Commissioner of Income Tax vs Gitwako Farma (I) P. Ltd.

M.L. Mehta, J.—This is an application seeking condonation of delay of 151 days in refiling the appeal. Upon hearing learned Counsel for the parties and on a perusal of the application, the delay in refiling the appeal is condoned subject to payment of costs of Rs. 5,000 to the Delhi High Court Legal Services Committee.

Accordingly, the application stands disposed of.

ITA No. 740 of 2010 Notice. Mr. Yadav enters appearance and accepts notice on behalf of the Respondent.

Heard the counsel for the parties. The present appeal is admitted on the following substantial questions of law:

(i) Whether the income tax Appellate Tribunal was correct in law in allowing the deduction u/s 80IB of the Act to the Assessee ?

(ii) Whether the process undertaken by the Assessee amounts to manufacturing or production of any article or thing so as to be eligible for deduction u/s 80IB ?

With the consent of parties, we have finally heard the appeal.

The Assessee is engaged in manufacturing of tinned fish and mutton. It has been filing returns and claiming deductions u/s 80IB of the income tax (Act hereinafter referred to as "the Act") for the assessment years 1996-97 to 2003-04. It is only during the assessment year 2004-05 that its case came to be examined by the Additional Commissioner of income tax by exercising his powers conferred upon him u/s 144A of the Act. Pursuant to the directions given by the Additional Commissioner of income tax u/s 144A, the Assessing Officer completed the assessment u/s 143(3) on December 27, 2006 and disallowed the deduction amount to Rs. 54,83,360 claimed by the Assessee u/s 80IB of the Act.

Aggrieved by this, the Assessee preferred an appeal before Commissioner of income tax (Appeals), who vide order dated February 6, 2008 allowed the appeal holding that the processes undertaken by the Assessee amounted to "manufacture". Consequently, the Commissioner of income tax (Appeals) held the Assessee to be entitled for deduction u/s 80IB of the Act and deleted the disallowance made by the Assessing Officer. The Revenue filed an appeal before the income tax Appellate Tribunal (hereinafter referred to as "the Tribunal"), which was dismissed upholding the reasoning and the order of the Commissioner of income tax (Appeals). It is against this impugned order, the Revenue has preferred the appeal. The short question for consideration is as to whether the processes undertaken by the Assessee in converting raw fish into tinned fish for consumption amounted to "manufacture" or not.

The process involved in converting raw fish into tinned fish as presented by the Assessee was examined by the Assessing Officer. Holding the activity to be a "process" and not "manufacture", the Assessing Officer recorded as under:

... I am of the considered view that the manufacturing undertaken by the Assessee company is at best food processing and cannot be categorized as manufacturing or production which results in creation of the new and distinct commodity, as recognized in the trade circle. The Assessee-company undertakes:

(i) sorting and quality control of fish.

(ii) packaging the raw fish in ice.

(iii) procuring of raw fish from fishing docks.

(iv) pre-processing of fish.

(v) cleaning, cutting of fish head, tail, fins, tips and removal of skin.

(vi) pre-cooking and packaging of pre-cooked products in cans.

(vii) creation of negative pressure for achieving long shelf life.

(viii) sterilization of canned product and inactivation of microbial load.

(ix) cooling of packed cans for further inactivation of microbial load.

(x) final product - tuna/mackerel fish.

(xi) tinned fish kept in warehouse.

2.1.5 After going through the above stages through which the input raw material--fish is converted into tinned fish, it is clear that, as a result of processing undertaken by the Assessee-company, no commercially different and distinct commodity has been produced and, hence, it is noticed that the processing undertaken by the Assessee-company cannot be held to be amounting to manufacturing or production of an article or thing and, therefore, the basic condition for eligibility of 80-IB deduction is not found to have been fulfilled and, hence, the deduction claimed u/s 80IB is not found to be allowable.

The Commissioner of income tax (Appeals) after going into the minute details of the processes involved in different commodities and also the judgments of different High Courts and the Supreme Court regarding those commodities held the activities involved in conversion of raw fish into tinned fish as "manufacturing" and thus the Assessee was held to be entitled to deduction u/s 80IB. The Tribunal recorded its agreement with the Commissioner of income tax (Appeals) in the following manner:

Moreover, the claim of the Assessee for deduction u/s 80IB was allowed by the Assessing Officer in the initial year and the same having not been admittedly withdrawn, we hold that the claim of the Assessee for such deduction could not be denied for the subsequent years as held inter alia in the case of Commissioner of Income Tax Vs. Paul Brothers, cited by the learned Counsel for the Assessee. Furthermore the entire process involved in conversion of raw fish into tinned fish was examined by the learned Commissioner of income tax (Appeals) and after having considered the different stages involved in the said process as well as the nature of input and output, the activity of the Assessee-company was held by him to be manufacturing activity eligible for deduction u/s 80IB, keeping in view the ratio of various judicial pronouncements discussed in the impugned order.

Learned Counsel for the Assessee has relied upon various judgments of different High Courts to substantiate his submission that the process involved in converting raw fish into tinned fish is manufacturing. He submitted that there was a difference between the input raw fish and the end product of tinned fish. He tried to demonstrate that the input is not eatable whereas the end product is eatable and the life of the input raw fish is short as against the long shelf-life of the tinned fish. He further submitted that the process involved processing by mixing with oil, spices and other vegetables like ginger, chilly, onion, cooking at specified temperature and packaging in air-tight containers. He also submitted that the Assessee has been paying excise duty on the basis of the manufacture of tinned fish.

Learned Counsel relied upon Commissioner of Income Tax Vs. Marwell Sea Foods, ; Commissioner of Income Tax Vs. Bharath Sea Foods, ; ASPINWALL and CO. LTD. Vs. Commissioner of Income Tax, ; Commissiioner of Income Tax Vs. Sophisticated Marbles and Granite Industries, and Commissioner of Income Tax Vs. Jalna Seeds Processing and Refrigeration Co. Ltd.,

We may note that the decisions in the cases of Commissioner of Income Tax Vs. Marwell Sea Foods, and Commissioner of Income Tax Vs. Bharath Sea Foods, of the Kerala High Court related to prawns and fish respectively are no longer holding field on the subject in view of the judgment of the hon''ble Supreme Court in the case of Commissioner of Income Tax, Trivandrum Vs. Relish Goods, In this case the undermentioned findings of Sterling Foods, A Partnership Firm represented by its Partner Shri Ramesh Dalpatram Vs. State of Karnataka and Another, were applied by the Supreme Court that (page 61):

... the processed or frozen shrimps and prawns are commercially regarded as the same commodity as raw shrimps and prawns. 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. There is no essential difference between raw shrimps and prawns and processed or frozen shrimps and prawns. In common parlance they remain known as shrimps and prawns.

The case of ASPINWALL and CO. LTD. Vs. Commissioner of Income Tax, related to manufacture of coffee beans from coffee berries. The process involved plucking or receiving the raw coffee berries and putting them to undergo nine processes to give them the shape of coffee beans. It was held that (page 328) "The process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which results in the production of a commercially different article. If a commercially different article or commodity results after processing then it would be a manufacturing activity. The Assessee after processing the raw berries converts them into coffee beans which is a commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity."

In the case of Commissioner of Income Tax Vs. Jalna Seeds Processing and Refrigeration Co. Ltd., processing of raw seeds to make them suitable only for cultivation was held to be a manufacturing process. It was held that the raw seeds undergo various processes to make it marketable lot after which they are no longer edible and they can only be used for cultivation. The different commodity emerges after raw seeds undergo different stages and so the Assessee can be said to be engaged in the manufacturing or production of seeds.

The case of Commissiioner of Income Tax Vs. Sophisticated Marbles and Granite Industries, related to conversion of marble blocks into slabs, tiles, etc. by involving different processes like cutting, putting full size fibre on one side, filling holes and cracks by applying chemicals, polishing, applying different types of tin oxides and then cutting the finished slabs to appropriate sizes and shapes from which the marketable size of slabs, moulded pieces, edged pieces and tiles are made. This activity was held to be clearly falling within the definition of manufacturing.

In the case of Golden Hind Shipping (India) Pvt. Ltd. Vs. Commissioner of Income Tax A-X New Delhi, a similar issue was raised before this High Court and it was observed as under (page 330):

... the broad principle which can be deduced from various judicial pronouncements on the subject is that it is only when a change or series of changes take the commodity subjected to such processes to a point where it can no longer be regarded as the original commodity but is instead recognised as a new and a distinct article, that such a process can be said to have resulted in ''manufacture'' or ''production'' of an article. In other words, what is to be seen is whether the article claimed to be manufactured or produced is commercially a different from the commodity out of which the same has been produced. As noted above, in the present case, the Tribunal has found that the Assessee''s activity is restricted to catching of fish on the high seas, cleaning it from both the ends and then keeping it in the cold storage till the same is sold to various customers. So far as the process, the Assessee puts the fish to, is concerned, the aforenoted finding, one of fact, is not sought to be challenged in the question referred to this Court. Applying the above test to the facts found by the Tribunal, we are of the opinion that by mere cutting off of the head and tail of the fish, it does not become another distinct commodity. In common parlance it continues to be known as fish and, therefore, the Assessee-company cannot be said to be an industrial undertaking engaged in the manufacture or production of an article to be entitled to any relief u/s 80J of the Act.

The view we have taken finds support from the decision of the Supreme Court in Sterling Foods v. State of Karnataka [1986] 63 STC 239, wherein it has been held that the processed or frozen shrimps and prawns are commercially regarded as the same commodity as raw shrimps and prawns. When raw shrimps and prawns are subjected to the process of cutting off of heads and tails, peeling, deveining, cleaning and freezing they do not cease to be shrimps and prawns and become other distinct commodities. There is no essential difference between raw shrimps and prawns and processed or frozen shrimps and prawns. In common parlance they remain to be known as shrimps and prawns. Following the said judgment, in a recent decision in Commissioner of Income Tax, Trivandrum Vs. Relish Goods, the apex court has affirmed the decision of the Bombay High Court in Commissioner of Income Tax Vs. Sterling Foods (Goa), wherein it was held that the activity of processing of prawns is not an activity of manufacture or production. A similar view was taken earlier by the Bombay High Court in Commissioner of Income Tax Vs. Fazalbhoy Ibrahim and Co. P. Ltd., wherein it was held that ''catching fish'' did not amount to ''manufacture'' or ''production'' of fish within the meaning of Section 80J. Both the decisions of the Bombay High Court are apposite to the question before us.

In the light of the aforenoted judgments of the Supreme Court, with respect, we are unable to subscribe to the view taken by the Calcutta High Court in Commissioner of Income Tax Vs. Union Carbide India Ltd., relied upon by learned Counsel for the Assessee. We are of the view that the Assessee is neither an industrial undertaking nor is it engaged in the business of manufacturing or producing any article and consequently it is not entitled to deduction u/s 80J.

On the same issue, the hon''ble Madras High Court in the case of Commissioner of Income Tax Vs. E.I.D. Parry (India) Ltd., observed as under (page 490):

The Assessee is engaged in the operation of catching of fish, processing the same, treating the fish with chemicals, freezing it and packing it in a cold storage plant. This Court in the case of Commissioner of Income Tax Vs. George Maino Exports (P.) Ltd., has held that the processing of shrimps does not amount to manufacture and, therefore, the Assessee is not entitled to investment allowance u/s 32A of the Act. That decision squarely applies here.

Recently, this Court had the occasion to consider a similar issue in STR 12 of 2002 and STR 4 of 2003 decided on January 24, 2011 Metalite Industries Vs. Commissioner of Sales Tax, In the said case, a reference was made to the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Pio Food Packers, Though this case was under the Sales Tax Act, the question regarding manufacturing came to be considered. The case of Pio Foods Packers (supra) related to pineapple fruits which were processed into pineapple slices. It was held that though it has undergone a degree of processing, it must be regarded as still retaining its original identity. The principles laid down in this case by the Supreme Court are of wide importance, which are noted as under (pages 65 and 66 of 46 STC):

... the generally prevalent test is whether the articles produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. 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 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. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity . . .

In the present case, there is no essential difference between the pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient form and by reason of being canned it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as preservative. On a total impression, it seems to us, the pineapple slices must be held to possess the same identity as the original pineapple fruit . . .

Referring to Anheuser-Busch Brewing Association v. United States 52 L Ed 336 the court said:

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

''At some point processing and manufacturing will merge. But where commodity retains a continuing substantial identity through the processing stage we cannot say that it has been "manufactured" ''.

In the light of facts and circumstances of the Assessee''s activities as described in the preceding paragraph and also in the order of the Assessing Officer and in the light of the settled legal position as discussed above, it is held that the Assessee is engaged in processing and not manufacturing and as such is not eligible for deduction u/s 80IB. In view of the findings, we answer question (ii) in favour of the Revenue and against the Assessee in the sense that the activities undertaken by the Assessee did not amount to production or manufacturing and so is not eligible for deduction u/s 80IB. Consequently, question (i) is answered in the negative in favour of the Revenue and against the Assessee.

To substantiate his submission that the Department has been accepting the returns filed by the Assessee and allowing the deduction for the previous years and so was estopped from doing so on the principle of consistency, learned Counsel has relied upon the case of M/s. Radhasoami Satsang Saomi Bagh, Agra Vs. Commissioner of Income Tax, wherein it was observed as under (page 329):

We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

In this regard it may be stated that it is only during the relevant year that the case of the Assessee came to be examined by the higher authorities at the appropriate level. The examination of the case of the Assessee in the relevant year was not confined to the factual matrix of the previous years, but was an exercise done by the Department on the legal issues concerning the claim made by the Assessee u/s 80IB of the Act. We are of the view that since each year''s assessment is independent of the previous years'', there was no bar against the Revenue to examine the case of the Assessee from this legal perspective.

The last submission of the learned Counsel was that the activities undertaken by it in converting raw fish into tinned fish amounted to "manufacture" was also accepted by the Excise Department and they have been paying excise duty on their products. We have no hesitation in holding that the activities undertaken by the Assessee did not amount to manufacture by any stretch of extension and if for any reason or misconception, the Assessee or the Excise Department have been taking the activities as manufacturing, that would be sorted out by the Assessee with the Excise Department even to the extent of asking for refund of excise duty, if it was so entitled to.

For the aforesaid reasons, the appeal is allowed.