CIT vs Innovative Industries

Revenue is in appeal against the judgment of the Tribunal dt. 28-5-2010, raising following question for our consideration :-

Whether on the facts and in law, the Appellate Tribunal is right in concluding that the process employed by the assessee is such that it can be termed as manufacturing and thus eligible for deduction u/s 80IB of the Income Tax Act, 1961 ?

The issue arises in the following factual background. The assessee is engaged in the business of manufacturing home-care products; including perfume sprays, such as air fresheners; room fresheners as also polish spray; rust removers, etc. On the income derived from such activity, the assessee for the A.Y. 2004-05, claimed deduction u/s 80IB of the Income Tax Act, 1961 (''Act'' for short). The Assessing Officer however, rejected claim on the ground that the activity carried on by the assessee does not amount to manufacturing or production of ''an article'' or ''thing'' within the meaning of Section 80IB(3) of the Act.

Assessee carried the matter in appeal. CIT(A) by detailed order, examined the process carried on by the assessee and applied law laid down by different Courts; including the Apex Court and came to the conclusion that the assessee did carry on manufacturing activities and production of article or thing within the meaning of Section 80IB of the Act.

Revenue approached the Tribunal against the decision of the CIT(A). Tribunal, by the impugned order, rejected the Revenues appeal confirming the view of the CIT(A). Tribunal also took note of various processes undertaken by the assessee for producing different perfumes, air fresheners and came to the conclusion that the assessee did carry on manufacturing activity. Revenue is, therefore, in appeal before us.

Having heard learned counsel for the Revenue and having perused the orders on record, we do not find any error in the view of the Tribunal. Tribunal noted the process undertaken by the assessee in producing the air fresheners. We may note different steps undertaken by the assessee.

Process of manufacture :

The goods manufactured by the appellant are home care projects like the premium air fresheners aerosol product. The manufacture of the products involves various stages of manufacture as below :-

(A) Container Forming :

Firstly the tin plates are procured and then the same are converted into cans. This process is carried out by the job-worker M/s. Vividh Industries as per the requirements and specification stipulated by the appellant. The containers should be of such specifications which can withstand the pressure exerted by the propellant. The containers are so designed so as to render the same suitable for fitting of 1-inch Aerosol valves.

(B) Pre-mix Preparation :

This stage of manufacturing process involves mixing of different chemicals i.e., the product constituents according to pre-determined formulation. The chemicals used for preparing pre-mix formulation are various Chemicals like Aromatic industrial chemicals (which in loose terms are also known as perfumes/fragrance), Isopropyl Alcohol, etc. In some of the processes the chemicals viz., Triethylene Glycol, Propylene Glycol can also be added as additional ingredients, depending upon the individual formula of the pre-mix as per the requirement of each manufacturer. The aromatic industrial chemicals purchased by us are inputs for the manufacture of Air Fresheners and the same are not capable of being used for the home care application as Air Fresheners, in the condition in which they are manufactured by the Aromatic Industrial Chemicals manufacturers. Therefore, a pre-mix formulation, consisting of various product constituents is prepared as first stage of production.

(C) Cleaning of Tins Cans :

The tin cans received from the job-worker are thoroughly cleaned from inside so as to ensure that there are no contaminating remnants in the containers as well as to ensure corrosion free tin can life.

(D) Filling :

Filling of pre-mix into Aerosol Tin Can with the help of liquid filling machine in a predetermined quantity of products.

(E) Crimping :

Sealing of press button type valve into the Tin Can containers. Valves are essential for accurately controlling the discharge of the product of uniform particle size and of required spray pattern. The valve mechanism assembly is also fitted with valve cup, gasket, dip tube, actuator and spray nozzle.

(F) Charging :

Filling the required type and quantity of propellant into the container. In this process liquefied propellant is charged into the container through the valve under pneumatic pressure at normal temperature. During the process purging of air from the container is also carried out so as to avoid contamination of the product due to pressure of air.

(G) Weighting :

Filled Tin cans are weighed for ensuring uniform quantity of filling.

(H) Water Bathing :

These filled and sealed containers are water bathed to ensure that there is no leakage in the gas filled containers.

(I) Sealing :

The containers filled with product pre-mix and fitted with valve are sealed with the help of sealing machine.

(J) Packing :

Thereafter these containers are tested for valve, a protective cap is placed on the valve and then the same are taken up for packing.

From the above, it can be seen that for bringing into existence the air fresheners as a commodity which could be sold in the market, the assessee had to undertake several steps noted above. The assessee had to manufacture containers from tin plates, which was done through job-workers. The assessee had to prepare pre-mix by mixing various chemicals in certain proportion which would vary according to the requirement of each manufacturer. The assessee thereafter had to ensure proper cleaning of the tin cans received from the job-workers to ensure that there was no contamination to avoid corrosion. Such tin cans thereafter would be filled by the pre-mix with the help of liquid filing machine. Precise quantity of such product would have to be filled. The tin had to be sealed by fitting a valve to control accurate discharge of the product in uniform particle size; depending upon the requirement of the spray pattern. This would require valve mechanism assembly which would be fitted with the valve tube, spraying nozzle, etc. The assessee would thereafter have to fill the tin with propellant to create pressure inside the tin which would enable the consumer to spray the liquid through the nozzle under the pressure. Such tins would be checked for leakages and properly sealed and packed before they would be sold in the market. By no stretch of imagination, the activity carried out by the assessee would not amount to manufacturing activity. The very complex activity undertaken by the assessee in not only preparing the tins for air fresheners and thereafter, filling it with the perfumed liquid through a complex and technical process and fitting the same with the valve, the mixture itself was prepared by the assessee by mixing various chemicals in different proportion, admittedly, the entire new marketable product would come into existence carrying excise duty liability. Section 80IB of the Act requires the assessee to be involved in manufacture, or production of ''an article'' or ''thing''. The Assessing Officer was wholly unjustified in denying the benefit of deduction. CIT(A) as well as the Tribunal committed no error. Tax Appeal is, therefore dismissed.