magnetic and electrical properties of lamination.

VI - TESTING OF LAMINATION : After annealing, the laminations are physically inspected for technical details. They are verified to ensure that they are as per customer's drawings and specifications.

Key aspects like length, width, thickness, mitering, holing, notching and physical appearances are verified and examined during this process. The verification is done by experienced and skilled quality executives. To certify and verify that the annealing process has restored or improved the magnetic and electrical properties of the lamination, a test is conducted. The Franklin power supply unit measures the surface insulation of the lamination and the Epstein tester iron loss tester measures the core/iron loss in the lamination. The quality and technical staff ensures that the lamination is as per its technical details. Certificates are prepared and issued by quality department as per the results.

VII - CORE STACKING : The core laminations are stacked as per customer's specifications. The laminations are stacked in such a fashion that minimum manhandling is occurred while assembling/packaging or transporting the core. Due to the large sizes of core laminations of power transformers, they stacked and directly sent to packaging department for packaging and forwarding.

VIII - CORE ASSEMBLY : The transformer laminations for distribution transformers are assembled and built to form an assembled transformer core. Drawings, specifications and details are provided by the customers. The supporting utilities to build the core lamination are also supplied by the customers which include iron channels, iron rods of various sizes, nuts and bolts, insulation tape, craft paper, resins etc. All the limbs/plates are interleaved in mitered joints in order to facilitate the passage of the magnetic/electrical flux and to avoid hot spots and reduce no load losses, no load current and low noise level. Highly experienced, professional and trained personnels are employed to assemble the transformer core. The personnels practice utmost care during building the core and ensure that stacking factor, building, window height, air gapping and other technical aspects are within technical limitations/details.

IX - TESTING OF ASSEMBLED CORE: After assembling and building the core, it is mandatory to test and certify the no load losses of the built core. EMCO no load tester measures and ensures that its technical results are within standard limits specified in customer's drawings. The technical staff and testing laboratory are fully equipped to detect and rectify any lapse in the built core.

Certificates are prepared by quality department.

X - PACKAGING AND FORWARDING : For packing the assembled cores, the whole core is horizontally laid down onto wooded skids then securely wrapped with jute cloth and plastic covers. The core is then strapped tightly to the skids/pallets with steel straps. For packing stacked core laminations, individual limbs/laminations are packed separately with jute cloth and plastic wrappers, further they are strapped tightly onto wooden skids/pallets. Strapping the final product onto wooden skids ensures and prevents any damaged or disturbance to the material during transportation. Packing lists provided to customers. The Packaging department follows the Pyramid style of packing the laminations which is advantageous during core assembly.

32. The raw materials used by the assessee in the process, is called the CRGO coil whereas the products supplied by the assessee to the transformer manufacturers is called "transformer core'. The end product called CRGO transformer core is a new and different marketable article having different qualitative characteristic due to various processes including assembling and annealing processes. The CRGO coil looses its existence during the course of various processes. Even the iron loss and magnetizing loss is reduced during the annealing process, which has been accepted by the Assessing Officer in his order. Thus, there is a qualitative change also.

33. The two products namely CRGO Coil/Sheet and Core Lamination are not only separately classified in the respective commercial market but also in other legislations like Excise, Central and State Sales Tax and Factory Act, etc. and given separate treatment according to their utility. For example, in Excise, CRGO Coil/Sheet has been classified under the head Flat Roll Product of other alloy steel under Chapter 7225 as "7225 11 00 - Grain Oriented" whereas Core Lamination has been classified under the head Electrical/Electronic Machinery and Equipment under the Chapter 85 of Excise Law as item "No. 85049010 - parts of Transformers". The said facts are confirmed by the sales bill issued by the assessee as stated by the CIT(A). The fact that it is a new and different article is thus accepted by the Central Excise Department, as excise duty @16% is charged. Its existence as a different article is also accepted by the Sales Tax Department as assessment orders were passed by giving benefit of taxfree sales to the assessee. It is therefore clear that a new and different article is emerged from the various processes carried out by the assessee. The existence of new and different article is found place in the sale invoices issued by the assessee.

34. A set of lamination core prepared by the assessee has five separate bases, called outer limb plates-two, one middle limb plate and yoke plates-two as per the specific drawing and various such sets are required for the transformer in which, every set is of different size.

The assembled transformer core is looks like five pyramids made up of outer limb, middle limb and yoke. It is covered in a water proof sheet.

The raw material used by the assessee is called the CRGO coil whereas the product supplied by the assessee to the transformer manufacturers is called transformer core. Thus the CRGO material, which is in coil and sheet form, after process it is converted into Transformer core consisting of number of pieces stacked. Each CRGO lamination produced is specific to the customer's requirements and cannot be used by other customers. The CRGO coils/sheets loose their identity during the manufacturing process and a new and different article transformer lamination core comes into form. It is a different marketable article compared to the CRGO coils/sheets. The CRGO coils/sheets loose their character while cutting to particular shape and size and get structural and qualitative change after annealing process. After assembling process, it becomes the transformer lamination core, entirely a different article.

35. The process employed by the assessee brought about changes and has to be understood in the light of treatise of various authors. In Forging Hand Book by Thomas G. Byrer, editor, S.L. Semiatin, associate editor and Donald C Vottmer, associate editor, brought out by Forging Industry Association American Society for Metals under the heading "Heat Treated To Final Physical Properties", the learned contributing authors Robert MoreOi, Consultant, Pittsburgh, Pennsylvania and Dr.

S.L. Semiatin, Principal Research Scientist, Battette's Columbus Laboratories, Columbus, Ohio said (at pages 229-229), summarised: Special heat treatment provides control of dimensional distortion, relief of residual stresses before or after machining operations, avoidance of quench craddng, prevention of thermal shock, surface (case) hardening, and stabilization of microstructure in certain high alloy steels.

36. Mr. S.K. Hajra Choudhury in his book "Materials Science and Processes in SI Units" (Indian Book Distributing Co., Calcutta 9), 1987 edition, under the heading "Heat Treatment" (at page 274) summarised that: Heat treatment of metals may be defined as an operation or a combination of operations involving the heating and cooling of metals or alloys in the solid state to produce certain desired properties. As a result, heat treatment plays a vital part in tike manufacturing process of machine parts and tools. Only by heat treatment it is possible to otter the structure and consequently, the mechanical properties of metals required for normal operation of modern machinery and tools. As wett, many shaping, forming and joining processes involve heating and cooling the metal and, thus, 'accidental' heat treatment may result. All heat treatment processes may be considered, to consist of three main parts: (2) The soaking of the metal at that temperature until the structure becomes uniform throughout the section; (3) The cooling of the metal at some pre determined rate to cause the formation of desirable structures within the metal for the desired properties.

37. In the book, I Movikov's "Theory of Heat Treatment of Metals", translated from the Russian language by Mr. V. Afanasyev, published in 1978 by Mir Publishers, Moscow, the learned author (at page 9) has summarized that: Heat treatment is a process that is used most extensively in modern technology to change the properties of metals and alloys. At metallurgical and machine building works, it is one of the principal links in the manufacturing process, for making semi products and machine elements, treatment is used as an intermediate procedure for improving some properties (forgeability, machinability, etc.) or as a final option impart to metals and alloys the desired combination of mechanical, physical and chemical properties which can ensure the specified characteristics of products. As a general rule, major structures machines have more heat treated elements. Heating or cooling of a metal can change its structure, which causes variations in the mechanical, physical and chemical and affects the behaviour of the metal in processing and operation, 38. In the book "Elements of Mechanical Engineering by Mr. K.P. Roy Mr.

S.K. Hajra Choudhury, third edition (Asia Publishing House), under heading "Heat treatment", the learned authors (at page 226) has summarised that: Heat treatment of metals may be defined as an operation or combination of different operations involving the heating and cooling of metals alloy in the solid state to produce certain desired qualities. Heat treatment, therefore, serve one or more of the following purposes: (1) Improve mechanical properties such as tensile strength, hard, ductility, shock resistance, etc.

each of the first four methods, At improvements that take place mainly due to the development of certain micro constituents, while in each of the four others improvements are due to the absorption of carbon or nitrogen or carbon and nitrogen both. Flame hardening is an exception to the above remarks.

39. In the book "Practical Heat Treating" by Howard E. Bayer (American Society for Metals, Metals Park, OH 44073) (1984 edition), in Chapter 1, under the heading "What is Heat Treatment, Classification and Commercial Importance" (at page 1), the learned author has summarisedh that: The generally accepted definition for heat treating metals and metal alloys is n heating and cooling a solid metal or alloy in a way so as to obtain specific conditions and/or properties". Heating for the purpose of hot working (as in forging operations) is excluded from this definition, likewise, the of heat treatment that are sometimes used for products such as glass or plastics are also excluded from coverage by this definition.

Commercial importance. It would be difficult to imagine what life would be like if the properties of metals could not be altered a variety of ways through ate use of heat treatment. Without the benefits derived from heat treating, the auto industry, airplane/aerospace industries, and countless everyday hardware items would be non existent. Indeed, a sharp edge steel razor Made would not be available.

Almost all metals and alloys respond to some form of heat treatment in the broadest sense of the definition. The response of various metals and alloys, however, is by no means equal. Almost any pure metal or alloy can be softened (annealed) by means of a suitable heating and cooling cycle; however, me number of alloys mat can be strengthened or hardened by meat treatment is far more restricted.

Practically all steels respond to one or more type of heat treatment. This is the major reason why steels account for over 80 per cent of total metal production.

40. STEEL AUTHORITY OF INDIA LIMITED (A Government of India Enterprises), Central Marketing Organisation, Branch Sales Office, 104-115, Swastik Chambers, Sion Trombay Road, Chembur, Mumbai - 400 071 vide letter Ref No. MBI/PET/2004 : Division PET : Date 18.06.2004 stated: Cold Rolled Non-Oriented (CRNO), the energy efficient steel, is an essential raw material, recognized the world over for manufacturing magnetic cores and components, electrical stamping & lamination....

Used primarily in special rotating and static electrical equipments, the CRNO steel is characterized by low watt loss and high permeability.

Rourkela Steel Plant (RSP), a unit of Steel Authority of India Limited (SAIL) took the lead and achieved the distinction of being the first in the country to start commercial production of CRNO. Equipped with the state of the art technology, Silicon Steel Mill, which has a capacity to produce 75.000 Tonnes of CRNO per annum, was set up with technical collaboration of M/s ARMCO, USA, a pioneer in the field of electrical steels.

Meeting international standards with respect to magnetic properties, coating, insulation resistivity, dimensional tolerances and lamination factor is the credo at the CRNO unit of RSP. RSP has developed a method to produce CRNO steel coils and sheets of multiple grades with superior magnetic and coating insulation properties and minimum thickness deviation in both transverse and rolling directions. The unit also has a modern Magnetic Testing laboratory, which is one of its kind in the country.

From the I above gives clear idea that these electrical steels are not ordinary steels. Ii; India only two mills are producing this material: CRNO is a raw material to manufacture transformers lamination/transformers cores/motor stamping and E & I lamination.

It has no use in as its condition. It has to undergo various manufacturing steps i.e. shearing, punching, stamping, holing, 'V'-notching etc.

These are the common manufacturing steps adopted by manufacturers of transformers lamination all over, the world and there activity is recognized as a manufacturing activity.

We have observed your manufacturing activities of E & I lamination and also have observed an activity of other manufacturer's who are manufacturing transformers lamination and stamping. Our opinion is that the activity of manufacturing these products is almost same all over in India and outside the country.

As per our opinion you are not doing simple cutting of CRNO steel coil but are producing new item, which is known as E & I lamination and which is used in making transformers. Keeping an eye on the desired electrical/magnetic properties, the design of the transformers are made. Out of these design the design for E & I lamination is made, accordingly different tooling are made for manufacturing of different E&I lamination. Hence with emphasis it can be told that manufacturing of E & I lamination is not simple cutting of CRNO coils/sheets. During the manufacturing process, the size, shapes, dimension, name of the raw material CRNO. are completely changed, while after shearing, stamping, punching, and holing etc. it becomes E & I lamination which is The CRNO steel coil after manufacturing activity will no longer but become stamping or lamination for use in transformers and motors.

Thus, it is a new product. After carrying out various operations the coil/sheet left their characteristics and become lamination for transformers.

The Chapter heading number of Central Excise is also different, for CRNO coil it's 7225.10 and after manufacturing E & I lamination it is 8312.00. The rate of sale tax is only 4% on CRNO coil where as on lamination manufactured it is applicable at prescribed rate. Excise.

Duty is also applicable on transformers lamination at differential rate.

Lamination manufacturing is a highly skill job and it falls under engineering manufacturing category. During manufacturing of transformers E & I lamination many significant visible and invisible changes occur in the material. These changes can be observed and measured by testing equipment and instrument which are as under: By performing manufacturing operation there are some significant invisible changes in the characteristics of the CRNO material. There is change in core loss, hardness, silicon percentage and permeability.

1. The thickness of the original CRNO sheets also changes in micron during the stamping and punching on power press.

2. As a consequence of the same, when the laminations are stacked, the excited winding draws mere current than the estimated current.

3. The flux generated by the exciting current is disarrayed which results in excess no load current which in turn increase the no load wattage.

4. The non linear flux path creates high impedance inductance also which contributes to increase no load current.

5. The lamination ends develop distorted burs, and are not smooth Hence, while stacking uneven gaps are developed.

6. The gaps tend to increase the inductance, resulting in excess no load current.

8. The gaps provide path for natural air and due to the changing flux noise and vibration are increased resulting in high decibel noise surrounding the transformers.

41. VEERMATA JIJABAI TECHNOLOGICAL INSTITUTE (VJTI) [Central Technological Institute, Maharashtra State], MATUNGA, MUMBAI - 400 019 also opined: The above mentioned party has approached this department to give technical opinion on their manufacturing activity, we the undersigned subsequent to the factory visit have found that the factory is engaged in following. The visit was arranged on 18^th March 2004 on the request of the party.

The factory Address of M/s. TRANS LAM ELECTRICALS, is UNIT No. B/6, 7 and 11, Span Industrial complex Dadra silvassa road Village Daora, U.T. of Dadra and NH. During the course of our visit, we found that the concern is engaged in the manufacturing of Electrical Laminations known as "E & I Laminations" which described as Type-43, Type-15, Type-3, Type-31, Type-23, Type-12, Type-17, Type-8, Type-16 E & I laminations. The sizes and dimensions of each type of E & I laminations are as per customer design.

The Concern has installed at the location of the factory, the machines as mentioned below. They have power connection of 25 HP and 14 workers are employed. The details of machines which are installed at the location of the factory are as under: The Concern is manufacturing various type E & I laminations of different sizes. To manufacture each type of laminations different dies & tools are used. For holes of different sizes, different holing tools are used.

They use CRNO steel as the raw material, which they get in the form of coil in various weights. Each coil weighs approximately 2 M.T. to 5 M.T. having a width of approximately 1000 mm and thickness of 0.5 mm. The raw material is purchased from Steel Authority of India Limited. Some of the coils are also imported.

All the manufacturing activities carried out on Power Presses and Shearing Machines are as under: 2. They are shearing the coils into sheets and then into patta, as per required size on shearing machines. After inspection & testing of raw material they are taking suitable material into production for making "E & 'l laminations". Blackish, rusty, thick & improper coating material are kept a side for rejection.

3. They are stamping & punching patta - on heavy-duty power press with required die & tools, The required die & tool are fitted on Power Press.

4. The die is selected as per customer's requirements (size & shape). The burr due to cut on lamination is removed on Debuing Machine to improve stacking factor & decrease the gap.

5. Then they are punching holes on laminations using power press.

Holing die and tools are fitted on Power Press.

6. Then, they are shearing each lamination into two equal parts on Power Press and get the final product E & I laminations.

9. Then, they are packing the finished product in wooden box cover with pole-thin paper for dispatch. They are bundling bigger size laminations before packing.

10. Die and punching tools are maintained uptodate by using surface grinding machines regularly.

By performing manufacturing operations as above, there are some significant invisible changes in the characteristics of the material. There is change in core losses and permeability. Due to proper laminations stacking footer...the original sheet also changes by a very small amount due to the process. During the manufacturing activity of laminations, scrap is also generated.

All this manufacturing activities are carried out by skilled workers. Manufacturing of laminations is a highly skilled job.

Lamination manufacturing activities are generally similar all over the world. Without good quality material skills and knowledge it would not be possible to meet the end user's requirements. CRNO material comes in various grades having grade wise guaranteed specific corelosses. Steel mill that manufactures the coil provides test certificate.

The raw material CRNO coils passes through different stages on different machines. In all this processes raw material CRNO coil disappears, and a new product comes into existence, which is known as E & I laminations comes into existence.

The raw material undergoes a substantial change in physical characteristics such as size, shape, form & dimension. As a result of the above activity the physical characteristics of finished goods are different from that of its raw material. Raw material is transformed into finished goods giving rise to commercially new product, commercially new name, ready to use product without requiring to performing further process, marketable, saleable, and usable as a new product. Thus E & I laminations is a new article or thing in the commercial market. By entire manufacturing activity E & I laminations emerge which have distinctive name, character and use.

A new commercial commodity E & I laminations comes into existence.

The raw material and finished product are different commercial commodities.

To manufacture the transformers of various capacities E & I laminations of different laminations are required as per the technical design. The transformers cannot be made without E & I laminations. Thus, E & I laminations are a basic item for milking all type of transformers. The raw material for the CRNO coils cannot be used in electrical transformers unless stamping, punching, holing & shearing is done with die & tools on power press in a particular size.

Taking into considerations the above facts, as such, in our opinion, the Concern M/s. TRANS LAM ELECTRICALS is carrying on the activity of manufacturing of E & I laminations for transformers.

42. A similar case relating to manufacturing of stampings or laminations came up for consideration before the CEGAT Special Bench in the case of Jhonson Electric Co. v. Collector of Central Excise . In that case also the assessee had Imported Cold Rolled Grain Oriented Electrical Grade Silicon Steel sheet, which after cutting in particular forms, straight away went into transformers as stampings or laminations. It held, "In this case, the cut laminated strips can be used only for the purpose of placement as a cave in a transformer and not for any other purpose. It would indicate that the manufacture of this cut strips was with a view to manufacture electrical stampings. When the manufacture is for particular utility, namely, lamination for transformers, the manufacturing activity would be established. It is the effect of the operations that is mattering for deciding the issue. There is a substantial and basic change in the product in view of the processes of cutting and the design involved.

The steel sheets or strips, which are subject to cutting would no longer be sheets but become stampings or laminations for use in the transformer. Thus, it is a new product compared with a steel sheet or laminated sheets. After cutting to particular shapes, the strips left their character of strips, plane and simple and became laminations or stampings. The strips that have been formed, shaped and worked upon would never be strips again to be used as such. Thus, cutting of the strips amounts to manufacture.

43. The annealing process has been explained during the course of appellate and assessment proceedings. We have also inspected the process. From the records as shown in the table iron loss and magnetizing current loss before and after the annealing process was given it is evident that there is definite reduction in iron loss and magnetizing current loss after the annealing process. The percentage reduction in iron loss at 1.5T is 14.5 - 19.5 and at 1.7T is 19.5 - 32.4. The percentage reduction in magnetizing current loss at 1.5T is 54 - 84.6 and at 1.7% is 120 - 244. The Assessing Officer himself has given the finding In the assessment order that "the annealing process performed by the assessee though decreases the iron loss of the core and relieves the laminations of plastic and elastic stresses and improves the conductivity and magnetic value of the transformer core".

Therefore the view of the AO that 'it cannot be said that because of this process, a new product comes into existence' cannot have any force. In our opinion on reduction of iron and magnetizing loss after the annealing process, the quality and structure of the lamination strips, used in the transformer core are improved and increased.

Various processing stages of the of the activity including the design and drawing involved, the annealing process, the assembling process, the test certificates and special packing in wooden pallet leave no doubt that the activity is a manufacturing activity. The CRGO coils/sheets loose their identity during these processes and a new and different article comes into form, which is called transformer lamination core. It is commercially known in different name in the market than CRGO coils/sheets. It is a different marketable article compared to the CRGO coils/sheets. The CRGO coils/sheets loose their character on cutting to particular shape and size and get structural and qualitative change after annealing process. After assembling process, it becomes the transformer lamination core, entirely a different article. As held by Madras High Court in in the case of Tamilnadu Heat Treatment and Petting Services (P.) Ltd. (supra), the automobile parts to be subjected to heat treatment to increase wear and tear resistance to remove the inordinate stress and increase tensile strength and the process of heat treatment was absolutely essential for rendering the article marketable. Thus, the annealing process brings out manufacture of an article or thing is clearly brought out in this decision.

44. The ITAT Ahmedabad Bench in the case of Anil Steel Traders v. DCIT in ITA No. 739, 740 and 741/Ahd/2004 for Asst. Years 1995-96 to 1997-98 order dated 3.3.2005, in which one of us - JM was a party, following the decision of the aforesaid Madras High Court held as under: 11. We have carefully considered the rival submissions in light of the material placed before us. We do not find much substance in the arguments of the learned DR that the assessee did not carry any activity of manufacturing particularly in view of the decision of the Hon'ble Madras High Court in which, considering the same activities, it was held by the Madras High Court that the assessee carried on the activity of manufacturing. Madras High has turned down the plea of the revenue that since there was no physical change in the article to which heat treatment was given, the activity of annealing was not an activity of manufacturing. Hon'ble Madras High Court after discussion made in respect of process carried on as heat treatment, which include annealing, and also various case-laws have observed as under: In the backdrop and setting of the principles, as enunciated by the Supreme Court and various High Courts as relatable to the activity of "manufacture " or "processing of goods " and in the light of the various literature and books of foreign authors, relatable to the qualitative change, having been brought about by well-termed process, as referred to above, we may now proceed to consider and decide the moot question as to whether the activities carried on by the assessee, namely, receiving untreated crankshafts and forgings and castings from its clients and subjecting them to heat treatment to toughen them up for being used as automobile spare parts can ever be construed as activities relatable to manufacture and, consequently, enable it to claim investment allowance under Section 32A of the Income-tax Act.

We have to take note of the fact that the process of heat treatment to crankshaft, etc. were absolutely essential for rendering it marketable. Automobile parts, as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increase tensible strength. The raw untreated crank shafts and the like can never be used in an automobile industiy. Thus, in the crank shafts subjected to the process of that treatment, etc. a qualitative change is effected, to be fit for use in automobiles, although there is no physical change in them. In such statement of affairs, it cannot at all be stated that crank shafts, subject to heat treatment, etc. cannot at all change the status of new products of different quality for a different quality for a different purpose altogether. In this view of the matter, we are of the view that the activities of the assessee in relation to raw or untreated rank shafts being subjected to heat treatment etc. is definitely a "manufacturing activity" entitling it to claim "investment allowance" under Section 32A of the Income-tax Act. We answer question Nos.2 and 3 accordingly.

In fine, we find that the assessee is engaged in manufacturing activities in relation to crankshafts being subjected to heat treatment etc. for the assessment years 1984-85, 1986-86 and 1986-87 and, consequently, entitled to "investment allowance" under Section 32A of the Income-tax Act, 1961.

These tax case petitions are, thus, disposed off. There shall, however, be no order as to costs, in the circumstances of the case.

12. No decision has been cited on behalf of the revenue wherein the activity of heat treatment, which includes annealing, was held to be not an activity of manufacturing. Therefore, after considering the submissions of both the parties and facts of the case, we find that the activity carried on by the assessee is covered by the aforementioned decision of the Madras High Court in the case of CIT v. Tamil Nadu Heat Treatment And Fetting Services (P) Ltd. (supra).

We therefore direct the AO to allow deduction under Section 801A to the assessee by considering the activity carried on by the assessee as an activity of manufacturing. Thus ground is allowed for all three years.

45. The Assessing Officer in the case of M/s. Alfa Transcore Industries, for Asst. Year 1994-95 in an order Under Section 143(3) of the Act has accepted the claim of the assessee and held as under: The assessee-firm is new. During the year the firm set-up one Unit at Daman for manufacturing of Elect. Transformers Lamination. During the year the turnover was Rs. 28.49 Crores on which G.P. had been shown at 24.18%. The assessee has claimed that it is eligible for 100% deduction because the assessee has set-up new unit at Daman and provisions of Section 80-IA are applicable. After verification, the same is allowed.

46.Similarly for Asst.Year 1995-96 in their case,again, the Assessing Officer, in an assessment order Under Section 143(3) of the Act held as under: As in the preceding year, the assessee firm is engaged in the business of manufacture of Electrical Laminations and Stampings etc.

which are required by the various industries manufacturing electrical transformers and other electrical accessories. During the year under consideration, the gross profit shown by the assessee is 31.12% on total sales of Rs. 63.19 crores as against last year's G.P. of 24.18% total sales of Rs. 28.49 crores. The assessee claimed that it is eligible for 100% deduction Under Section 801 A as in the last year. In view of the fact that the said deduction has been allowed to the assessee in the preceding year, the assessee's claim is accepted.

47. The provisions for exemptions or relief should be considered liberally. As observed in the decision of the Gujarat High Court in the case of CIT v. Gujrat Alluminium Extrusions Pvt. Ltd. 263 ITR 453 (Guj.) and also of the Bombay High Court in the case of Ship Scrap Traders v. CIT 251 ITR 806 (Bom.), the later being jurisdictional High Court for the assessee such liberal view should be applied in the case of the assessee. The Bombay High Court while considering the object of the enactment of Sections 80HHA and 80-I, held that the said expression will have to be construed liberally in a broader commercial sense keeping its object in mind.... The expression "manufacture" has in ordinary acceptation a wide connotation. It means the making of articles, or material commercially different from the basic components, by physical labour or mechanical process. However, the word "manufacture" appears in the company of the word "production" which has a wider connotation than the word "manufacture". The word "production" or "produce" when used In juxtaposition with the word "manufacture" takes in, bringing Into existence new goods by a process which may or may not amount to manufacture. The associated words are indicative of the mind of the legislature. When a word is doubtful or ambiguous in nature, the meaning has to be ascertained by considering the company in which it is found and the meaning of the word associated with it. In view of this case, there may not be any doubt in accepting the activity of the assessee as manufacturing activity. The assessee is carrying out its activity in a priority area where 100% of the income is exempt Under Section 80IB of the Act for a period of five year. It was held by the Court in this case that the expression "manufacture" has in ordinary acceptation a wide connotation. It means the making of articles, or material commercially different from the basic components, by physical labour or mechanical process. The activity will therefore be certainly a manufacturing activity because the article of the appellant is commercially different from the basic raw material.

48. In Arthur E. Newell 223 ITR 776 (AAR), Authority for Advance Ruling held that : "The expression 'manufacture' involves the concept of changes effected to a basic raw material resulting in the emergence of, or transformation into, a new commercial commodity. Judicial decisions on the meaning of the expression 'manufacture', starting with the leading case of Union of India v. Delhi Cloth and General Mills Co.

Ltd. and South Bihar Sugar Mills Ltd. v. Union of India , are legion and it is unnecessary to refer to them in detail. Broadly speaking, the essence of manufacture lies in the change or modification of some material into an acceptable form to satisfy some want, desire, fancy or taste in man. As the Corpus Juris Secundum (volume 56, at pages 685 and 686) puts it: In determining whether an article is or is not a manufacture, or whether a process or operation is not manufacturing, one of the important factors is the extent of the change that has been effected in the original material. While every change in an article is the result of treatment, labour and manipulation, every change is not manufacture. Something more is necessary and the application of labour must be carried out to such an extent that the article suffers a species of transformation and a new and different article emerges.

49. Whether an article is converted into a different article depends on several criteria and one of the essential tests is whether in a commercial sense, the original article has ceased to exist and a new article has taken its place. It is, however, not necessary that the original article or material should have lost its identity completely; all that is important is whether, what has emerged as a result of the operations is a different commercial commodity, having its own name, identity, character or end use. This determination is essentially one of fact and has to be arrived at on a consideration of all relevant factors such as, the quality and nature of the original article, the extent and magnitude of the operations earned out on, or in relation to it, and the commercial identity, character and use of the article produced.

50. In Black's Law Dictionary 5^th edition, the word 'manufacture' has been defined as : "The process or operation of making goods of wares or any material produced by hand, by machinery or by other agency, anything made from raw materials by hand, by machinery or by Article It also states that production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand, labour or by machine." This test is folly applicable in this case as a new and differently known item comes into existence after the processes are applied to raw material.

51. The Supreme Court case of COCO fibers, 1992 (supp) 1 SCC 290 has held that : "By process of manufacture something is produced and brought into existence which is different from that our of which it is made in the sense that the things produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily loose its identity or may become transformed into the basic or essential products.

52. The Supreme Court case of Saraswati Sugar Mills 1992 (1) SCC 418 held that : Manufacturing is a transformation of an article which is commercially different from the one which is constructed. See para 12 of Kores India Ltd. 2004 (174) ELT 7 (SC): 'Manufacture' is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that in manufacture something is brought into existence, which is different from that, which originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of processing it is not necessary to produce a commercially different article.

53. The Supreme Court case of Empire Industries Ltd. 1985 (3) SSC 314 observed that : "To put differently, the test to determine whether a particular activity amounts to 'manufacture' or not is : Does new and different goods emerge having distinctive name, use and character. The moment there is a transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use, and name, whether be it the result of one process or several processes 'manufacture' takes place and liability to duty is attracted".

54. The Supreme Court case of Kores India Ltd 2004 (174) ELT 7 (SC) held: "Ribbons in spools out of jumbo rolls and the resultant product is a distinct, identifiable article having distinct name, function and use. The resultant product is also commercially distinct as understood in commercial parlance and has a separate market. Their function and use are also completely different and both products are not interchangeable.

55. The Supreme Court case of N. C. Budharaja and Co. 204 ITR 412 has observed that : "The words 'manufacture' and 'production' have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this Court in Dy. CST v. Pio Food Packers [1980] 46 STC 63, among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak, J., as he then was, stated the test in the following words (at page 65): Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place.

if by process a different commercial commodity causes into existence the identity of the original commodity ceases to exist and commodity when in existence will serve no purpose but for the said purpose, then it is manufacturing.

57. We shall now deal with the cases facts relied upon the Revenue in comparison with the assessee's cases. In CIT v. Poyilakada Fisheries (P) Ltd. (supra), the Kerala High Court held that the assessee engaged in the processing and export of shrimps was not entitled to the benefit of Sections 80HH and 80-I of the Income-tax Act, 1961. In the case Supreme Court in the case of CIT v. Relish Foods 237 ITR 59 (SC), it is held that the processed or frozen shrimps and prawns are commercially regarded as the same commodity as raw shrimps and prawn; that when raw shrimps and prawns are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing they do not cease to be shrimps and prawns and become other distinct commodities; that there is no essential difference between raw shrimps and prawns and processed or frozen shrimps and prawns and that in common parlance they remain known as shrimps and prawns. The Madras High Court, in the case of CIT v. George Maijo 250 ITR 440 (Mad.) This is also a case of processing of shrimps at any stage of the processing frozen shrimps are neither produced nor manufactured by reason of such processing. The ratio laid down in these case cannot be applied in the present case as the transformer core is commercially regarded as a different commodity compared to the raw material CRGO coil/sheets and is known by its name and not known as CRGO coil/sheets. There is qualitative change in the raw material due to annealing process as accepted by the Assessing Officer in the assessment order.

58. In Lucky Minmat Pvt. Ltd. 245 ITR 830 (SC) : In his case also the assessee was engaged in the business of mining of limestone and marbles. In order to sell it, it has cut and sized the output from the mines. The High Court in this case 226 ITR 245-Raj. held that "manufacture" implies a change but every change is not "manufacture", although every change in the article is the result of treatment, labour and manipulation. To bring about change qualifying as manufacture something more is necessary and that something is transformation, i.e., a new and different article, having a distinct name, character or use, must emerge. Where the commodity retains a continuing substantial identity through the processing stage, it can not be said that it has been manufactured. It was further held that cutting the boulders in to slabs might have been with the aid of machinery, but the original commodity retains a continuing substantial identity through the processing stage, carried on by the assessee company. This finding of the Rajasthan High Court Is affirmed by the Supreme Court by observing that "manufacture" implies a change but every change is not "manufacture", although every change in the article is the result of treatment, labour and manipulation. To bring about change qualifying as manufacture something more is necessary and that something is transformation, i.e. a new and different article, having a distinct name, character or use, must emerge. Where the commodity retains a continuing substantial identity through the processing stage, it cannot be said that it has been manufactured. It was further held that cutting the boulders in to slabs might have been with the aid of machinery, but the original commodity retains a continuing substantial identity through the processing stage, carried on by the assesses company". This finding is applied by the CIT(A) to the case of the assessee and he held that the activity of the assessee was definitely be the manufacturing activity One set of lamination core is having five separate bases called outer limb plates-two, one middle limb plate and yoke plates-two as per the specific drawing and various such sets are required for the transformer in which, every set is of different size.

The assembled transformer core is looks like five pyramids made up of outer limb, middle limb and yoke. It is covered in a water proof sheet.

The raw materials used is called the CRGO coil whereas the products supplied to the transformer manufacturers is called transformer core.

This name is found place in the sale invoices of the appellant. The name is accepted by the Central Excise department and the Sales Tax department by granting benefit of tax free sales have been given. In our opinion the CIT(A) is right in holding that the CRGO transformer core is definitely a new and different marketable article having different qualitative characteristic due to annealing and assembling processes; that the CRGO coil in itself cannot be used in the transformer; that the transformer core can only be used in the transformer : that the CRGO coil is different marketable commodity and transformer core is different marketable commodity; that the CRGO coil looses its existence during the course of various processes; that even the iron loss and magnetizing loss is reduced during the annealing process; that the cutting with specific drawing, testing, annealing and assembling processes are involved in the activity are absent in marble cutting and therefore, the ratio laid down in this decision of Lucky Minmat Pvt Ltd. is not applicable in this case.

59. The case of CIT v. Gem India Manufacturing Co. 249 ITR 307 (SC), was a case where the raw and uncut diamond was subjected to a process of cutting and polishing which yields the polished diamond which was held to be not a different article or thing. The ratio laid down in this decision cannot be applied in this case as there is sufficient material on record to show that transformer core is a new article or thing, which is the result of various processes of manufacturing. The transformer core is a different commercial commodity and known in the trade as such. As aforesaid the Central Excise department is charging excise duty only on account of different article; the Sales Tax department accepts the sales in this name. There is qualitative change in the raw material due to annealing process as accepted by the Assessing Officer in para - 5.14 of the assessment order.

60. In Bherhaghat Mineral Industries (supra), Crushing of dolomite lumps into chips and powder is not a process of manufacture that brings about a new commercial commodity. Similarly in Vijay Granites P. Ltd. (supra) it was held that the act of cutting and polishing granite slabs before exporting them did not involve any process of manufacture or production. The assessee was not entitled to deduction under Sections 32A and 80-I.61. In Sacs Eagles Chicory (supra) it was held, affirming the decision of the High Court, that the only process recorded by the Appellate Tribunal being that the chicory roots were roasted and that they were powdered, the activity of the assessee did not satisfy the test laid down in Aspinwall and Co. Ltd. v. CIT and did not amount to manufacture and the assessee was not entitled to the special deductions under Sections 80HH, 80-I and 80 J of the income-tax Act, 1961.

62. In Vijay Ship Breaking Corporation (supra) Gujrat High Court held that ship breaking activity was not an activity of manufacture or production of any article or thing for the purposes of availing of the benefit of deductions under Sections 80HH and 80-I. This decision is contrary to the jurisdictional High court of Bombay in Ship Scrap Traders (supra) and therefore may not be any help to the revenue.Collector of Central Excise. Hyderabad v. Bakelite Hvlam Limited 1997 911 E.L.T. 13 (SC) in this case the sheets are required to be cut and punched in required size and shape before being used as insulators, it was claimed that the goods cannot be classified under heading 85.46 as insulators. The Supreme Court held that these sheets has electrical insulating properties and can be used as insulators. Mere cutting and punching of these sheets, already having electrical properties, cannot be considered as manufacture of electrical insulators. The ratio of the above decision does not apply in the assessee's case as the issue before the Supreme Court was on classification of the goods, i.e.

whether the above industrial laminated sheets and Glass Epoxy sheets would fall under heading 85.46 as insulators or under heading 70.14 as an article of glass. The Supreme Court held that the goods would fall under heading 85.46, since they were already having electrical insulating characteristics even before the process of cutting and punching.

64. Shaw Scot Distrilleries (Cal-SB)(supra) the undisputed facts of the instant case were that the assessee purchased potable spirit from the distilleries as per agreement. This potable spirit was already manufactured and did not require any further manufacturing. Only some processing was required to produce IMFLs like brandy, whisky and rum etc. by adding certain percentage of water, colour, and essence. For safe marketing, required bottling. Generally manufacturing means consumption of one article for production of another. But, in the instant case, no article or thing was consumed for production of another. Alcohol remained alcohol. There was only reduction of degree of alcohol content because of addition of water to potable alcohol and stirring it. This action at best could be said to be processing and not manufacturing. There should also be transformation of article or thing if manufacturing is involved for the same. But, in the instant case no such transformation had taken place as alcohol remained alcohol both in the beginning and after processing also. In case of manufacturing also, article or thing should be distinct and separate. In the instant case, no new product had come as a by-product, which could be said to be distinct and separate from the original one and alcohol remained alcohol with reduced content of alcohol because of the addition of water. There was also no change in its basic identity. Generally in case of manufacturing there will be change which is considerable and substantial but in the instant case it was not so. In the instant case, the alcohol in the beginning and after processing also remained alcohol. No distinct article or thing had been produced. Alcohol remained alcohol throughout the processing stage till it was marketed.

There is no difference between potable spirit and whisky or brandy except in the process of production, water and certain essences have been added to them. Therefore, although it had undergone a degree of processing, must be regarded as still retaining its original identity.

The original commodity was alcohol and the commodity produced had also remainea alcohol. Therefore, it would be said that no commodity was consumed in the manufacture of another in the instant case. Therefore, there was no essential difference between the potable spirit and the bottled IMFLs. The dealer and the consumer both regard it as alcohol.

The only difference was that in potable spirit some water and essences were added and bottled up nicely to make it presentable for marketing.

Therefore the above discussion clearly showed that the bottled IMFLs and potable spirit must be held to possess the same character, identity as the original before its bottling. Hence, the activities of the assessee did not involved any manufacturing but only processing and, therefore, it was not entitled to the benefit of Section 80HH.65. In India Cine Agencies (supra), it was held that the assessee was only trading in photographic colour paper as a wholesaler and slit the already manufactured and produced photographic paper into required sizes to suit the requirements of its customers and in easily marketable sizes. In the process of slitting bigger rolls into marketable smaller rolls or sizes neither manufacture nor production was involved. A new product did not emerge, even though the gods were handled by forklift and hoist and slit by a computarised slitting machine which process was required to be done in a dark air-conditioned humidity controlled dust proof room. The assessee was not entitled to deduction either under Section 32A or under Section 80-I.66. In S.R. Tissues (P) Ltd. And Anr. (supra) the Supreme Court held that the characteristics of the tissue paper are its texture, moisture absorption, feel, etc. In other words, the characteristics of table napkins, facial tissues and toilet rolls in terms of texture, moisture absorption capacity, feel, etc. are the same as the tissue paper in the jumbo rolls. The said jumbo rolls cannot be conveniently used for household or for sanitary purposes. Therefore, for the sake of convenience, the said jumbo rolls are required to be cut into various shapes and sizes so that they can be conveniently used as table napkins, facial tissues, toilet rolls, etc. However, the end-use of the tissue paper in the jumbo rolls and the end-use of the toilet rolls, the table napkins and the facial tissues remain the same, namely, for household or sanitary use. The Tribunal was right in holding that the characteristics of the tissue paper in the jumbo roll are not different from the characteristics of the tissue paper, after slitting and cutting, in the table napkins, in the toilet rolls and in the facial tissues. No new product had emerged on winding, cutting/slitting and packing. The character and the end-use did not undergo any change on account of the abovementioned activities and, therefore, there was no manufacture on first principles. Brakes India Ltd. v. Supdt. of Central Excise and Ors. applied. Similarly, it was held that there was no deemed manufacture under Section 2(f) of the Central Excise Act. In order to make Section 2(f) applicable, the process of cutting/slitting is required to be recognized by the legislature as a manufacture under the chapter note or the section note to Chapter 48.

Slitting and cutting of toilet tissue paper or aluminium foil has not been treated as a manufacture by the legislature. In the circumstances, Section 2(f) has no application. Mere mention of a product in a tariff heading does not necessarily imply that the said product was obtained by the process of manufacturing. That, just because the raw material and the finished product came under two different headings, it cannot be presumed that the process of obtaining the finished product from such raw material automatically constituted manufacture. Merely because tissue paper in the jumbo roll of the size exceeding 36 cms. fell in one Entry and the toilet roll of a width not exceeding 36 cms. fell in a different Entry, it cannot be presumed that the process of slitting and cutting of jumbo rolls of toilet tissue paper into various shapes and sizes amounted to manufacture. The above tests would also apply to cutting and slitting of jumbo rolls of aluminium foils. Shyam Oil Cake Ltd. v. CCE and Union of India v. J.G. Glass Industries Ltd. applied. There is no change in the nature or characteristics of the tissue paper in the jumbo roll and the nature and characteristics of the tissue paper in the table napkin, facial tissues, etc. Therefore, without such change in the nature or characteristics of the tissue paper, value addition on account of transport charges, sales-tax, distribution and selling expenses and trading margin cannot be an indicia to decide what is manufacture.

Thus, value addition without any change in the name, character or end-use by mere cutting or slitting of jumbo rolls cannot constitute criteria to decide what is "manufacture". Value addition based on price difference only without any change in the name, character or end-use is a dangerous criteria to be applied in judging what constitutes "manufacture". Lastly, the end-use in both the Entries 4803 and 4818.90 is the same, namely, for sanitary or household purposes. In the circumstances, value addition criteria as applied by the Commr. is erroneous. Decorative Laminates (India) (P) Ltd. v. CCE relied on; Computer Graphics (P) Ltd. v. Union of India approved; Foils India Laminates (P) Ltd. v. CCE overruled.

67. In CIT v. Sri Meenakshi Asphalts (supra) it held, that no new product emerged from the process employed by the assessee. What was bitumen continued to be bitumen, but with lesser quantity of oil and moisture. The purposes for which it could be used were only the purposes for which the use of bitumen was appropriate. Heating of the scrap bitumen in order to obtain solid bitumen, by causing the moisture and oil in the scrap bitumen to evaporate or separate, could not be compared to curing of coffee and the conversion of raw berry into coffee beans. The assessee was not entitled to special deductions under Sections 80HHA and 80-I.68. In Tamil Nadu State Transport Corporation Ltd. (supra) the Supreme Court held that from the decision of the High Court see [1999] 239 ITR 375 to the effect (i) that for the purposes of the relief under Section 80HH of the income-tax Act, 1961, there has to be production which brings into existence a new article; and (ii) that when a tyre wears out, its life might be renewed by retreading but a different and distinct commodity cannot be said to have come into existence as a result of retreading, and, therefore, the business of retreading of tyres did not amount to production of a new article entitling the assessee to the relief under Sections 80J and 80HH. Similarly in Vijaya Retreaders (supra) held that in order to claim special deduction under Section 80-I of the Income-tax Act, 1961, there should be manufacture or production of a new article. The word "production" means bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all byproducts, intermediate products and residual products which emerge in the course of manufacture of goods.

The next word to be considered is "article". The word is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in the commercial world. It is equally well to keep in mind the context since a word takes its colour from the context. The rods "article" is preceded by the words "manufactures or produces". Retread means tread again; to replace the worn tread of the outer cover of a rubber tyre with a new tread. There is no manufacture or production of a new artice in the treading of a tyre. It may be a commodity in the market. But the only thing is that a worn out tyre becomes usable. The definition of manufacture in Explanation (iii) to Section 10A of the Act cannot be imported for the purposes of Section 80-I. An assessee who retreads tyres is not entitled to special deduction under Section 80-I.69. In Hindusthan Metal Refining Works (P.) Ltd. (supra) Galvanization is an act or process of galvanizing or coating by which iron or steel is coated with zinc to protect it from rust. The process of galvanizing does not result in the manufacture or production of new goods as such.

Therefore, the business carried on by the assessee in galvanizing metal on behalf of its customers did not involve manufacture or production of any article and was not an industrial undertaking engaged in manufacture and production of articles within the meaning of Section 84(2)(iii) and as such the assessee was not entitled to relief under the section for the assessment year 1965-66 in respect of profits derived by it from such business.

70. In N.C. Budharaja And Co. And Anr. (supra) the Supreme Court held that the assessee was not entitled to the benefit provided under Section 80HH, because the activity of construction of a dam could not be characterized as manufacture or production of an article or articles within the meaning of Section 80HH(2)(i).

71 In Novapan India Ltd. 1994 (73) ELT 769 (SC) it was held that according to the process of manufacture given in the brochure on record, the appellant was carrying on "a unique process where the resin impregnation takes place in an integrated process and this melamine facing is a part of this process, and not what could be a simple gluing of a material subsequently." It is difficult to say from the said process that MFPBs are unveneered particle boards. The melamine facing gives it a smooth polished surface. It looks as if the particle board has been laminated. The true test of classification is understanding in commercial circles or in commercial parlance and not what, according to the appellant, the Encyclopedia Britannica says. Nobody in the trade circles or in the market would consider both the products as one and the same. The words 'unveneered particle boards' in Item 6 of the Table appended to the Exemption Notification cannot and do not take in melamine faced particle boards. The appeal fails and is dismissed with costs." In Paragraph 18 the court observed: 18. We are, however, of the opinion that, on principle, the decision of this Court in Mangalore Chemicals and the Union of India v. Wood Papers referred to therein - represents the correct view of law. The principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee assuming that the said principle is good and sound - does not apply to the construction of an exception or an exemption provision; they have to be construed strictly. A person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. This is for the reason explained in Mangalore Chemicals and other decisions, viz., each such exception/exemption increases the tax burden on other members of the community correspondingly. Once, of course, the provision is found applicable to him, full effect must be given to it. As observed by a Constitution Bench of this Court in Hansraj Gordhandas v. H.H. Dave [1978 (2) E.L.T. (J 350) (SC) : 1978 (2) S.C.R. 253 that such a Notification has to be interpreted in the light of the words employed by it and not on any other basis. This was so held in the context of the principle that in a taxing statute, there is no room for any intendment, that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification, i.e., by the plain terms of the exemption.

2. Definitions. - In this Act, unless there is anything repugnant in the subject or context,- (i) incidental or ancillary to the completion of a manufactured product; and (ii) which is specified in relation to any goods in the Section or Chapter Notes of Schedule I to the Central Excise Tariff Act, 1985 as amounting to manufacture, and the word "manufacture" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

73. It is true that the specific definition given for a specific statute cannot be blindly or mechanically applied while dealing with another statute, but the general meaning of a word cannot be ignored merely because that term is defined in a particular statute. We have not gone by the a particular meaning of the term given in Excise Laws but taken the general meaning in understanding the term 'Manufacture'.

74. The decisions in the case of TELCO v. Union of India 89 ELT 436 (Bom.) and Computer Graphics Pvt. Ltd v. Union of India 52 ELT 491 (Mad) are of no help in view of a direct decision of the CEGAT, Special bench, New Delhi (supra).

75. The opinion of the Standing Counsel of the Income-Tax Department, Gujarat on the point of law and facts involved in this case vide letter dated 05.05.04 does not have legal bearing on the issue. There is no provision in the Act, which empower the Assessing Officer to refer the matter to the Standing Counsel to sought his express opinion or to give an opinion a legal exposition of law. How an Advocate by profession, can decide the issue of manufacturing of a product on which even the High Courts and Supreme Courts have not came to a definite and similar conclusion. Whatever is stated by him is taken by way of arguments by the learned DR and has been considered in arriving at the decision.

Therefore nothing turn on that.CIT v.Prabhudas Kishordas Tobacco Products (P.) Ltd. 154 Taxman 404 (Guj.) held that the tests to ascertain whether an activity amounts to manufacture of production of an article or thing have been laid down and reiterated by various decisions of the Apex Court and the High Courts. Broadly, the requirement is that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end-product after the raw material undergoes the process of manufacture. In other words, the goods purchased as raw material should go in as inputs in the process of manufacture and the result must be manufacture of other goods. The article produced must be regarded by the trade as a new and distinct article having an identity of its own, an independent market after the commodity is subjected to the process of manufacture. The nature and extent of the process would vary from case to case and in a given case, there may be only one stage of processing, while in another case, there may be several stages of processing, and perhaps, a different kind of process at every stage. That with every process the commodity would experience a change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, can it be said that the commodity used as raw material has been consumed in the manufacture of the end-product. To put it differently, the final produce does not retain identity of raw material after it has undergone the process of manufacture. It was a case Bidi manufacturing and the court applying the well-established principles, held the assessee-company was an industrial undertaking engaged in business of manufacturing bidies. Tendu leaves and tobacco, which are used as inputs, do not retain independent identity after the bidies are rolled after undergoing several processes. Commercially, the final product is known in the trade as a distinct commodity and has a separate market for the same. Furthermore, merely because an assessee gets the work done through contractworkers, in other words, enters into a contract with the workers and pays them on per piece basis, the relief cannot be denied. The test is whether the outside agency works directly under the supervision and control of the assessee, it being immaterial whether the processing is done by the workers employed by the assessee, at a place outside the premises of the assessee. It was a case of 80HH and 80-I and the court held that the Tribunal rightly concluded that the activities carried on by the assessee amounted to manufacture of bidies, entitling the assessee to relief.

77. It may be true that employment of huge plant and machinery does not mean that the activity carried on by the assessee is manufacturing/production as such huge machineries are involved even in excavation of marble blocks and cutting and sizing the same, but it is not a manufacturing activity; that a Single machine used for cutting and polishing of diamonds costs about Rs. 1 crore, but still, cutting and polishing of diamonds is not a manufacturing/production activity of the purposes of Chapter VI-A of the Act. however the nature of activity that is carried out on that machine or with the help of that machine would certainly determine whether it was manufacturing activity.

78. The argument that it is registered as a manufacturing unit under the factories Act, Sales-tax Act and Central Excise Laws by itself may not be decisive in view of specific requirement under those statutes and an activity, which is manufacturing under some other Act need not be manufacturing under the Income-tax Act and vice-versa Various courts, including the Hon'ble Supreme Court have gone into minute details of the activity to decide as to whether such an activity is manufacturing under the Income-tax Act or not, though, there were decisions holding that activity as manufacturing under some other Act/Law. Certain examples in this context are cited, i) Crushing of stone is not a manufacturing/production activity under the Sales Tax Laws, whereas, the same is a manufacturing activity under the IT. Act Best Chem & Lime Stone Industries Pvt. Ltd. DBIT ref No. 116181, dtd.

08/12/92 and State of Maharashtra v. Mahalaxmi Stone Civil Appeal No.9157 of 1995 (SC); ii) Twisting & Texturising of yarn is not a manufacturing/production activity under the Sales Tax Laws, whereas, it amounts to manufacturing/production under the IT. Act; iii) Repacking of medicines is a manufacturing/production activity under the Central Excise Laws, whereas, it is not a manufacturing/production activity under the IT. Act, as well asunder the Sales Tax Laws; iv) Preparation of 'Garam Masala' by grinding and mixing of varieties of condiments in a specific manner to give a specific taste and flavour amounts to manufacturing/production under the IT. Laws as well as under the Central Excise Laws, whereas, it is not a manufacturing/production under Sales Tax Laws Sales-Tax Commissioner v. Dhameja Home Industries 54 STC 217; v) Redrawing of wire is not a manufacturing/production activity either under IT. Laws or Sales Tax Laws, but it is a manufacturing/production activity under the Central Excise Laws; vi) Purchase of odd size newsprints and cutting them into smaller sizes does not amount to manufacturing/production under the IT. & ST. Laws, whereas, it is manufacturing/production under the Central Excise Laws State of Gujarat v. Nareshkumar & Bros. 49 STC 264; vii) Cutting timber into sizes, logs, planks, rafters, etc. is not a manufacturing/production activity under the ST. Laws, whereas, it is a manufacturing/production under the IT. Act Pyarelal Khushwant Rai v.State of Punjab (1974) 34 STC 341 & B.S. Bajaj & Sons v. CIT (1996) 135 CTR 491; viii) Slitting paper rolls of bigger width into smaller width is not manufacturing/production either under ST. Laws or under the IT.Laws, whereas, it amounts to manufacturing/production under the Central Excise Laws Commissioner of Sales-Tax v. Paper Process Works (1996) 62 STC 322; ix) Cutting of trees into firewood is not a manufacturing/production activity under the Income-Tax Act, whereas, the same is a manufacturing/production activity under the ST. Laws Bachha Tewari v. Div. Forest Officer (1963) 14 STC 1067 & B.S. Bajaj & Sons v. CIT (1996) 135 CTR 491; x) Excavation of Marble Blocks and cutting into stone of specified dimensions is manufacture/production for Sales Tax Purposes, whereas, it is not manufacture/production for the IT. purposes CTO v. Bhonrilal Jain (1994) 94 STC 118 and Lucky Minerals(P) Ltd. . Even under the Income-tax Act, an activity, which is manufacturing under one section, need not be manufacturing under another section. A sample example of this is treatment of cutting and polishing of diamonds as non-manufacturing activity for the purpose of Chapter VI-A of the Act and treating the same as a manufacturing activity for the purpose of Section 10A and 10B of the Act.

79. Similarly the logic and reasoning adopted by the CIT(A) that perusal of photograph would made it evident that the finished product is materially different from the raw material and that in view of the above the assessee has manufactured the finished good is only a supporting material and that by itself cannot a ground for determining the issue.

80. On the analysis of the above, inspection of factory and looking to the processes applied and carried out by the assessee, the finding of the AO in earlier assessments in the group cases, the literature and treatise of various foreign and Indian authors, the reports of SAIL and Veermata Institute, the treatment given in Excise and Sales Tax proceedings, and various case laws relied upon by the Counsel of either side and other submissions, we are of the opinion that making of CRGO Core lamination from CRGO Steel is a manufacturing activity. These are specially made for use in electric transformers in a prescribed and required way and assembled in a pyramidal form to be used only in transformers. The assessee would therefore rightly held to be entitled to deduction Under Section 80IB of the Act. the order of the CIA(A) is accordingly upheld.This order is pronounced in the open court on October, 2006.(I.P. BANSAL) (R.P. GARG)JUDICIAL MEMBER VICE PRESIDENT 1. I have carefully gone through the order proposed by Hon, Vice President. I have also discussed the issue with him but I am unable to persuade myself to agree with the order vide which it has been held that assessees in the present cases are entitled to claim deduction Under Section 80IB. I, therefore, proceed to express my view on the subject matter.

for the years under consideration at NIL by claiming following amount of deduction Under Section 80IB @ 100% in their respective returns:---------------------------------------------------------------------SI.Name of assessee Amount of deductionNo. Under Section 80IB @ 100%---------------------------------------------------------------------1.

M/s National Lamination Industries Rs. 6,43,64,670/----------------------------------------------------------------------2. M/s Alfa Industries Rs. 3,55,86,392/--------------------------------------------------------------------- Facts and circumstances of both the cases are identical and similar.

So, further discussion is made by referring to one assessee only i.e.

M/s National Lamination Industries.

Rolled Grain Oriented Electric Steel (named shortly CRGO) rolls/coils into CRGO Core Lamination sheets which are used in making 'transformers'. For such conversion the assessee applies following process on CRGO in its factory premises:(a) Testing -wherein, material to be cut is tested(b) Slitting -wherein, CRGO rolls/coils are cut to required width(c) Shearing -wherein, it is cut to required length.(d) Notching -wherein, a v. shape is cut on sheets.(e) Holing -wherein, a hole is cut on the sheets.(f) Annealing -wherein, the cut sheets are passed through electric furnace(g) Deburring -wherein, burrs formed on the edges of sheets while cutting is removed,(h) Core -wherein, the cut CRGO sheets of various dimensions assembling are stacked one over the other in a specific pattern,(i) Packing -wherein, it is packed in wooden boxes.

4. It was explained to Assessing Officer that assessee imports raw material called CRGO electrical steel strips/sheets/coils in prime and secondary quality and it comes in the thickness of 0.23, 0.27, 0.30 & 0.35 mm. The electrical steel comes in various grades with each having specific iron loss, also called core loss which is guaranteed. The total losses are the losses expressed in watts per kilogram. Core loss is the electrical power lost in terms of heat within the core of electrical equipment, when cores are subjected to AC magnetizing force.

Every type of steel has "grains" which consists of "domains" which are electrical charges oriented in any random direction and it is for this reason that the transformers are being made from CRGO core lamination sheet instead of Mild Steel because if the same is prepared from Mild Steel the size of will be very large.

5. It was explained that various machines are required for the process of manufacture such as grinding machines, shearing machines, slitting line, power presses for holing and notching, Decoilers, annealing furnace, laboratory equipment like Eepstien Tester, Franklin tester, stacking, factor measuring instrument etc.

6. For storage of CRGO steel it was explained that CRGO steel is a delicate steel has to be handled with care. As the magnetic property of the steel and not the tensile strength is the important quality required to be maintained. If storage is not done properly, it ultimately leads to higher losses.

7. It was explained that stresses are of two types, elastic stress and plastic stress. An elastic stress is a temporary stress which any CRGO steel may be subjected to like some load on top of the coil or a slight force to decoil. The moment the stress is removed, the original magnetic properties of the material are restored and these are no longer damaged. However, a plastic deformation due to winding into cores or pulling or stretching or bending CRGOs can only be rectified by a stress relief annealing at around 820C. Thus it was explained that the material being delicate electrical magnetic property has to be handled with care.

8. It was explained that after storage second stage requires testing of raw material which is stringent and exhaustive. For such testing the assessee maintains fully equipped laboratory with the latest measuring equipment and before issuing the coils for production, samples from each coil of specific width and length are cut as per the specification for testing of electrical steel. The test is carried out to confirm the iron loss at particular induction and such instrument is known as Epstein Tester.

9. Thereafter the material is sent for slitting to cut the coils to the required width as per programme from the planning department.

10. Thereafter the coils are slitted and it goes to Shearing Section where required length of lamination are cut.

12. Thereafter holing is done which are made as per specification of customers.

13. Thereafter annealing is done. It was explained that it is a very important process. It is done on electrically operated Annealing Furnace and all the process individual laminations are annealed at 820C temperature and the process brings a vast characteristic change in the composition of the material. By this process most of the plastic and elastic stresses are relieved from the material and it improves the magnetic valve of the material, which in turn improves the conductivity. Annealing activity also reduces iron loss considerably which ultimately increases the durability of Transformer.

14. Thereafter Deburring is done. It was explained that burrs are residual steel on the edges of lamination on which, activities were performed. During these activities, the thickness of the material increases at edges. Burrs decrease the stacking factor and also increase the overall losses of CRGO Steel and also reduce the conductivity at the edges of laminations. Thus deburring process is done, which also removes the oxides formed at the edges. Burrs are reduced to an extent by annealing process.

15. Thereafter Core assembling is done wherein individual cut sheets are clamped to form a core. Core assembling is a delicate operation which has to be done with great care. The method of holding the lamination in a core assembly and the mechanical pressure applied to the core assembly also affects the total core loss. High assembly pressures decrease the service resistance. Therefore, excessive clamping on the core must be avoided as the resistance of surface insulation is inversely proportional to the pressure applied.

16. It was explained that final product is totally different in electrical properties in comparison to the raw coils. CRGO raw material can be used in other electrical applications whereas CRGO lamination can be used only in different types of Transformers. The CRGO material is in coil and sheet form whereas after process it is converted into Transformer Core, which consists of number of pieces stacked. Each CRGO lamination produced is specific to the customer's requirements and cannot be used by other customers.

17. Thereafter packing is done. The packing process is done as per specification received from each customer. In all of the above processes great care is taken to ensure that absolute precision is maintained regarding the dimensions. Only skilled and qualified personnel are allowed to work. Material with inaccurate dimensions results in a distortion of flux and increase in overall core losses.

Valuation in thickness in the same width step of material also results in core building and overall increase in core loss. The company is maintaining international standard. It was thus claimed that the activities done by assessees are activities of manufacturing and production of an article or thing.

18. On the basis of above processes done on CRGO it is the claim of assessee that it is engaged in the activity of manufacturing and production of an article within the meaning of Section 80IB(2)(iii), which is one of the conditions to make entitled the assessee to claim deduction Under Section 80IB.19. The Assessing Officer did not allow such claim of the assessee on the ground that assessee is not engaged in the activities of manufacture and production of an article or thing. According to Assessing Officer the word "manufacture" implies a change, but every change in the article is result of treatment of labour and manipulation. In the instant case, the basic operations that are being done are cutting. The annealing process performed by the assessee though decreases the iron loss of the core and relieves the laminations of plastic and elastic stresses and improves the conductivity and magnetic value of the transformer core, it cannot be said that simply because of this process, a new product comes into existence. Thus the Assessing Officer expressed the view that burring, annealing and core assembling, all other processes done by the assessee are cutting of varying fashions. Thus, the activity of the assessee cannot be treated as a manufacturing activity. Relying on the following decisions he held that assessee is not involved in manufacturing activities:CIT v. Tamilnadu Heat Treatment and Fetting Services (P) Ltd. 238 ITR 529 (Mad) The decision of Assessing Officer was challenged in an appeal filed before CIT(A). The submissions made before Assessing Officer were reiterated and apart from that it was pleaded that assessee employed huge plant and machineiy and is an industrial undertaking engaged in manufacturing activities. The assessee firm holds licence to work as a factory under the provisions of Factories Act and its licence number is 1390, in which it was indicated that the factory of assessee is engaged in the manufacturing of electrical stamping and lamination. It was pointed out that assessee is registered with Sales-tax authorities and Xerox copy of Sales-tax Registration was furnished in which it was also mentioned that assessee firm is engaged in the manufacture of electrical lamination. It was also pointed out that assessee is registered with Central Excise authorities where also the assessee is registered as manufacturing unit. It was explained that CRGO sheets are raw material and this is a marketable commodity in the metal market.

Finished products being Transformer Core/Electrical Lamination is a different marketable commodity having independent sale in the electrical market. The assessee is liable for excise duty on such product. Manufacturing process was also explained which has already been discussed in the above part. Relying on photograph of raw material it was submitted that the raw material was different from finished product. Attention was drawn to the comparative chart of properties of the material after the process of annealing to show that electrical property of raw material was materially different than the finished product and reliance was placed on following decisions:Engineering Works (P) Ltd. v. CIT 6. 68 ITR 325 (Bom) CIT Bom. City 1 v. Tata Locomotive & Engg. Co.

Ltd. 7. 257 ITR 737 (Punjab & Haryana) CIT v. Oswal Woollen Mills Ltd.(No. 1)(Mad) CIT v. Tamilnadu Heat Treatment & Fetting Services (P) Ltd. (No.20. It was explained that the provisions of Section 80IB are in the nature of incentive provisions for encouragement of overall development of industries in the country and law providing such incentive should be construed liberally.

21. It was further pleaded that if it is considered that two views are possible then also the issue should be decided in favour of assessee and for this purpose reliance was placed on the decision of Hon.

Supreme Court in the case of CIT v. Vegetable Products Ltd. 88 ITR 192.

The Assessing Officer also represented before CIT(A) and also submitted two reports which are dated 24.8.2004 and 22.9.2004. Relying on the submissions made by Assessing Officer as well as the assessee, the findings of CIT(A) are as follows: i) Registration certificates issued under various Acts are not decisive factors to decide whether the activity of assessee is manufacturing or not and the question of manufacture has to be decided on the facts of the case by considering the ratio of judicial decisions.

ii) The decisions rendered by Courts under various Acts to hold that whether a particular activity is manufacturing or not can be considered to decide the issue that whether assessee is involved in the activity of manufacturing or production of an article or thing within the meaning of Section 80IB. iii) There is no decision either of the Tribunal or High Courts on the issue of Transformer Core or Transformer Lamination as the Transformer Core or Transformer Lamination is the main component in the Transformer and are being manufactured since long it implies that issue of Transformer Stamping or Transformer Lamination or Transformer Core was not in dispute in the Income-tax Department and it must have been accepted as manufacturing activity by the Income-tax Department Reference to paragraph 34 of CIT(A)'s order .

iv) In other case of M/s Stamcor the issue was decided in favour of assessee and following the said order he has also decided the similar issue in favour of another assessee vide his order dated 15^th July, 2004.

v) There is a Special Bench decision of CEGAT in the case of Jhonson Electric Co. v. Collector of Central Excise , wherein the appellant who had imported Cold Rolled Grain Oriented Electrical Grade Silicon Steel sheet, which after cutting in particular forms straight way went into transformers as stampings or laminations, was held to be new product compared with a steel sheets or laminated sheets. Thus it was held that process was a manufacturing process. In that case annealing process was not done even then it was held that it was a manufacturing activity.

vi) The Assessing Officer himself has indirectly accepted that the activity of assessee is manufacturing activity. Reliance in this regard is placed on the following observations of Assessing Officer: It was seen that majority of the activities performed by the assessee was cutting activity, barring the annealing activity.

On going through the submission with respect to the activity of the assessee, it is seen that majority of the activity performed by the assessee is that of cutting in the form of slitting, shearing, V-notching and holing. The activities that are different from cutting are annealing and core assembling.

It is hence clear that "manufacture' implies a change, but every change is not "manufacture " although every change in the article is the result of treatment of labour and manipulation. In the instant case, the basic operations that are being done are cutting. The annealing process performed by the assessee though decreases the iron loss of the core and relieves the laminations of plastic and elastic stresses and improves the conductivity and magnetic value of the transformer core, it cannot be said that simply because of this process, a new product comes into existence. Barring annealing and core assembling, all other processes done by the assessee are cutting of various fashions.

Ld. CIT(A) also visited the factory premises of assessee along with Assessing Officer on 3/9/2004 and a report was also submitted by Assessing Officer on the annealing process in which it was submitted that CRGO sheets were just passed through the furnace and it does not harden the metal and sheets coming out from annealing process were picked up with bare hands which shows that more heat and duration of exposure to heat may be probably in seconds which cannot bring about structural changes in the metal. CIT(A) observed that such reporting of Assessing Officer is factually incorrect and prepared without going through the assessment order and documents submitted during the course of assessment proceedings. Thus CIT(A) did not agree with the report of Assessing Officer that annealing does not bring any structural change in the metal as it decreases the iron loss of the core and relieves the lamination of plastic and elastic stresses and improves the conductivity of magnetic value of Transformer core.

22. Considering the various processes adopted by the assessee he concluded that Transformer Lamination Core was an entirely different article as per following observations: 50. Considering the various processing stages of the appellant's activity including the design and drawing involved, the annealing process, the assembling process, the test certificate given and packing in wooden pallent, I have no doubt that the activity of the appellant is not a manufacturing activity. The CRGO coils/sheets loose their identity during the manufacturing process and a new and different article comes into form which is called transformer lamination core. It is commercially known in different name in the market than CRGO coils/sheets. It is a different marketable article compared to the CRGO coils/sheets. The CRGO coils/sheets loose their character while cutting to particular shape and size and get structural and qualitative change after annealing process. After assembling process, it becomes the transformer lamination core, entirely a different article.

Discussing the various case laws relied upon by Assessing Officer he has held that the same were not applicable to the case of the assessee as under:Lucky Minmat (P) Ltd. v. CIT 245 ITR 830 (SC). Ld. CIT(A) observed that the decision being given on marble blocks cannot be applied. He observed that the CRGO is definitely a marketable article which even is accepted as a different item by Central Excise Department and Sales-tax Department, is marketable commodity. Thus the case of Lucky Minmat (P) Ltd. (supra) cannot be considered to be applicable to the case of assessee.

b) CIT v. Gem India Manufacturing Co. 249 ITR 307 (SC) Relying on the same argument as given for Lucky Mineral (P) Ltd. 226 ITR 245 (Raj) he has held that this case is also not applicable.

c) CIT v. Relish Foods 237 ITR 59 (SC) which is a case of processed or frozen shrimps and prawns was also held inapplicable due to the change of name of finished article in the case of assessee which was accepted even by Central Excise Department and Sales-tax Department.

Similar is the position with the case of CIT v. George Maijo 250 ITR 440 (Mad).

d) CIT v. Sri Meenakshi Asphalts 266 ITR 626 (Mad) which is a case relating to Bitumin has been distinguished on the ground that no new product emerged in the said case by the process employed.

e) TELCO v. Union of India 89 ELT 436 (Bom) and Computer Graphics (P) Ltd. v. Union of India 52 ELT 491 (Mad) These decisions have been held to be inapplicable on the ground that these were not part of the assessment order and also on the ground that Assessing Officer cannot rely on excise cases when she is of the opinion that manufacturing is differently treated in Income-tax Act and Central Excise Act. He also held that there is a direct decision of CEGAT Special Bench 'B1', New Delhi in the case of Jhonson Electric Co. v. Collector of Central Excise (supra), which is in favour of assessee. Therefore, the decisions of Bombay and Madras High Courts cannot be applied.

23. He did not accept the report submitted by Assessing Officer which was an opinion obtained from Shri Ramesh J. Trivedy, Standing Counsel of the Income-tax Department, Gujarat, as the same was only an opinion and the issue was to be decided in the light of various judicial pronouncements.

24. He further referred to the following decisions relied upon by the assessee and has come to the conclusion that claim of assessee that it is involved in activity of manufacturing and production of an article or thing within the meaning of Section 80IB is acceptable: i) Aspinwall and Co. Ltd. v. CIT 251 ITR 323 (SC) on the ground that a new and different article has emerged from the process carried on by the assessee and the existence of article is accepted by Central Excise Department and Sales-tax Department.

ii) Ship Scrap Traders v. CIT 251 ITR 806 (Bom) on the ground that enactment of Sections 80HHA and 801 will have to be construed liberally in a broader commercial sense keeping its object in mind and also the decision of Hon. Gujarat High Court in the case of CIT v. Gujarat Alluminium Extrusions (P) Ltd.CIT v. Tamilnadu Heat Treatment and Fetting Services (P) Ltd. 238 ITR 529 to hold that annealing process done by assessee is a manufacturing activity.

25. He has held that following decisions relied upon by the assessee are not applicable:Singh Engg. Works (P) Ltd. v. CIT 74. After carefully considering the facts of the case and the ratio laid down by various courts in the decisions relied upon by the Assessing Officer as well as by the ld. Counsel as discussed in paragraph 28 to paragraph 73 above, I am of the considered opinion that the appellant firm was engaged in the manufacturing of transformer core, a distinct and commercially different article. The activity of the appellant firm is, therefore, held to be as manufacturing activity. The appellant is entitled to the deduction available Under Section 80IB of the Act. The finding given by the Assessing Officer on this issue is rejected and he is directed to allow the deduction to appellant Under Section 8MB of the Act.

26. Various contentions of both parties on this issue are recorded in the order proposed by Hon. Vice President and these are mentioned in paragraph 20 to 25 of that order and for the sake of brevity the same are not repeated.

The Bench also visited the factory premises of the assessee and the report of the Bench has been reproduced in paragraph 26 of the proposed order which also is not reproduced for the sake of brevity.

In paragraph 27 the comments of revenue and Bench report are reproduced which are also not being reproduced for the sake of brevity.

I have carefully considered the rival submissions in the light of material furnished before us.

Under Section 801B(2)(iii) it is an essential condition that eligible industrial undertaking should manufacture or produce an article or thing not being an article or thing specified in list in the Eleventh Schedule. The relevant portion of Section 80IB is reproduced below for the sake of convenience: 80IB (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely: (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section; ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India: (v) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employees ten or more workers in a manufacturing process carried on with the aid of power, or employees twenty or more workers in a manufacturing process carried on without the aid of power.

The deduction under Section 80IB has been denied by Assessing Officer on the ground that industrial undertakings of the assessees (hereinafter the assessee) have not fulfilled the condition as laid down in Section 80IB(2)(iii) inasmuch as it does not manufacture or produce an eligible article or thing. There is no dispute to the extent that the article or thing claimed to be manufactured and produced by the assessee is not an article or thing specified in list in the Eleventh Schedule. Now, therefore, the question in the present appeals is limited only to examine, is that whether assessee is manufacturing or producing an article or thing within the meaning of Section 80IB(2)(iii).

27. Before proceeding further it is necessary to consider the first arguments of the assessee that as it deployed huge machinery and it has been granted with licences under various Acts in itself are indicative of the fact that assessee is manufacturing and producing eligible article or thing to make it entitled for deduction under Section 80IB.28. Ld. CIT(A) has rejected the contention of the assessee that grant of licences under various Acts is not decisive factor to hold that whether assessee is involved in activity of manufacturing or producing an article or thing so is the case with the contention that the huge machinery is deployed by the assessee in the process and this contention of assessee is liable to be rejected in the light of decision of Hon. Jurisdictional High Court in the case of CIT v. Vijay Ship Breaking Corporation and Ors. 261 ITR 113 (Guj) wherein it has been held by the Hon. High Court that merely because the ship-breaking is considered as an industry, it would not be an industry engaged in manufacture or production of any article or thing. Benefit of the provisions of Sections 80HH and 801 is clearly not intended for such ship-breaking activities which do not result in bringing into existence any new article or thing. It will be relevant to reproduce the following observations of their Lordships: 27. Thus, there is nothing whatsoever in the process of ship-breaking activity which can be termed as manufacture or production of any article or thing. The dismantled material was already existing as a component of die old ship. The process of extracting steel plates from it while dismantling the ship will not make such extraction of existing material an activity of manufacture or production of such material nor will the process of cutting extracted steel plates for convenient disposal be manufacture or production of such steel plates. Merely because the ship-breaking is considered as an industry, it would not be an industry engaged in manufacture or production of any article or thing. Benefit of the provisions of Sections 80HH and 80-I is clearly not intended for such ship-breaking activities which do not result in bringing into existence any new article or thing. The word "manufacture" in the context of Sections 80HH and 80-I of the Act would mean making of articles or things. While dismantling the ship, steel plates are not made but only removed which is not the same thing as making; of steel plates. The word "production" in context of these provisions would mean the action of making or manufacturing from components or raw materials an article or thing and not just removing existing article or cutting it. The Supreme Court in Indian Poultry v. CIT , held, in context of Section 80-I, that it was not possible to conclude that the dressing of poultry is tantamount to manufacture. In CIT v. Gem India Manufacturing Co.

, the Supreme Court held in context of Section 80-I, that there can be little difficulty in holding that the raw and uncut diamond is subjected to process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. In CIT v. Venkateswara Hatcheries (P) Ltd. 80HH, 80HHA, 80-I and 80J, held that the business of the assessee who was having poultry farms and running a hatchery where eggs were hatched on a large scale by adopting latest scientific and technological methods was not an industrial undertaking nor was it engaged in the business of producing 'articles or things" and, therefore, the assessee was not entitled to deductions under the said provisions.

In the light of above observations of their lordships of jurisdictional high court it will be difficult to accept the proposition that merely because assessee has been recognized as industrial undertaking in the licences granted under various Acts and it employees latest scientific and technological methods on a large scale cannot in itself be decisive factor to hold that the assessee is manufacturing or producing an article or thing and it has to be examined on merits that whether the activity of the assessee is actually an activity of manufacturing or production of an article or thing. Thus the preliminary argument of the assessee has to be rejected that on the basis of deployment of huge machinery with latest scientific and technological methods for the process carried on by it and licences granted under various Acts in itself are sufficient to indicate that assessee is manufacturing and producing an article or thing within the meaning of Section 80IB(20(iii). Therefore, it has to be examined on merits that whether assessee is actually engaged in the activity of manufacturing or producing an article or thing as required under Section 80IB(2)(iii).

29. The term "manufacture" and "produce" as described in Section 80IB(2)(iii) are not defined in Income-tax Act, 1961 (hereinafter the Act). Therefore, the same has to be analysed as interpreted by the Courts and by now it has almost become settled that what should be the real test to come to the conclusion that whether there is an activity of manufacturing or production of an article or thing.

30. Their Lordships of Hon. Supreme Court have examined both the terms "manufacture" and "production" in the light of various pronouncements and definitions etc. in the case of CIT v. N.C. Budharaja & Co. and Anr. etc. etc. 204 ITR 412 (SC). The relevant observations of their Lordships are reproduced below for the sake of convenience: The words "manufacture" and "production" have received extensive judicial attention both under this Act as well as Central Excise Act and the various Sales-tax Laws, The word "production" has a wider connotation than the word "manufacture". While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this Court in Dy. Commr. of ST v. Pio Food Packers 46 STC 63 (SC) among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak, J. as he then was, stated the test in the following words.

Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place.

The word "production" or "produce" when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.

31. In the case of Aspinwall & Co. Ltd. v. CIT 251 ITR 323 (SC) it has been observed as under: 8. The word 'manufacture' has not been defined in the Act. In the absence of a definition of the word 'manufacture' it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity.

9. This Court while determining as to what would amount to a manufacturing activity held in Dy. CST v. Pio Food Packers (1980) Supp. SCC 174, that the test for determination whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognized in the trade as a new and distinct commodity. It was observed: Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another and indeed there be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.Commissioner of Central Excise v. S.R. Tissues (P) Ltd. and Anr. 197 CTR (SC) 437 while examining the issue that whether activity of converting jambo rolls of tissue paper by the process of unwinding, cutting/slitting and packing is an activity of manufacture and production and it was observed as under: 10. At the outset, we may point out that the assessee is one of the downstream producers. The assessee buys duty-paid jumbo rolls from M/s Ellora Paper Mills and Mis Padamjee Paper Mills. There are different types of papers namely, tissue paper, craft paper, thermal paper, writing paper, newsprints, filter paper, etc. The tissue paper is the base paper which is not subjected to any treatment. The jumbo rolls of such tissue papers are bought by the assessee, which undergoes the process of unwinding, cutting/slitting and packing. It is important to note that the characteristics of the tissue paper are its texture, moisture absorption, feel, etc. In other words, the characteristics of table napkins. facial tissues and toilet rolls in terms of texture, moisture absorption capacity, feel. etc. are the same as the tissue paper in the jumbo rolls. The said jumbo rolls cannot be conveniently used for household or for sanitary purposes.

Therefore, for the sake of convenience, the said jumbo rolls are required to be cut into various shapes and sizes so that they can be conveniently used as table napkins, facial tissues, toilet rolls, etc. However, the end-use of the tissue paper in the jumbo rolls and the end-use of the toilet rolls, the table napkins and the facial tissues remain the same, namely, for household or sanitary use. The predominant test in such a case is whether the characteristics of the tissue paper in the jumbo roll enumerated above is different from the characteristics of the tissue paper in the form of table napkin, toilet roll and facial tissue. In the present case, the Tribunal was right in holding that the characteristics of the tissue paper in the jumbo roll are not different from the characteristics of the tissue paper, after slitting and cutting, in the table napkins, in the toilet rolls and in the facial tissues.Brakes India Ltd. v. Supdt. of Central Excise and Ors.

test of character or end-use by observing as follows "If, by a process, a change is effected in a product, which was not there previously, and which change facilitates the utility of the product for which it is meant, then the process is not a simple process, but a process incidental or ancillary to the completion of a manufactured product. It will not be safe solely to go by a test as to whether the commodity after the change takes in a new name, though in stated circumstances, it may be useful to resort to it.

This may prove to be deceptive sometimes, for it will suit the manufacturer to retain the same name to the end product also. The 'character or use' test has been given due importance by pronouncements of the Supreme Court. When adopting a particular process, if a transformation takes place, which makes the product have a character and use of its own, which it did not bear earlier, then the process would amount to manufacture under Section 2(1) irrespective of the fact whether there has been a single process or have been several processes.

12. Applying the above tests, we hold that no new product had emerged on winding, cutting/slitting and packing. The character and the end-use did not undergo any change on account of the abovementioned activities and, therefore, there was no manufacture on first principles.Union of India v. J.G. Glass Industries Ltd. , this Court has succinctly drawn a distinction between manufacture vis-a-vis process and in the course of the judgment, it has been observed as follows: 16. On an analysis of the aforesaid rulings, a two-fold test emerges for deciding whether the process is that of 'manufacture'. First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist; secondly, whether the commodity which was already in existence will serve no purpose but for the said process. In other words, whether the commodity already in existence will be of no commercial use but for the said process. In the present case, the plain bottles are themselves commercial commodities and can be sold and used as such. By the process of printing names or logos on the bottles, the basic character of the commodity does not change. They continue to be bottles. It cannot be said that but for the process of printing, the bottles will serve no purposes or are of no commercial use.

17. Applying the above tests to the facts of the present case, we hold that mere mention of a product in a tariff heading does not necessarily imply that the said product was obtained by the process of manufacturing. That, just because the raw material and the finished product came under two different headings, it cannot be presumed that the process of obtaining the finished product from such raw material automatically constituted manufacture. In the present case, merely because tissue paper in the jumbo roll of the size exceeding 36 cms. fell in one Entry and the toilet roll of a width not exceeding 36 cms. fell in a different Entry, it cannot be presumed that the process of slitting and cutting of jumbo rolls of toilet tissue paper into various shapes and sizes amounted to manufacture. The above tests would also apply to cutting and slitting of jumbo rolls of aluminium foils (which item is the subject-matter of some of the civil appeals herein).

33. In the case of CIT v. Gem India Manufacturing Co. 249 ITR 307 (SC) it is held that cutting and polishing of raw-diamonds and conversion thereof in finished diamond was not manufacture or production of an article or thing and it was observed as under: 4. The Tribunal took the view that it did because in 'common parlance and commercial sense raw diamonds are not the same thing as polished and cut diamonds. The two are different entities in the commercial world. Though the chemical composition remains the same the physical characteristics of shape and class, etc. are substantially different'. It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusions that, either in common or in commercial parlance, raw diamonds were not the same thing as polished and cut diamonds, and that they were different entities in the commercial world. An ipse dixit of the Tribunal is not the best foundation for a decision.

5. The High Court, as aforestated, concluded that the case was covered by its decision in the case of CIT v. London Star Diamond Co. (I) Ltd. (supra). It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of Section 2(8) of the Finance Act, 1975, and that, in answering that question, the High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the "processing of goods" to convert them into marketable form. The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things.

6. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.

The appeal is, therefore, allowed. The order under challenge is set aside. The question quoted above is answered in the negative and in favour of the Revenue. The assessee shall pay to the Revenue the costs of the appeal.

34. In the case of CIT v. Prabhudas Kishordas Tobacco Products .(P) Ltd. 282 ITR 568 (Guj) it has been held that the tests to ascertain whether an activity amounts to manufacture or production of an article or thing as laid down and reiterated by various decisions of the apex Court and this High Court, broadly, are that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end-product after the raw material undergoes the process of manufacture and the final product does not retain the identity of raw material after it has undergone the process of manufacturing. It will be relevant to reproduce the following observations of their Lordships of Hon. High Court: 7. The tests to ascertain whether an activity amounts to manufacture or production of an article or thing have been laid down and reiterated by various decisions of the apex Court and this High Court. Broadly, the requirement is that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end product after the raw material undergoes the process of manufacture. In other words, the goods purchased as raw material should go in as inputs in the process of manufacture and the result must be manufacture of other goods. The article produced must be regarded by the trade as a new and distinct article having an identity of its own, an independent market after the commodity is subject to the process of manufacture.

The nature and extent of the process would vary from case to case, and in a given case, there may be only one stage of processing, while in another case, there may be several stages of processing, and perhaps, a different kind of process at every stage. That with every process, the commodity would experience a change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, can it be said that the commodity used as raw material has been consumed in the manufacture of the end product. To put it differently, the final product docs not retain the identity of the raw material after it has undergone the process or processes of manufacture.Union of India v. Delhi Cloth & General Mills Co. Ltd. observed that manufacture means "bringing into existence a new substance" and does not mean merely "to produce some change in the substance" however minor in consequence it may be.

The following passage from Permanent Edition of Words and Phrases, Vol.

26 was referred to "Manufacture implies a change, but every change is not manufacture and yet every change of the article is the result of treatment, labour and manipulation. But something more is necessary and there must be a transformation, a new and different article must emerge having a distinctive name, character or use." It will be relevant to reproduce following observations of Hon. Supreme Court from the said decision: According to the ld. Counsel, 'manufacture' is complete as soon as by the application of one or more process, the raw material undergoes some change. To say this is to equate 'processing' to 'manufacture' and for this we can find no warrant in law. The word 'manufacture' used as a verb is generally understood to mean as 'bringing into existence a new substance' and does not mean merely 'to produce some change in a substance', however minor in consequence the change may be.

Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use.

The Supreme Court has followed the central idea in the above passage in a large number of cases for e.g., Devi Dass Gopal Krishna v. State of Punjab , CST v. Dr. Sukh Deo , CST v.Ujagar Prints v. Union of India , Dy. CST v. Pio Food Packers and In the light of above mentioned position of law, I have to examine the merits of the case of assessee.

36. On merits it is the main contention of the revenue that assessee did nothing and on cutting also the sheet remains the sheet, though after cutting it was a smaller size of sheet as against the sheet in roll but that does not bring into existence any commercially known different item. Annealing only restore the loss on cutting and did not add anything to call it a manufacture and for such contention reliance has been placed on various decisions and definition of manufacture under Central Excise Act as enlisted in paragraph 21 of the proposed order of Hon. Vice President.

37. As against such argument of department it is the contention of the assessee that the activities performed by it on CRGO sheets are the activities of manufacture and production of an article or thing within the meaning of Section 80IB(2)(iii) and the product emerging after these activities is a totally new and different end product which is a distinct new marketable product having different name, classification, use and application and the product is known differently as CRGO core Lamination. To show that it has a different classification, it has been pointed out that CRGO coil/sheet is classified under the head Flat Roll Product of other alloy steel under Chapter 7225 as "7225 11 00 -Grain Oriented" whereas Core Lamination has been classified under the head Electrical/Electronic Machinery and Equipment under the Chapter 85 of Excise Law as item "No. 8504 90 10 parts of Transformers" and the names are supported by sale bills issued by the assessee.

38. Various processes done by the assessee on CRGO coil/sheets have already been enumerated in paragraph 3 of this order. CRGO sheet is a sophisticated product scientifically prepared. It contains in itself specified electrical and magnetic properties suitable for use in various electrical instruments/applications. The process done by the assessee did not add or subtract any of the basic electric and magnetic properties of CRGO steel. The process done by the assessee is done only to give a convenient shape to make it suitable/convenient for use in various types of Transformers & electric applications. The process adopted by assessee did not bring any change in the basic and inherent properties of CRGO steel as per discussion below.

(a) Testing - it cannot be said to be an activity of manufacturing or production of an article or thing because the material is tested only for use.

(b) Slitting, Shearing, Notching and Holing - these activities cannot be held to be the activities of manufacturing and production of an article or thing within the meaning of Section 80lB(2)(iii) according to the decision of Hon. Supreme Court in the case of Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (1997) E.L.T. 13 (SC). The relevant observations of Hon. Supreme Court are as under: 29. It is the contention of the Central Excise Department that industrial laminates and glass epoxy laminates cannot be considered as electrical insulators because these sheets are required to be cut in the requisite shape and holes may have to he punched in them before they could be fitted as insulators. However, mere cutting or punching holes does not amount to manufacture. These sheets have insulating properties and are used as electrical insulators. They cannot be taken out of the category of electrical insulators only because they have to be cut to the requisite shape or a few holes may be required to be punched in them in order that they may fit into the electrical instrument/appliances in question.

As against the above decision, reliance on behalf of assessee has been placed on the decision of CEGAT Special Bench in the case of Jhonson Electric Co. v. Collector of Central Excise . In the said case assessee was manufacturing electric power distribution transformers. It imported Cold Rolled Grain Oriented Electrical Grade Steel Silicon Sheets in coil form. The relevant facts as stated in paragraph 2 of the said decision are as under: 2. The appellants manufacture electric power distribution transformers of various specifications and sizes. They imported Cold Rolled Grain Oriented Electrical Grade Sheet Silicon Sheets. They are in coil form and width varied from 600 to 700 milimeters. The Customs duty on these sheets was collected under Tariff Heading 73.15 and for countervailing duty for purposes of classification under Central Excise Tariff item 28AA. These sheets in coil form were sent to factories in Bombay for slitting operations. Such strips in running length were received by the appellants in their factory at Baroda. These strips were cut into small pieces by means of a tradle machine operated manually. The cut pieces were either in the form of a trapazoil polygon or rectangular. The appellants contend that the process of cutting adopted by them will not be manufacture. The process of slitting and cutting did not bring into existence a product having distinctive name, character and use. On 1.2.1983 the Department wrote to the appellants that their request for permission under Rule 56A could not be granted because the process carried on by them was not a process of manufacture. They were advised to surrender the license. There was a visit by the authorities and in a communication dated 3.4.1983 the appellants were informed that the cutting process did not tentamount to manufacture under Section 2(f). On 9.12.1980 the Assistant Collector wrote to the appellants. On a representation and after a visit to the factory that the Tariff description of 28A was quite exhaustive and that the laminations cut from sheets would fall within the ambit of Tariff item 28A. The appellants paid the duty and later applied for refund of duty amounting to Rs. 22,23,290.26 on 21.1.79. The Assistant Collector after discussing the matter with the Assistant Works Manager of the appellants held on 7.6.79 that the question of refund would not arise, it was also pointed out that the appellants have not filed any appeal against the approval of the classification list.

Thus the main question before the Special Bench was whether the sheets prepared by assessee from imported Cold Rolled Grain Oriented Electrical Grade Steel Silicon Sheets are within the tariff item 28A and, therefore, liable for excise duty under that item. Tariff item 28A is "electrical stamping and laminations all sorts". As against this, the claim of assessee was that no duty can be levied as the assessee was not engaged in the activity of manufacturing as process of cutting adopted by it will not be manufacture. On consideration of these arguments, it was held that electrical stamping itself falls under specific entry i.e. 28A were liable for Excise duty irrespective of the fact that whether assessee was involved in the activity of manufacture or not. It is clear from the following observations of the Special Bench: 13. We also note that since these are electrical stamps and there is a specific Tariff Entry in regard to such goods, the question whether it would amount to manufacture under Section 2(f) would not strictly arise. The specific Entry would indicate that the item is excisable whether it is as a result of a manufacturing process or not. The appellants have admittedly used these cut strips as cave or electrical stampings for the transformers. The cutting into specific designs confirms our view that these are only electrical stampings falling under Tariff item 28A. 19. Hence, on a careful consideration of all the facts, we are of the view that the Appellate Collector was right in coming to the conclusion that the resultant product is excisable under Tariff item 28A. The appeal is, therefore, rejected.

Thus the main question involved before Special Bench was whether the Appellate Collector was right in coming to the conclusion that resultant product was excisable under Tariff item 28A and the other questions were incidental.

39. However, the conclusion of Special Bench that the activities done by assessee by assessee were manufacturing cannot be held to be correct conclusion in view of the decision of Hon. Supreme Court in the case of Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (supra), CCR v. S.R. Tissues (P) Ltd. and Anr. (supra) and CIT v. Gem India Mfg.

Co. (supra), wherein it has clearly been held that slitting, shearing, notching, holing etc. are not the activities of manufacture.Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (supra), it is the contention of assessee that the said decision is not applicable to the case of assessee as issue before Hon. Supreme Court was a classification of goods. Paragraph 29 from the said decision has already been reproduced in paragraph 38 of this order wherein according to underlined portion it has been categorically held that mere cutting and punching hole in industrial laminates and glass epoxy laminates does not amount to manufacture. Underlined portion is reproduced again for the sake of convenience.

29. It is the contention of the Central Excise Department that industrial laminates and glass epoxy laminates cannot be considered as electrical insulators because these sheets are required to be cut in the requisite shape and holes may have to be punched in them before they could he fitted as insulators. However, mere cutting or punching holes does not amount to manufacture.

Thus it was decided as a point that whether manufacturing is involved in cutting or punching of electrical insulator. The items dealt with in the aforementioned case are like items dealt with in the present case.

The CEGAT Special Bench decision in the case of Jhonson Electric Co. v.Collector of Central Excise (supra) is contrary to the decision of apex court in the case of Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (supra), and thus cannot be given preference to the decision of Hon. Supreme Court which is available on the very subject.Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (supra), cannot be held to be inapplicable on the ground that to decide that whether the activity of cutting, punching & holing was an activity of manufacture was not a question before the Hon. Supreme Court. Under Section 3 of the Central Excise Act duty is levied on all excisable goods mentioned in the Schedule provided they are produced or manufactured. Therefore, where goods specified in the Schedule are excisable goods but whether such goods can be subjected to duty would depend on whether they were produced or manufactured by the assessee on whom duty is to be levied.

Consequently it is open to an assessee to prove that even though the goods in which he was carrying on business, were excisable as they are mentioned in the schedule, they could not be subjected to duty as they were not goods either because they were not manufactured or having been produced or manufactured, they were not marketed or capable of being marketed. This position of law is clear from following observations of Hon. Supreme Court in the case of Moti Laminates (P) Ltd. v.Commissioner of Central Excise and Anr. :Moti Laminates (P) Ltd. v. CCE , this Court held that Section 3 of the Act levies duty on all excisable goods mentioned in the schedule provided they are produced and manufactured. Therefore, where the goods are specified in the schedule, they are excisable goods but whether such goods can be subjected to duty would depend on whether they were produced or manufactured by the assessee on whom duty is proposed to be levied.

Consequently, it is always open to an assessee to prove that even though the goods in which he was carrying on his business were excisable as they are mentioned in the schedule, they could not be subjected to duty as they were not goods either because they were not manufactured or having been produced or manufactured, they were not marketed or capable of being marketed.

Thus it is very important for an assessee who has been or is going to be fastened with the liability of excise liability to prove that whether he manufactures or produces the article or thing which is excisable. Therefore, it was an important point of law determined by Hon. Supreme Court in the case of Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (supra) to decide that cutting or punching holes in electrical insulators whether amounts to production or manufacture of an article or thing and thus it was ratio decidendi to decide in that case. Thus the law has been set at rest by Hon.

Supreme Court that mere cutting or punching holes does not amount to manufacture. Therefore, relief cannot be given to assessee merely on the basis of CEGAT Special Bench decision in the case of Jhonson Electric Co. v. Collector of Central Excise (supra) which is contrary to the decision of Hon. Supreme Court. In the circumstances, slitting, shearing, notching, holing, deburring, core assembling and packing cannot be held to be the activities of manufacturing or production of an article or thing.

41. The decision in the case of CIT v. Gem India Mfg. Co. (supra) also supports the case of revenue. In the process of finished diamond from raw diamond following processes are involved: Assortment is the initial stage where purity of the stone and checking of its colour is graded thereafter the rough diamond so assorted is sent to planning and marking and in the second stage of planning and marking the final shape of diamond its cut and weight is finally decided and it is a very crucial stage of the process. Thereafter cleaving & sawing is the next stages where rough diamond is divided into two different pieces and the marked diamond is cleaved and sawn. A diamond has to be cleaved if the marking is along with parallel to its planes and sawn i.e. cut in case the marking is perpendicular or against the planes. The process of sawing is now done with the latest machinery with laser. Thereafter the diamond is sent to bruting department where the diamond gets its final shape and this process is also to be done with utmost care so that the diamond does not break or its natural skin is not removed or there is minimum weight loss. It is done to give final shape to the rough diamond to achieve the optimum effect on the stone is the main objective of the bruter. The final task of faceting is done once the bruted stone is passed to the polishing department and the method of giving the stone its final look is called polishing. Even a small mistake done by the artisan can make the diamond look less valuable than what it might have been. Thereafter the diamond goes to the grading department. Thus keeping in view these processes, diamond manufacturing was claimed to be a very skillful process and despite all these processes being involved in preparing finished diamond from raw diamond Hon. Supreme Court in the case of CIT v. Gem India Mfg. Co. (supra) have held that raw and un-cut diamond is subjected to process of cutting and polishing which yields the polished diamond, is not a result of manufacture or production. It will be relevant to reproduce following observations from the said decision: 5. The High Court, as afore-stated, concluded that the case was covered by its decision in the case of CIT v. London Star Diamond Co. (I) Ltd. (supra). It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of Section 2(8) of the Finance Act, 1975, and that, in answering that question, the High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the "processing of goods" to convert them into marketable form. The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things.

6. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.

Thus, the Tribunal which took the view that in common parlance and commercial sense raw diamonds were not the same thing as polished and cut diamonds, the two are different entities in the commercial world, though the chemical composition remained the same the physical characteristics of shape and class, etc. are substantially different was - held to have wrongly concluded the issue as polished diamond is not a new article or thing which is result of manufacture or production.

In view of above discussion process of slitting, shearing, notching and holing done by the assessee on CRGO sheets cannot be termed to be the activities of manufacturing and production of an article or thing within the meaning of Section 80IB(2)(iii) of the Act.

42. In the case of CCE v. S.R. Tissues (P) Ltd. and Anr. (supra) it has been held by Hon. Supreme Court that the pre-dominant test will be that whether the characteristics of the tissue paper in the jambo roll is different from the characteristics of the tissue paper in the form of table napkin toilet roll and facial tissue and it is held that the Tribunal was right in holding that the characteristics of the tissue paper in the jambo roll were not different from the characteristics of tissue paper after slitting and cutting in the table napkin, in the toilet roll facial tissue. According to the test of character or use, if a transformation takes place which make the product for a character and use of its own which it did not bear earlier, then only the process will be a process of manufacture. The relevant observations have already been reproduced in paragraph 32 of this order and the some extracts are reproduced again for ready reference: The predominant test in such a case is whether the characteristics of the tissue paper in the jumbo roll enumerated above is different from the characteristics of the tissue paper in the form of table napkin, toilet roll and facial tissue.

It will not be safe solely to go by a test as to whether the commodity after the change takes in a new name, though in stated circumstances, it may be useful to resort to it. This may prove to be deceptive sometimes, for it will suit the manufacturer to retain the same name to the end product also. The 'character or use' test has been given due importance by pronouncements of the Supreme Court. When adopting a particular process, if a transformation takes place, which makes the product have a character and use of its own, which it did not bear earlier, then the process would amount to manufacture under Section 2(1).

Thus following the above observations in the present case, according to the test of character or use no transformation took place as CRGO sheets retained their characteristics even after the activities of cutting, slitting, shearing, V-notching, holing etc. Thus this case is also fully applicable to the facts of present case to decide that the activities of cutting, slitting, shearing, notching, holing etc. are not in the nature of manufacture.

43. In the case of Shaw Scot Distilleries 76 ITD 89 (Cal) (SB), it has been held that preparing the Indian manufactured foreign liquor i.e.

whisky from potable spirit, the commodity continues to possess its original identity notwithstanding the addition of water, essence, etc.

in certain proportions and therefore, the production of IMFLs from portable spirit does not involve any manufacturing. It was observed that generally manufacturing means consumption of one article for production of another and there should also be transformation of article or thing if manufacturing is involved for the same and generally manufacturing means consumption of one article for production of another and in that case no article or thing was consumed for production of another as alcohol remained alcohol and there was only reduction of degree of alcohol content because of addition of water to potable alcohol and stirring it. It was observed that in case of manufacturing of an article or thing it should be distinct and separate and in the said case no new product has come as bye product which can be as distinct and separate from original one and there was no change in its basic identity, Generally in the case of manufacture there will be change which will be considerable and substantial which was not so in that case. It will be relevant to reproduce following observations from the said decision: 7. We have considered the submissions of the parties, gone through the appellate order in the assessee's own case for the asst. yr.

1983-84 and the decision reported in (1990) 33 ITD 485 (Mad) (supra). We have also perused the case laws relied on by both the parties which have already been mentioned in the foregoing paragraphs. We may state here the fact which is not in dispute is that the assessee purchases potable spirit from Rampur Distilleries as per the agreement. This potable spirit is already manufactured and does not require any further manufacturing. Only some processing is required to produce JMFLS like brandy, whisky and rum, etc. by adding certain percentage of water, colour, essence and for safe marketing requires bottling. Generally manufacturing means consumption of one article for production of another. But in the instant case no article or thing is consumed for production of another. Alcohol remains alcohol. There is only reduction of degree of alcohol content because of addition of water to potable alcohol and stirring it. This action at best can be said to be processing and not manufacturing. There should also be transformation of article or thing if manufacturing is involved for the same. But in the instant case no such transformation has taken place as alcohol remains alcohol both in the beginning and after processing also. In case of manufacturing also article or thing should be distinct and separate. In the instant case no new product has come as a bye-product which can be said as distinct and separate from original one and alcohol remained alcohol with reduced content of alcohol because of addition of water. There is also no change in its basic identity. Generally in case of manufacturing there will be change which is considerable and substantial but in the instant case it is not so. Here we consider necessary to refer Section 80HH of the IT Act, 1961. In order to encourage industrial activity in backward areas, this section grants deduction to an assessee, whose total income includes any profits and gains derived from an industrial undertaking (other than a mining undertaking) or the business of a hotel in a notified backward area. Section 80HH(1) defines the word "derived" from an industrial undertaking. The meaning of the term "derived" has been construed to have a definite narrow and restrictive meaning compared to the word "attributable" or "referable to". The industrial undertaking must itself be the source of the profits and gains and it would not be sufficient if a commercial connection is established between the profits and gains earned and the industrial undertaking. From Section 80HH(2) of the Act it is clear that the Act has not given any definition of the expression "industrial undertaking". The requirement of Section 80HH(2) is that to be eligible, the industrial undertaking, should be one which is engaged in the manufacture or production of an article or thing. Therefore, the expression can be understood by looking upto the meaning as understood in common parlance or by making a reference to its definition in cognate legislation. In this connection we may mention the Supreme Court's decision in the case of N.C. Budharaja & Co. (supra) wherein their Lordships have held that construction of a 'dam' did not amount to production or manufacture of an article or thing. That the words used in the Act, take their colour from the context in which these are used. That the expression "manufacture" or "produce" are normally associated with movable articles or goods. That the words "articles" and "things" are used interchangeably. That these words never denote construction of a dam or building. That the word "article" in Section 80HH(2) cannot include, a dam, a bridge, a building, a road, a canal or so on.

In my opinion the above decision is also applicable to the present as basic characteristics and feature of CRGO coils were not changed by the process done by the assessee. There was no considerable or substantial change in the inherent properties of CRGO steel which was manufactured by its suppliers to the assessee. Unless there is a considerable and substantial change, the activity of the assessee cannot be said to be a manufacturing activity within the meaning of Section 80IB.undergone various processes. Thus it cannot be said that so-called lamination sheets were new and distinct articles in which CRGO sheets were consumed as in the case of CIT v. Prabhudas Kishordas Tobacco Products (P) Ltd. (supra) their Lordships of Hon. Jurisdictional High Court have observed that final product should not retain its identity after it has undergone the process or process of manufacture. The relevant portion of their observations has already been reproduced in paragraph No.34. The extract from relevant portion are reproduced for ready reference.

7. The tests to ascertain whether an activity amounts to manufacture or production of an article or thing have been laid down and reiterated by various decisions of the apex Court and this High Court. Broadly, the requirement is that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end product after the raw material undergoes the process of manufacture.

That with every process, the commodity would experience a change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, can it be said that the commodity used as raw material has been consumed in the manufacture of the end product. To put it differently, the final product does not retain the identity of the raw material after it has undergone the process or processes of manufacture.

In the present case, assessee has not brought into existence a new substance and to produce some changes in the substance cannot said to be manufacturing. Thus the process adopted by the assessee cannot be said to be manufacturing process.

45. According to the decision of Hon. Supreme Court in the case of Union of India v. Delhi Cloth & General Mills Co. Ltd. manufacture means "bringing into existence a new substance" and it does not mean merely 'to produce some change in a substance'. The relevant observation of Hon. Supreme Court have been reproduced in paragraph 35 of this order. What has been done by assessee is only that some changes have been made in substance and there is no existence of new substance which is the result of so called manufacture.

46. It has also been the contention of the department that definition under Central Excise Act, is vast to cover the process which are incidental or ancillary to the completion of a manufactured product and which is specified in relation to any goods in the section or Chapter notes on Schedule-I, to the Central Excise Tariff Act as amounting to manufacture. The definition under Central Excise Act reads as under: 2. Definitions. - In this Act, unless there is anything repugnant in the subject or context,- (i) incidental or ancillary to the completion of a manufactured product; and (ii) which is specified in relation to any goods in the Section or Chapter Notes of Schedule 1 to the Central Excise Tariff Act, 1985 as amounting to manufacture.

And the word "manufacture" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

The contention of ld. DR is that if any activity is not held to be an activity of manufacture under Excise Law, the same in no circumstances can be held to be an activity of manufacture and production of an article or thing under Income-tax Act Law for the reasons that the definition under Central Excise Act is vast and inclusive. There is a force in such contention of ld.DR that if an activity which has not been considered an activity of manufacture and production of an article or thing as per definition under Section 2(f) of the Central Excise Act, 1944, the same cannot be held as an activity of manufacture or production while construing the provisions of Income-tax Act which does not define the word "manufacture". According to the decision of Hon.

Supreme Court in the case of Collector of Central Excise, Hyderabad v.Bakelite Hylam Ltd. (supra), while considering similar activities done by assessee on CRGO Sheet was not considered an activity of manufacturing or production of an article or thing as per definition under Section 2(f) of Central Excise Act than such activities cannot be held to be the activities of manufacture and production of an article or thing while construing the provisions of Section 80IB(2)(iii) of Income Tax Act 1961. While construing the provisions of Excise Act, Hon. Supreme Court in the case of Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (supra), has held that activity of cutting and holing of Lamination Sheet is not an activity of manufacture or production of an article or thing. Then similar activity cannot be considered to be the activity of manufacture or production of an article or thing while construing the provision of Section 80IB(2)(iii) of the IT Act, 1961.

47. Now coming to annealing process done by assessee. It is the claim of assessee that annealing process done by the assessee brings changes in the CRGO sheets which amounts to manufacture and production of an article or thing.

48. As against this claim of assessee it is the case of revenue that annealing process done by assessee does not bring any change in the basic properties and structure of CRGO sheets. Thus the said process cannot be said to be a process involving manufacture or production of an article or thing.

49. When the Bench visited the factory premises of the assessee, following note was given on annealing: The next (fifth) and one of the most important step of the process is the annealing process. This process is undertaken to deburr and relieve the stress and strains on the limbs/plates through a roller hearth annealing furnace. CRGO electrical steel and core laminations develop stress, strains and burns during shipment, transit, and processing which affects its quality. Annealing process is done as per the mill's specification at a temperature of 820 for 72 to 90 seconds depending upon the thickness and grade of material. This process of annealing restores and improves the magnetic and electrical properties of lamination.

50. One of the suppliers of GRGO sheets to the assessee is a concern known as THYSSENKRUPP ELECTRIC STEEL of Germany. The assessee has placed before us, the literature of material supplied to the assessee by the said concern. In the said literature for CRGO sheets under head FURTHER PROCESSING HINTS following details are given: Grain oriented electrical steel sheet is used for the building of magnetic cores. It must be recognized that the best magnetic properties exist only in the rolling direction. When the magnetization is outside the rolling direction the core loss will increase substantially e.g. at 90 to the rolling direction more than triple and at 60" more than quadruple. Therefore, it is absolutely necessary to constrain the magnetization in the whole magnetic circuit as exactly as possible in the rolling direction to ensure optimal performance.

Mechanical stresses exert a significant effect on the magnetic properties of grain oriented electrical steel.

External stresses may arise if the laminations in a magnetic core are pressed into a wavy or curved shape by excessive or uneven compression. Internal stresses are generated along the cut edges during each slitting operation and as a result of bending the sheet or subjecting it to tension beyond the yield point. By stress relief annealing, it is possible to reduce these unavoidable stresses almost completely. This annealing can be performed for laminations as short time annealing in an air atmosphere or for cores as long time annealing in an inert atmosphere. Whether stress relief annealing is necessary or not is dependent upon customer's conditions. Generally for laminations slit under proper conditions to widths of more than 60 mm a stress relief anneal is not necessary.

For the annealing of laminations the short annealing cycle in a roller hearth or mesh belt furnace is advantageous. This cycle lasts only few minutes, the annealing time being 1-2 minutes between 800C and 860C. Since the annealing is performed in air atmosphere, the cut edges are subject to oxidation which produces an insulating coating. Grease and oil from previous processes are burnt off. Thus they generally are not harmful provided that they do not occur in excessive amounts.

The long term annealing cycle is recommended for wound or small stacked cores. It is performed continuously in a mesh belt furnace or as batch annealing in a bell type furnace. For such an annealing cycle the following conditions are recommended: -Soaking time : 2 hours (coolest part of the material must be min.

800C) -Protective atmosphere : preferably 100 nitrogen, tares of oxygen are allowed. Hydrogen addition is not recommended.

The heating and cooling times depend largely on the furnace size and the amount of material to be annealed. The annealing cycle must he adjusted according to the above parameters. In principle it must be recognized that too rapid heating may cause local overheating, especially of the outermost cores. This can be minimized by temperature control with a thermocouple located close to the heating elements. The soaking lime must be such that the material reliably reaches the soaking temperature (minimum 800C) throughout the cores. Too rapid heating or cooling may cause warping or distortion of the cores. It is further recommended to control the soaking temperature by thermocouples which should be located at the hottest and the coolest position of the annealed material. To avoid quenching effects during unloading, the cores should remain in the furnace until a temperature of about 200C to 300C is reached. The material to be annealed must be free from grease, oil and other organic substances to prevent any recarburisation.

From the above process as described, the annealing which is done by assessee is short-term annealing cycle which is for the duration between 1 to 2 minutes. The main purpose of such type of annealing is done to reduce the stresses and as it can be seen from the above literature that it does not bring any structural change except removing stresses. Thus the argument of assessee that it improves electrical and magnetic properties of CRGO coils/sheets is beyond reality. The comparative figures are the figures of CRGO lamination sheets before annealing and after annealing and what is changed after annealing is only restoration to some extent of the original electrical and magnetic properties of CRGO sheets. The annealing is done for removal of stresses and not for inducting new electric and magnetic properties which were not already there in CRGO sheets. Thus it can not be said that after annealing any new product had emerged. In my opinion, even after all these processes CRGO steel/sheets retains similar properties.

The reliance in this regard on the following decisions cannot be placed by assessee in his favour for the reasons discussed hereinafter:CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. 238 ITR 529 (Mad). In the said case it was found that the process of heat treatment to crankshaft, etc., were absolutely essential for rendering it marketable. Automobile parts, as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increase tensile strength. The raw untreated crank shafts and the like can never be used in an automobile industry. Thus, in the crank shafts subjected to the process of heat treatment, etc., a qualitative change is effected, to be fit for use in automobiles, although there is no physical change in them. In the circumstances it was held that it was manufacturing activity which entitled assessee to claim "investment allowance". It will be relevant to reproduce the following observations of their Lordships from the above decision: We have to take note of the fact that the process of heat treatment to crankshaft, etc., were absolutely essential for rendering it marketable. Automobile parts, as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increase tensile strength. The raw untreated crank shafts and the like can never be used in an automobile industry. Thus, in the crank shafts subjected to the process of heat treatment, etc., a qualitative change is effected, to be fit for use in automobiles, although there is no physical change in them. In such state of affairs, it cannot at all be stated that the crank shafts, subjected to heat treatment, etc., cannot at all change the status of new products of different quality for a different quality for a different purpose altogether. In this view of the matter, we are of the view that the activities of the assessee in relation to raw or untreated crank shafts being subjected' to heat treatment, etc., is definitely a "manufacturing activity" entitling it to claim "investment allowance" under Section 32A of the Income-tax Act. We answer questions Nos. 2 and 3 accordingly.

Thus it was found as a fact by Hon. High Court that process of heat treatment to crankshaft, was absolutely essential for rendering it marketable whereas in the present case annealing was not absolutely essential for rendering the transformer core as marketable as it has been specifically pointed out that in other cases for preparing transformer core, annealing has not been done at all. Thus annealing in the present case is not a process absolutely essential and the same is done only to restore original electrical and magnetic properties.

(b) Anil Steel Traders v. DOT in ITA Nos.739, 740 & 741/Ahd/2004 The said case is of annealing and stripping of steel rods and annealing steel rods as per customers orders. The process adopted therein is different from the process adopted in the case of assessee which is only a short term annealing cycle which does not bring structural changes as were brought into structure of steel rods in the case of Anil Steel Traders and thus this decision is also not applicable.

Moreover, the above case has been decided only on the basis of decision of Madras High Court in the case of CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. (supra) as per following observations: 12. No decision has been cited on behalf of the revenue wherein the activity of heat treatment, which includes annealing, was held to be not an activity of manufacturing. Therefore, after considering the submissions of both the parties and facts of the case, we find that the activity carried on by the assessee is covered by the aforementioned decision of the Madras High Court in the case of CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. (supra).

We, therefore, direct the Assessing Officer to allow deduction under Section 80IA to. the assessee by considering the activity carried on by the assessee as an activity of manufacturing. Thus ground is allowed for all three years.

Therefore reliance on the decision in the case of Anil Steel Traders v.DOT (supra) is misplaced as the same is distinguishable on facts.

It may be mentioned here that for examining that whether annealing done by assessee can be said to be manufacturing production of an article or thing within the meaning of Section 80IB(2)(iii). It will be relevant to refer to the production literature of one of the suppliers to the assessee i.e. THYSSENKRUPP ELECTRIC STEEL of Germany instead of relying on the decisions in the case of Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. (supra) and Anil Steel Traders (supra). As pointed out earlier, the processes in the cases of Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. (supra) and Anil Steel Traders (supra) were entirely different than that in the case of assessee. It has been mentioned in the production information of THYSSENKRUPP ELECTRIC STEEL of Germany that annealing will remove the stresses occurred to the CRGO steel during the process of cutting, slitting, shearing, notching, holing etc. and it has also been mentioned that excess amount of annealing can be harmful to the product. The relevant portion has already been reproduced in paragraph 50 of this order. It is thus clear that annealing done by assessee does not add any property in CRGO sheet but only rectify the defects/deformities arising out of the process of cutting, slitting, shearing, notching, holing etc. It has also been pointed out that no material has been brought on record by the assessee to show that what addition is made by annealing in the original properties of CRGO sheets i.e. the properties consisting in CRGO sheets before the process of cutting, slitting, sheared, notching, holing etc.

The changes which have been given in chart are the changes occurred to CRGO sheets after cutting, slitting, shearing, notching, holing etc.

when compared them with the annealed sheets. That chart also does not help the assessee because by the process of annealing which is done for a period between 1 to 2 minute, nothing could be added to the original properties of the CRGO sheets and annealing is done only to rectify the defects occurred due to the process of cutting, slitting, shearing, notching, holing etc.

51. It may also be pointed out that annealing of CRGO sheets done by assessee is not an essential process to render them as marketable even as per norms given in the opinions furnished by assessee of Steel Authority of India Ltd. and Veer Mata Jijabai Technological Institute (VJTI). These opinions have been reproduced in paragraph 40 & 41 of the order of Hon. Vice President. For ready reference the following portion from the report of Steel Authority of India Ltd. is reproduced below to show that annealing has not been described as an absolute necessary step to be taken to prepare transformer core: CRNO is a raw material to manufacture transformers lamination/transformers cores/motor stamping and E & I lamination.

It has no use in as its condition. It has to undergo various manufacturing steps i.e. shearing, punching, stamping, holing, 'V-nothing etc.

These are the common manufacturing stemps adopted by manufacturers of transformers lamination all over, the world and there activity is recognized as a manufacturing activity.

From the report of Veer Mata Jijabai Technological Institute (VJTI) (supra) the relevant portion is reproduced as under: 2. They are shearing the coils into sheets and then into patta, as per required size on shearing machines. After inspection & testing of raw material they are taking suitable material into production for making "E & I laminations", Blackish, rusty, thick & improper coating material are kept a side for rejection.

3. They are stamping & punching patta - on heavy-duty power press with required die & tools. The required die & tool are fitted on Power Press.

4. The die is selected as per customer's requirements (size & shape). The burr due to cut on lamination is removed on Debuing Machine to improve stacking factor & decrease the gap.

5. Then they are punching holes on laminations using power press.

Holing die and tools are fitted on Power Press.

6. Then they are shearing each lamination into two equal parts o Power Press and get the final product E & I laminations.

9. Then, they are packing the finished product in wooden box cover with pole-thin paper for dispatch. They are bundling bigger size laminations before packing.

10. Die and punching tools are maintained uptodate by using surface grinding machines regularly.

By performing manufacturing operations as above, there are some significant invisible changes in the characteristics of the material. There is change in core losses and permeability. Due to proper laminations stacking footer...the original sheet also changes by a very small amount due to the process. During the manufacturing activity of laminations, scrap is also generated.

Thus it is a clear fact that for preparing transformer core from CRGO coil annealing is not an essential activity to render it as a marketable product as was in the case of CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. following which decision this Tribunal in the case of Anil Steel Traders (supra) has held that annealing is an activity of manufacturing and that case also is distinguishable on the ground that in that case annealing was an essential process to be done to make those products as marketable and in the present case it has been shown that it is not an essential process.

52. It is also the contention of revenue that after cutting also sheet remained sheet though after cutting it was a smaller size of sheet as against sheet in roll but that does not bring into existence any commercially known different item. As against this argument of revenue it has been held by ld. CIT(A) that a new product emerged from the process done by assessee on CRGO coil which is known as transformer core and also that "transformer core" has been classified as a different entity from CRGO coil under Excise Law.

53. It has already been pointed out that electrical and magnetic properties of CRGO coil remained substantially the same and there was no change occurred during the process adopted by assessee on CRGO coil/sheets and only a different name is given when CRGO coils are processed to be called as "Lamination core". The issue that whether change in name of the article alone is sufficient to hold that manufacture process was involved, came into consideration of apex court in the case of Brakes India Ltd. v. Supdt. of Central Excise and Ors.

and If by a process, a change is effected in a product, which was not there previously, and which change facilitates the utility of the product for which it is meant, then the process is not a simple process, but a process incidental or ancillary to the completion of a manufactured product. It will not be safe to go by a test as to whether the commodity after the change takes in a new name, though in stated circumstances, it may be useful to resort to it. This may prove to be deceptive sometimes, for it will suit the manufacturer to retain the same name to the end product also. The 'character or use' test has been given due importance by pronouncements of the Supreme Court. When adopting a particular process, if a transformation takes place, which makes the product have a character and use of its own, which it did not bear earlier, then the process would amount to manufacture under Section 2(f) irrespective of the fact whether there has been a single process or have been several processes, Thus according to above decision, what is important is "character or use" test and the transformation of product which has its own character and use and the character which it did not bear earlier. Here in the present case the character of sheet did not change. Applying the above test, Hon. Supreme Court in the case of CCR v. S.R. Tissues (P) Ltd. and Anr. 197 CTR (SC) 437 have held that no new product had emerged on winding, cutting/slitting and packing plain tissue paper/alluminium foils into smaller size is not manufactured on first principle apart from definition under Section 2(1) of the Central Excise Act. The relevant observations of Hon. Supreme Court from the said decision are reproduced below: 12. Applying the above test, we hold that no new product had emerged on winding, cutting/slitting and packing. The character and the end-use did not undergo any change on account of the abovementioned activities and, therefore, there was no manufacture on first principles.

Thus their Lordships of Hon. Supreme Court have held that irrespective of definition given under Central Excise Act, the process of winding, cutting/slitting of jambo rolls of tissue paper/alluminium into smaller size does not amount to manufacture. In my opinion this decision will have full application to the facts of the present case as by adopting similar process there is no change in the basic character of CRGO coil/sheets when after process even if it is called as "Lamination core".

54. Similarly classification of transformer core under different tariff head does not make it a different product being manufactured by the assessee which is an essential condition to make assessee entitled for deduction under Section 80IB. It has been clearly laid down by Hon.

Supreme Court in the case of Brakes India Ltd. v. Supdt. Of Central Excise and Ors. (supra), the relevant observations have already been reproduced wherein it has been held that the 'character or use' test has been given due importance by pronouncements of the Supreme Court, because it is necessary that there should be transformation having taken place according to the character or use test and only if transformation takes place which make the product to have a 'character' or 'use' of its own which it did not bear earlier then the process would amount to manufacture. Referring to the test of character or use Hon. Supreme Court in the case of CCR v. S.R. Tissues (P) Ltd. and Anr.

(supra) have observed as under?: 17. Applying the above tests to the facts of the present case, we hold that mere mention of a product in a tariff heading does not necessarily imply that the said product was obtained by the process of manufacturing. That, just because the raw material and the finished product came under two different headings, it cannot be presumed that the process of obtaining the finished product from such raw material automatically constituted manufacture. In the present case, merely because tissue paper in the jumbo roll of the size exceeding 36 cms. fell in one Entry and the toilet roll of a width not exceeding 36 cms. fell in a different Entry, it cannot be presumed that the process of slitting and cutting of jumbo rolls of toilet tissue paper into various shapes and sizes amounted to manufacture. The above tests would also apply to cutting and slitting of jumbo rolls of aluminium foils (which item is the subject-matter of some of the civil appeals herein).

Thus mention of product in a different tariff heading does not necessarily imply that the said product was obtained by the process of manufacture. Just because raw material and finished product came under two different headings it cannot be presumed that the process of obtaining the finished product from such raw material automatically constitute manufacture. Thus in the present case also, the argument of the assessee that CRGO sheets and Lamination core are mentioned under different tariff head cannot advance the case of assessee.

55. Now coming to the opinions submitted by assessee from SAIL and Veer Mata Jijabai Technological Institute (VJTI). These opinions have been furnished by assessee to contend that activities like cutting, slitting, shearing, notching, holing etc. performed by assessee are in the nature of manufacture. In my opinion, these opinions do not advance the case of assessee for the following reasons: (i) These opinions have not been given in the case of assessee but are given in the case of Trans Lam Electricals.

(ii) The product described in these opinions is not the same product as is being dealt with by the assessee.

In the opinions the raw material which has been dealt with is CRNO whereas in the case of assessee it is CRGO. CRNO represent "Cold Rolled non-oriented Steel" whereas the product being dealt by assessee is Cold Rolled Grain Oriented Steel. This difference has also been brought out in the literature of products being manufactured by THYSSENKRUPP ELECTRICAL STEEL.

iii) The opinion of SAIL is signed by Shri S.P. Dash who is described as Chief (M)/PET. It is not known that what qualification he possesses to state the activities done on CRNO Steel to be the activities of manufacture. Similar is the position with the opinion given in the case of Veer Mata Jijabai Technological Institute (VJTI) (supra), which is signed by Dr. B.K. Lande the Head Electrical Engineering Department and Shri H.B. Chaudhari, Lecturer, Electrical Engg. Department.

56. Moreover, the issue at hand cannot be decided on the basis of these opinions because the issue has to he decided in accordance with law ,and as per various judicial pronouncements by the Courts. It has already been explained with the help of various judicial pronouncements that the activities of cutting, slitting, shearing, V-notching, holing etc. are not the activities of manufacture. Thus opinions which are not even given in the case of assessee cannot prevail over judicial pronouncements on the very subject and are liable to be rejected.

Therefore, these opinions cannot advance the case of assessee.

57. During the course of hearing before us, it was pointed out on behalf of assessee that in group case namely - Alfa Transcore Industries, the department has allowed the claim of assessee under section 80IA on similar activity for A.Ys 1994-95 and 1995-96 by admitting that assessee's activities are of manufacturing or production of an article or thing and, therefore, in the case of assessee also such activities should be held to be activities of manufacturing and production of an article or thing. As against this contention of assessee it is the case of revenue that principles of res judicata/estoppel are not applicable and it is open to the department to establish that the activity of assessee is not of manufacturing or production of an article or thing within the meaning of Section 80IB(2)(iii).

the opinion that as per well settled law, principles of res judicata/estoppel is not applicable to the Income-tax proceedings and such position of law has been recognized by following decisions: We do not think that this decision would support the case of the Revenue. What the Bench did was to affirm that the principles of res judicata will not apply to income-tax proceedings. Nevertheless, the Appellate Tribunal may place reliance on an earlier decision to support its conclusion. It could not therefore be said that the decision in the assessee's case before us, relating to the prior years, would operate as res judicata. The Tribunal is entitled to take a different view of the matter, if new materials were placed or on a closer and more intelligent analysis. It is evident from the various decisions placed before us that a different aspect of the matter has been presented for consideration, as laid down in the decisions mentioned earlier. The Tribunal was, therefore, entitled to have a fresh look at the matter based on the line of thinking disclosed by these decisions. That was what was done by the Tribunal in the instant case. We are not, therefore, inclined to accept the contention that the assessment in the earlier years operates as res judicata or that it precludes the assessee from raising the plea as done in the instant case. We overrule the contention. In the circumstances, we do not find any reason to refer the questions raised to this Court under Section 256(2) of the Income-tax Act, 1961. These petitions are, therefore, dismissed.

2. Director of Income-tax (Exemption) v. Dharm Pratisthanam 155 CTR (Del) 385.

Perused the contents of paragraph 7 of the petition. Ld. Counsel for the petitioner submits that an identical issue is arising for decision in several other matters. Though in the case at hand the issue was not pursued further by filing a reference relevant to the asst. yr, 1985-86, yet the right of the petitioner to move this Court for the next year of assessment, i.e. 1986-87, is not taken away inasmuch as every year's assessment proceeding is an independent proceeding in the eye of law and the rule of res judicata is not in terms applicable to the tax assessment proceedings.

It was urged that in view of the earlier decision of the Tribunal, it was not open to the Tribunal to hold that the gifts were genuine.

The Supreme Court observed that the fact that in the earlier proceedings the Tribunal took a different view of the two gifts was not a conclusive circumstance and it did not operate as res judicata. In CIT v. British Paints India Ltd. , it has again been observed in paragraph 12 as under: 12. It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters, and the officer is not bound by the method followed in the earlier years.

6. From the above decisions, it is clear that although the findings arrived at in the previous assessment may have some value as cogent evidence, they do not bind the authorities either on the principle of res judicata or as estoppel. We may here also refer to a decision of the Allahabad High Court in Benoy Ratan Banerjee v. CIT (1947) 15 ITR 98 (All) : TC 54R 209 bearing on the facts similar to the one in the present case. In the said case, in the asst. yr. 1939-40, the AAC had treated the income derived as purely agricultural income but from the subsequent year of assessment, it was held that the said income from the sale of forest trees of spontaneous growth without the intervention of human agency, was not agricultural income exempt from the Indian IT Act, 1922. The assessment of this income to the tax was challenged, inter alia, on the ground that since in the earlier year of assessment the income was treated as exempted, it was not permissible for the assessing authorities to treat it differently in the subsequent years. It was observed that each year is a separate self-contained period of time for purpose of assessment and the opinion of the AAC made in connection with the previous assessment year was not relevant.

We need not go into the authorities for two very simple propositions of law, although some authorities will be considered hereafter. The first proposition is that a decision taken in regard to an earlier assessment year does not operate as res judicata for a subsequent assessment year. Thus the Tribunal's decision has to be judged on its merits as to the correct application of the law for the assessment year 1976-77 itself, whatever might have been the decision of the Commissioner of Income-tax (Appeals) for the assessment year 1975-76.

In the assessment proceedings, the Income-tax Officer, after hearing the evidence on specified points, assesses the total income of the assessee and all that is necessary for him to find out is what items can be treated as income of the assessee. It is not at all necessary for him to give a finding that there has been concealment of the particulars of his income or that the assessee has deliberately furnished inaccurate particulars of such income, as is necessary for imposing a penalty under Section 28(1)(c). Since the facts which have to be found are entirely different, findings given during the assessment proceedings cannot operate as res judcata in proceeding for imposition of penalty where entirely different facts have to be found.

Keeping in view the aforementioned well settled position of law it is to be held that principles of res judicata/estoppel will have no application. It is seen that for Asst. Year 1994-95 ld. Assessing Officer in the referred case while accepting the claim of assessee under Section 143(3) has not discussed the aspect as to how the assessee was engaged in the activity of manufacturing or production of an article or thing within the meaning of Section 801A and for Asst.

Year 1995-96, the deduction has been allowed by Assessing Officer simply on the ground that it was allowed in the earlier year. These findings cannot operate as res judicata/estoppel against the department to contend in the case of assessee (which is a different entity altogether) that the department cannot examine in the case of assessee that whether the activities carried on by the assessee are activities of manufacturing or production of an article or thing. Thus relying on the above assessment orders in the case of Alfa Transcore Industries, relief cannot be given to assessee in the present case and such argument has to be turned down and rejected and accordingly rejected.

59. Now coming to the contention of the revenue that relief cannot be granted to the assessee only on the basis of liberal construction of the provisions of Section 80IB. For this purpose revenue has relied upon the decision of Hon. Supreme Court in the case of Novopan India Ltd. v. Collector of C. Ex. and Customs, Hyderabad 73 E.L.T. 769 (SC).

A copy of said decision is placed at pages 64 to 66 of the paper book submitted by ld. DR. Our attention was invited to the following observations: 16. It is true that in some decisions a contrary view appears to have been expressed. In Caroline M. Armytage and Ors. v. Frederick Wilkinson (1878) 3 A.C. 355, a decision of the Privy Council it was observed: Thir Lordships have now to consider whether the decision of Mr.

Justice Molesworth upon the merits of the application to him is correct.

They must begin by expressing their dissent from the principle which seems to have influenced Mr. Justice Molesworth in this and some of the earlier cases, viz., that the provisions of the 24t} Section, because they establish an exception to the general rule, are to be construed strictly against those who invoke their benefit. That principle is opposed to the rule expressed by hoard Ellenborough in Warington v. Furbor 8 East 242, and followed and confirmed in Hobson v. Neale 17 Beav 185. Lord Ellenborough's words are - "I think that when the subject is to be charged with a duty, the cases in which it is to attach ought to be fairly marked out, and we should give a liberal construction to words of exception confining the operation of the duty." It is only, however, in the even of their being a real difficulty to ascertaining the meaning of a particular enactment that the question of strictness or of liberality of construction need arise.

17. To the same effect is the view expressed by Sir Raymond Evershed in Routledge v. McKay and Ors. 1954 (1) A.E.R. 855. The ld. Master of Rolls observed : "on the authorities, that exemption, as understand, should be liberally interpreted.

18. We are, however, of the opinion that, on principle, the decision of this Court in Mangalore Chemicals - and in Union of India v. Wood Papers referred to therein represents the correct view of law. The principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee-assuming that the said principle is good and sound -does not apply to the construction of an exception or an exempting provision; they have to be construed strictly. A person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. This is for the reason explained in Mangalore Chemicals and other decisions, viz. each such exception/exemption increases the tax burden on other members of the community correspondingly. Once, of course, the provision is found applicable to him, full effect must be given to it. As observed by a Constitution Bench of this Court in Hansraj Gordhandas v. HH Dave that such a Notification has to be interpreted in the light of the words employed by it and not on any other basis.

This was so held in the context of the principle that in a taxing statute, there is no room for any intendment, that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification, i.e. by the plain terms of the exemption.

60. As against this argument of the revenue it is the case of assessee that Section 80IB is a provision of deduction/exemption, therefore, requires to be liberally constructed and for this purpose reliance has been placed on the decisions in the case of CIT v. Gujarat Aluminium Extrusions (P) Ltd. 263 ITR 453 (Guj) and also on the decision of Bombay High Court in the case of Ship Scrap Traders and Ors. v.Commissioner Of Income Tax and Ors.

61. I have carefully considered the rival submissions on this aspect.

The relevant observations of Hon. Supreme Court have been reproduced from the decision in the case of Novopan India Ltd. v. Collector of C.Ex. and Customs, Hyderabad (Supra). In the said case, their Lordships of Hon. Supreme Court have clearly observed that even if the principle of liberal construction in favour of assessee in case of ambiguity may be good and sound but does not apply to the construction of an exception or an exempting provision which are required to be construed strictly. It has been held that a person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision and in case of doubtful ambiguity, benefit of it must go to the State and the reason for the same is that each such exception/exemption increases the tax burden on other member of the community correspondingly.

62. It has already been pointed out that language of Section 80IB(2)(iii) is clear and there is no ambiguity and unless assessee establishes clearly that he is involved in the activity of manufacturing and production of an article or thing as envisaged in that section, assessee cannot be held to be entitled to get deduction under Section 80IB. Because as per above decision Hon. Supreme Court a person invoking an exception or exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision and even in a case of ambiguity the benefit must go to the State. However, there is no question of liberal interpretation to be given in favour of assessee. The decision in the case of CIT v. Gujarat Aluminium Extrusions (P) Ltd. (supra) is not applicable as in the said case while analyzing Section 35 their Lordships have found that Section 35 of the Act, nowhere makes it obligatory on the part of assessee to use the assets for the purpose of scientific research to avail the deduction and ld. Representative of the department had fairly conceded before Hon. Gujarat High Court that Section 35 of the Act nowhere makes it obligatory on the part of assessee to use the asset for the purpose of scientific research to avail the deduction and it was argued on behalf of the revenue that looking to the object that such section was enacted one as to interpret the section in such a way that if the asset is not to put to use for research and development the assessee will not get the benefit of deduction under the provisions of Section 35 of the Act and Hon. Gujarat High Court has rejected such contention of the revenue on the ground that the provisions of Section 35 are clear as there was no such requirement of assets being put to use for research and development for the purpose of getting deduction under Section 35.

It is clear from the following observation of Hon. Gujarat High Court: We are of the view that when the Legislature has not expected the assessee to put the asset to actual use, it would not be open to the Revenue to deprive the assessee of the benefit of deduction under the provisions of Section 35 of the Act if the asset is not used in the previous year in which the capital expenditure is incurred.

It is also relevant to note that the deduction is given not on the count of user. Had it been so, the assessee would have been given benefit in the nature of depreciation. It cannot be disputed that depreciation is allowed when the asset is used by the assessee and when he suffers loss on account of wear and tear of the asset. Had the intention of the Legislature been to grant additional depreciation, we would have agreed with the submissions made by standing counsel appearing for the Revenue but the position is different in the instant case. Here, the Legislature wants the assessee to spend more amount for scientific research and it also wants the assessee to get the benefit immediately in the year in which he incurs the expenditure in the nature of revenue or capital for scientific research and therefore the Legislature refers to incurring of the expenditure and not the using of the asset.

Once it is established that the expenditure was incurred for the purpose of scientific research and the conditions incorporated in Section 35 of the Act are fulfilled, in our opinion, the Revenue cannot expect the assessee to start using the asset immediately. In a given case the assessee might have to go on incurring expenditure for several years before putting the asset to actual use. If the interpretation advanced by standing counsel for the Revenue is accepted, we are afraid, the assessee would not be in a position to avail of the deduction under Section 35 of the Act to the extent to which the Legislature intends to give to the assessee.

Thus reliance on the above decision by the assessee is misplaced as the provisions of Section 35 were found not to be ambiguous as there was no requirement therein for user of the asset for the purpose of scientific research and development whereas in the present case as a condition precedent the assessee requires to be a manufacturer or producer or an artjcle or thing.Ship Scrap Traders and Ors. v. Commissioner of Income Tax and Ors.

251 ITR 806 (Bom) This decision can not also be applied for the reason that on similar activities Hon. Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corporation and Ors. (supra) have held that ship breaking activities do not result in bringing into existence any new article or thing and thus assessee was not entitled to deduction under Section 80HH & 801. Thus principle of liberal construction was impliedly held not applicable by Hon. Gujarat High Court in a case where assessee's activity was found not to be the activity of manufacturing or production of an article or thing even though it was the claim of assessee that it has been recognized as industry and huge machinery is deployed for the manufacturing activities. Thus no strength can be drawn by the assessee from the decision in the case of Ship Scrap Traders and Ors. v. Commissioner of Income Tax and Ors.

(supra).

64. Moreover, the proposition that where the language of provision is clear, as per well established principle of law, the court should interpret that on the face value and there is no warrant to go behind it. Nothing should be added or subtracted to interpret the plain language and semantic view alone should be taken and even though the liberal interpretation has to be given to such a provision, the interpretation has to be as per wording of that section. If the wordings of the section are clear then the benefits which are not available under that section, cannot be conferred by ignoring or misinterpeting word in that provision. Reference in this regard can be made to the following decisions: (i) CIT v. New Shorrock Spinning & Manufacturing Co. Ltd. 212 ITR 355 (Bom): 6. Learned counsel for the assessee made two further submissions.

Firstly, according to him, there being two decisions of two different High Courts, one in favour of the assessee and another against the assessee, the one in favour of the assessee should be accepted. It is stated by learned Counsel that it is well-settled that where two views are possible, the one beneficial to the assessee should be accepted by the courts. So far as this proposition as such is concerned, we do not find any difficulty in accepting the same. We, however, find it difficult to equate the two decisions with two reasonable interpretations. According to us, the question of accepting the principle of beneficial interpretation would arise only in a case where two views are reasonably possible in the opinion of the court deciding the point at issue. In such a case the court should tilt in favour of the assessee. But where on a plain reading of the statutory provision, it is of the opinion that one and only one interpretation is reasonably possible and that is against the assessee, it cannot give an erroneous interpretation in favour of the assessee by taking resort to the principle of beneficial interpretation.

8. Another submission of learned Counsel for the assessee was that Section 80G being intended to give relief in respect of donations for charitable purposes, it should be construed liberally so as to give benefit to the assessee. We appreciate the sentiments of learned counsel. Left to us, we might have considered this submission. But that is not so. It is for the Legislature to decide how much relief to give in respect of which donations, when and under what circumstances. Where the law is clear and unambiguous, we cannot act contrary to it with a view to giving benefit to an assessee who has donated for a charitable purpose. In view of the above, we answer the question referred to us in the negative and in favour of the Revenue.

Equally misplaced and misconceived is the submission based on the principle of beneficial interpretation. It should not be forgotten that rules of interpretation are not rules of law. They have been devised to assist the courts in the interpretation of statutes where the words or the language used there are ambiguous and there is a doubt about the meaning thereof. For this purpose, the doubt as to the true meaning should be "real", and not merely, conjectural or fanciful. If the court does not think that the words or expressions are open to diverse interpretations, it is not entitled to say that there is ambiguity merely for the reason that some ingenious assessee or his counsel could suggest another meaning. Because, as remarked by Lord Cave L.C., "no form of words has yet been framed with regard to which some ingenious counsel could not suggest a difficulty". It is not for the courts to invent fancied ambiguities and stretch or pervert the language of the enactment in favour of the taxpayer.

12. At this stage, learned Counsel for the assessee submits that in this case two views are possible and the view canvassed by the assessee being favourable to the assessee, the same should be accepted. He relies on the principle of beneficial interpretation often applied to interpretation of taxing statutes. There is no quarrel with the principle of beneficial interpretation which is often applied to interpretation of taxing statutes. But there are limitations to the application of this rule. It can be applied by the courts to interpretation of taxing statutes only when there is an ambiguity or doubt about the meaning of the word or the language used therein. It cannot be applied to stretch or pervert the clear language of the enactment to give benefit to the assessee which is not intended by the Legislature. The question of applying the principle of beneficial interpretation would arise only where in the opinion of the court deciding the case two views are reasonably possible. But if, on a plain reading of the statutory provision, the court is of the opinion that one and only one interpretation is reasonably possible which is against the assessee, it cannot give an erroneous interpretation in favour of the assessee by resorting to the principle of beneficial interpretation. CIT v. New Shorrock Spg.

and Mfg. Co. Ltd. . Moreover, as held by this Court in CIT v. Boots Co. (I.) Ltd. , the doubt as to the true meaning should be real, and not conjectural or fanciful. It is not for the courts to invent fancied ambiguities and stretch or pervert the language of the enactment in favour of the taxpayer. In the instant case, it is clear from the foregoing discussion that the principle of beneficial interpretation has no application. The contention of learned Counsel based on principle of beneficial interpretation is also therefore rejected.

(iv) Central Board of Direct Taxes v. Cochin Goods Transport Association 236 ITR 993 (Ker) So long as the language employed in the statutory provision and more so in the fiscal statute is clear, the court should interpret that on the face value and there is no warrant to go behind it. Nothing should be added or subtracted to interpret the plain language and semantic view alone should be taken. If these principles are borne in mind, then the only interpretation which could be placed on the sub-section is, the one which has been put by the Supreme Court and there is no scope to interpret the sub-section in a different manner.Commissioner of Agricultural Income-tax v. Plantation Corporation of Kerala Ltd. This Court has always been reiterating that if the intendment is not in the words used it is nowhere else and so long as there is no ambiguity in the statutory language resort to any interpretative process to unfold the legislative intent becomes impermissible and the need for interpretation arises only when the words in the statute are on their own terms ambivalent and do not manifest the intention of the Legislature vide Doypack Systems Pvt. Ltd. v. Union of India [1989] 65 Comp Cas 1 (SC) and Keshavji and Ravji v. and Co.

v. CIT . That apart an Explanation is intended to either explain the meaning of certain phrases and expressions contained in a statutory provision or depending upon its language it might supply or take away something from the contents of a provision and at times even, by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt.

The supposed intention of the Legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous.

If the intendment is not in the words used, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. In Doypack Systems P. Ltd. v. Union of India The words in the statute must, prima facie, be given their ordinary meanings. Where the grammatical construction is clear, manifest and without doubt, that construction ought to prevail unless there are some strong and obvious reasons to the contrary....

It has to be reiterated that the object of interpretation of a statute is to discover the intention of Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the Legislature as expressed in the statute, considering it as a whole and in its context. That intention, and, therefore, the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand....

Artificial and unduly latitudinarian rules of construction, which with their general tendency to "give the taxpayer the breaks", are out of place where the legislation has a fiscal mission. Indeed, taxation has ceased to be regarded as an "impertinent intrusion into the sacred rights of private property" and it is now increasingly regarded as a potent fiscal tool of State policy to strike the required balance-required in the context of the felt needs of the times-between the citizens' claim to enjoyment of his property on the one hand and the need for an equitable distribution of the burdens of the community to sustain special services and purposes on the other. These words of Thomas M. Cooley in 'Law of Taxation', Volume 2, are worth mentioning: Artificial rules of construction have probably found more favour with courts than they have ever deserved. Their application in legal controversies has often times been pushed to an extreme which has defeated the plain and manifest purpose in enacting the laws. Penal laws have sometimes had all their meaning construed away and in remedial laws, remedies have been found which the legislature never intended to give. Something akin to this has befallen the revenue laws....

We are unable to accept the submission of Mr. Dastur. Undoubtedly Section 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision the interpretation has to be as per the wording of this section. If the wordings of the section are clear then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section.

The language of Section 80IB(2)(iii) is clear to the intent that to become entitled for deduction Under Section 80IB assessee should manufacture or produce an article or thing as enumerated in that section and if that condition is not fulfilled the benefit cannot be granted to the assessee simply because it is an incentive provision. If assessee is not manufacturing or producing an article or thing within the meaning of Section 80IB(2)(iii) deduction under Section 801B cannot be granted to the assessee merely on the basis of liberal construction.

(a) Deployment of huge machinery in the process and grant of various licences under various Acts alone in themselves are not sufficient to hold that assessee is involved in the activity of manufacturing and production of an article or thing. To become eligible for deduction under Section 80IB it is also one of the necessary conditions that assessee should manufacture or produce an article or thing of the nature specified under Section 80IB(2)(iii).

(b)(i) Process as stated by assessee as testing, slitting, shearing, notching, holing etc. are not the activities of manufacture or production of an article or thing within the meaning of Section 80IB(2)(iii) on the basis of following decisions:Collector of Central Excise, Hyderabad v. Bakelite Hylam Ltd. (supra) (ii) Commissioner of Central Excise v. SR Tissues (P) Ltd. and Anr.

(supra) (ii) Decision of Special Bench in the case of Jhonson Electric Co.

v. Collector of Central Excise (supra), cannot be applied as the same is contrary to the law laid down by Hon. Supreme Court in the decisions (i), (ii), (iii). The Special Bench decision is also distinguishable on facts.

(iii) Annealing as done by assessee is not an absolutely necessary process as without annealing also the cut and punched sheets can be utilized in transformer as is clear from the opinions furnished by the assessee from SAIL/Veer Mata Jijabai Technological Institute.

Following cases which have been relied upon by the assessee in support of its contention that annealing tentamounts to manufacture are distinguishable on the ground that in those cases, annealing was found to be an absolutely essential process to make the craneshafts etc. as distinct marketable product:CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. (supra) In the case of assessee annealing done on CRGO sheets is short term annealing which does not bring any change in the basic electrical and magnetic properties of the CRGO sheets. It only rectify to some extent the iron loss and current loss of CRGO sheets which occur to CRGO sheets during the process of testing, slitting, shearing, notching, holing etc.

(iv) The requirement that whether an activity amounts to activity or production of an article or thing is that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end product after the raw material undergoes the process of manufacture and to put it differently the final product does not retain the identity of raw material after it has undergone the process of manufacture.

Reference for this purposes can be made to the following decisions:CIT v. Prabhudas Kishordas Tobacco Products (P) Ltd. 282 IIR 568 (Guj) (c) Change in the name of so called finished product alone is not decisive factor to establish that assessee is manufacturing an article or thing as it will not be safe to go by that test and test of "character or use" has to be given due importance according to the following decisions: If 'character or use' test is applied there is no change in the basic characteristics of CRGO sheets and so called finished product "Lamination Core". The product did not undergo any change on account of various processes stated to be carried on by assessee and thus there was no manufacturing activity involved. So is the position with the contention of assessee that under Excise law "CRGO sheet" and "Lamination Core" fall under different categories.

(d) The opinions of SAIL and Veer Mata Jijabai Technological Institute (VJTI) (supra) also cannot advance the case of assessee for the reasons discussed elsewhere in this order.

(e) Grant of deduction under Section 80IB in the group case in earlier years by way of orders passed under Section 143(3) does not place an estoppel/res judicata against the department to consider the claim of assessee as per provisions of law as neither the doctrine of estoppel nor of res judicata is applicable to tax proceedings. Reference can be made to following decisions: (2) Director of Income-tax (Exemption) v. Dharm Pratisthanam 155 CTR (Del) 385 (f) Deduction under Section 80IB cannot be granted to assessee even according to the principle of liberal construction, as assessee does not fulfill the necessary condition of manufacture and production of an article or thing as laid down in Section 80IB(2)(iii). As according to the decision of Hon. Supreme Court in the case of Novopan India Ltd. v. Collector of C. Ex. And Customs, Hyderabad (supra), the person who is invoking an exception or exemption must establish clearly that he is covered by the said provision and in case of doubt or ambiguity the benefit must go to the State.

Language of Section 80IB(2)(iii) is clear and unambiguous, therefore assessee has to fulfill the condition of manufacturing or production of an article or thing. Deduction cannot be granted to the assessee on the basis of liberal construction unless assessee satisfies the condition laid down in Section 80IB(2)(iii). Reference can be made to following decisions:Novopan India Ltd. v. Collector of C. Ex. And Customs Hyderabad 73 ELT 769 (SC).

(2) CIT v. New Shorrock Spinning & Manufacturing Co. Ltd. 212 ITR 355 (Bom) (5) Central Board of Direct Taxes v. Cochin goods Transport Association 236 ITR 993 (Ker)Commissioner of Agricultural Income-tax v. Plantation Corporation of Kerala Ltd. 66. The above findings are to be read with relevant detailed discussion in the paras mentioned below each finding..

67. In view of above discussion, I hold that assessee does not fulfill the necessary condition of manufacturing and production of an article or thing within the meaning of Section 80IB(2)(iii) and thus is not entitled to claim deduction under Section 80IB.68. On all other issues decided by Hon. Vice President I am in agreement. The appeals filed by the revenue are partly allowed.


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