AAR : Whether, on the facts and in the circumstances of the case, exemption under s. 10(5B) of the IT Act, 1961 would be available to the applicant ?

Authority For Advance Rulings

Arthur E. Newell, In Re

Sections 10(5B), 10(6)(vi)

Asst. Year 1995-96

S. Ranganathan, J., Chairman & R.L. Meena, Member

AAR No. 273 of 1996

20th August, 1996

Counsel Appeared

K. Sampath & N.N. Gupta, for the Applicant : Ashish Abrol, for the CIT concerned

BY THE AUTHORITY :

Mr. Arthur E. Newell, the applicant, is a resident of United Kingdom (UK) and an employee of Kodak Ltd., a company incorporated in the UK and renowned for its cameras and films used in cinematography and photography. On 26th Jan., 1995, the company gave the applicant an assignment in Goa. In pursuance of this assignment, the applicant arrived in India for the first time on 5th Feb., 1995 and left after 7 days. He again came to India on 4th March, 1995 and stayed on in India for the duration of his assignment, a period of 12 months. Thus, his stay in India during the financial year 1994-95 was only of 35 days. Since the stay of the applicant in India during the financial year 1994-95 was only for 35 days and he had not been in India earlier, he is a “non- resident” for the purposes of the IT Act, 1961 (the Act) during the financial year 1994-95. The applicant has presented this application under s. 245Q(1) of the Act, seeking the ruling of this Authority on the following two questions :

“(1) Whether, on the facts and in the circumstances of the case, exemption under s. 10(5B) of the IT Act, 1961 would be available to the applicant ?

(2) Whether, on the facts and in the circumstances of the case, the applicant would be considered as a “technician” for the purpose of s. 10(5B) of IT Act, 1961 ?”

2. The applicant, being a non-resident in the financial year 1994-95, is entitled to maintain this application in view of the ruling given by this Authority in the case of Monte Harris, In re (1995) 128 CTR (AAR) 59 : 82 Taxman 365. It may also be mentioned here that the applicant was not a resident in India in any of the four financial years immediately preceding the financial year in which he arrived in India and that the Indian income-tax on the remuneration paid to him for the services rendered in India has been paid by the UK company.

3. The answer to the applicant’s questions primarily depends upon the issue whether he can be said to be a “technician” within the meaning of s. 10(5B) of the Act. This provision, which was inserted in the Act by the Finance Act of 1993 w.e.f. 1st April, 1994, replaces s. 10(6)(vii) which was in force between 1st April, 1964 and 31st March, 1971 and s. 10(6)(viia) which was in force between 1st April, 1971 and 31st March, 1994. It is, however, not necessary to set out the earlier provisions which vary in some respects from cl. (5B) with which the Authority is concerned at present. Sec. 10(5B) in so far as it is relevant, for present purposes, reads as follows : “Sec. 10 In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—……………. (5B). in the case of an individual who renders services as a technician in the employment (commencing from a date after the 31st day of March, 1993) of the Government or of a local authority or of any corporation set up under any special law or of any such institution or body established in India for carrying on scientific research as is approved for the purposes of this clause or sub-cl. (viia) of cl. (6) by the prescribed authority or in any business carried on in India and the individual was not resident in India in any of the four financial years immediately preceding the financial year in which he arrived in India and the tax on his income for such services chargeable under the head “Salaries” is paid to the Central Government by the employer (which tax, in the case of an employer, being a company, may be paid notwithstanding anything contained in s. 200 of the Companies Act, 1956) (1 of 1956), the tax so paid by the employer for a period not exceeding forty-eight months commencing from the date of his arrival in India;……… Explanation :—For the purposes of this clause, “technician” means a person having specialised knowledge and experience in— (i) constructional or manufacturing operations, or in mining or in the generation of electricity or any other form of power, or……. who is employed in India in a capacity in which such specialised knowledge and experience are actually utilised;”

Leaving out the irrelevant portions of the exemption clause, the point for consideration before the Authority is whether the applicant can be stated to be “a person having specialised knowledge and experience in constructional or manufacturing operations”. This involves a consideration of the nature of the operations which the applicant carried out during the period of his assignment in India.

The statement of facts having a bearing on the above issues may now be set out. The UK company, as part of its efforts to expand its business operations in the Asian region, obtained permission from the Foreign Investment Promotion Board for establishment of a 51% joint venture company in India. The Indian company (known as Kodak India Ltd.) has since been established with its head office located at Bombay and a factory at Goa. The factory at Goa is engaged in the production of two commodities : (i) 35mm film cassettes and (ii) Eastman Colour Print Motion Picture Films. The Indian company imports emulsion coated rolls of cellulose triacetate base in huge rolls of the width of 54 inches and the length of about 5000 ft. from Rochester in UK. These rolls come in huge boxes which are protected from light and are stored, in order to retain the sensitivity of the film and the proper colour balance, in godowns maintaining a temperature of 12 degrees C and a relative humidity of 50% and illuminated with white light which is less intense than the normal light. The jumbo rolls move from the cold storage into a stabilizing chamber where a temperature of 22 degrees C is maintained. The jumbo rolls are then cut into film rolls of the width of 35mm by slitting machines imported for the purpose. The next operation involves perforating the edges of the films at defined intervals. This perforation has to be of international standards because the gears in the cameras sold all over the world are moulded accordingly. During this operation, the cut quality like shear, emulsion lift and support marks as well as variables like margin, pitch and squareness are most important and have to be maintained according to international standards for the proper functioning of the film. The next operation comprises of sigma printing and notching which includes bar codes, legend and strip printing as a part of product grade and traceability procedure. In this operation, the film is notched at specific intervals depending on the number of exposures and the bar code must match international standards and be capable of being deciphered automatically. The next operation comprises of spooling the film through four sub assemblies which cut the perforated film into 1.6 mm length, wind them over spools with the aid of tape, slip them into a first form and then stack them with end caps. Other material like spooling tapes, first form blanks with velvet on the inner side, end caps, plastic spools, etc., are also selected, assembled and integrated into the final product. The camera rolls are filled in plastic containers and packed in cardboard cartons with the aid of machines. The process regarding motion picture films is more or less similar except that the film strips are longer and are rolled in containers duly sealed with tape. The colour of the jumbo rolls for this manufacture is also slightly different. All the operations have to be done in complete darkness. At every stage of production, there are international safety norms and the production is also subjected to an internal world-wide audit to ensure that standard norms are followed by the company throughout the world. It is claimed that through these efforts the company has been able to secure the first position in quality control in the world. At present the company manufactures 60,000 rolls per month of camera films and 5 million linear feet per month of motion picture.

The applicant has worked as production operation manager with the UK company for over 17 years and has acquired and contributed his experience and knowledge in all aspects of film processing, including finishing process operations, to Kodak’s business world-wide. The statement of facts accompanying the application gives a detailed description of the steps involved in the production of these two types of films and leaves no doubt that the applicant has expertise and specialised knowledge of the processes to be applied to film rolls before a camera film or motion picture film emerges from the factory as a finished product. In that sense, no doubt, the applicant is a technician. Sec. 10(5B), however, does not extend its exemption to all kinds of technicians or persons having specialised knowledge and experience. It further requires that such experience and knowledge must be “in constructional or manufacturing operations”. Though an attempt was made on behalf of the applicant to suggest that he was also supervising the constructional operations in the factory, this plea cannot be accepted. It was stated before the Authority that the factory building had been completed and even trial production had started by May, 1995. It appears that the operations of construction of the factory must have been completed before the arrival of the applicant. At best, the expertise of the applicant was utilised in the setting up and assemblage of the plant and machinery in appropriate atmosphere and proper order to ensure operational flow of work, stage by stage, through their proper positioning and installation. It can be accepted that in the initial years of production, the specialised knowledge and experience of the applicant was essential to put the company on its feet and commence efficient operation, as the day-to-day operations carried on in the factory for the production of films also require a good deal of precision and involve rigid quality control tests at every stage. There is no doubt that this expertise and knowledge of the applicant was utilised to enable the company to carry out these operations efficiently and in such manner as to ensure that its products come up to international standards and maintain the world-wide reputation of the company.

At the time of the hearing of the application, two aspects of the pre-conditions for the applicant being entitled to the exemption claimed had to be considered. The first of these, as already mentioned, is whether the process employed by the company can be said to be a manufacturing process. Looking at the operations broadly, it could be argued that the processes involve no element of manufacture. All that is done by the company is to import huge rolls, cut them into smaller rolls, perforate them on the sides, notch identifying marks and then pack them in appropriate forms in boxes or spools. The quality of the film or its sensitivity for photographic purposes is in no way improved, added to or modified. The best that can be said is that the company preserves the rolls in proper atmospheric conditions and carries out its operations in such a way as not to deplete or destroy their quality. What is imported by the company is “film” and what is produced by the company is also the same commodity except for differences in size, shape and packaging. Can these operations which preserve the shape and nature of the original product and introduce no qualitative changes therein be described as manufacturing processes at all ?

The applicant’s contention is that the true scope and real significance of its processes has been over-simplified in the above paragraph. The huge rolls imported by the company, according to the applicant, constitute the raw material for a manufacturing process carried on by it. The processes applied are not just mechanical processes of slitting, perforating and the like. They have to be done by high precision instruments and have to be carried out in rigid atmospheric and light conditions which are of great moment in ensuring the final quality of the picture. The final product has to conform to international quality standards. At every stage of the process, there have to be rigid quality standards and even a very minute variation or defect could render several rolls of the product totally worthless. The original rolls are not marketable commodities in a true sense : they cannot be sold except as rolls to manufacturers like the employer of the applicant. The films produced by the Kodaks, however, are sold in the world market as a distinct commercial commodity. The 35 mm cassettes or the motion picture films produced and sold by the company are completely different commercial commodities, distinct even from each other. It is pointed out that, under Chapter 37 of the Central Excise Tariff, these commodities have been classified as photographic or cinematographic goods and that the notes to this chapter states that “the process of cutting, slitting, perforation or any one or more of these processes shall amount to manufacture”. Production of cinematographic films has been held to involve manufacture of goods in CIT vs. D.K. Kondke (1991) 96 CTR (Bom) 161 : (1991) 192 ITR 128 (Bom) : TC 25R.703 and the CBDT has also expressed a view to the same effect in its Circular No. 24, dt. 23rd July, 1969. Learned representative for the applicant has also relied on a number of decisions of the Hon’ble Supreme Court and various High Courts and on certain observations in an earlier decision of this Authority in Robert W. Smith, In re (1995) 126 CTR (AAR) 221 : (1995) 212 ITR 275 (AAR) to substantiate his contentions.

After careful consideration, the Authority is of the view that the operations carried out in the Indian factory must be held to be manufacturing operations. 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 vs. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 and South Bihar Sugar Mills Ltd. vs. Union of India AIR 1968 SC 922, 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 (Vol. 56 at pp. 685-6) 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.” (Emphasis, italicised in print, added) 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 carried out on, or in relation, to it, and the commercial identity, character and use of the article produced. Judicial precedents, which very often turn upon the language of the definition of the expression in a particular statute, are useful only in that they furnish illustrations of the application of the general principles to different kinds of situations. A few judicial decisions may briefly be referred to indicate how Courts have looked at processes which bear some analogy to those in the case now before the Authority.

In Bholanath Sreemani vs. ACCT (1978) 42 STC 248 it was held that by no stretch of imagination could a person, who assembles spectacle frames and individual glasses as per medical prescriptions and sells the spectacles, be held to be a “manufacturer” of spectacles. Likewise in CST vs. Bombay Mercantile Corpn. (1975) 35 STC 505, where a dealer in lubricating oils purchased drums of oil and after hand-blending the same, sold the resultant mixture, the process was held not to amount to manufacture. So also, the assembling of automotives, buses and truck chassis from imported parts in a knocked down condition [CIT vs. Tata Locomotive & Engineering Co. (1968) 68 ITR 325 (Bom)]; the galvanisation of iron sheets [CIT vs. Hindustan Metal Refinery Works Ltd. (1981) 23 CTR (Cal) 252 : (1981) 128 ITR 472 (Cal) : TC 25R.679]; the mere compression of camphor powder into camphor cubes by application of mechanical pressure [Om Prakash vs. CIT (1965) 16 STC 935]; the mechanical blending of different qualities of ore while being loaded on to a ship [Chowgule & Co. vs. Union of India (1981) 47 STC 124]; or the blending of various varieties of tea for purposes of marketing [Apeejay Pvt. Ltd. vs. CIT (1994) 120 CTR (Cal) 27 : (1994) 206 ITR 367 (Cal) : TC 25R.695] may or may not amount to processing but certainly do not amount to manufacture. But, from the instances given above, it will not be correct to infer that manufacturing process is restricted only to cases where the identity of the original article gets completely lost or destroyed by the processes employed. There can be a manufacturing process, so long as the resultant article has a different and separate commercial identity, notwithstanding that the original article is still identifiable and existent. Thus, the retreading of tyres [CIT vs. Kalsi Tyres Pvt. Ltd. (1981) 131 ITR 636 (Del) : TC 24R.218]; the dyeing, bleaching, embroidering and printing of fabrics [CIT vs. Sovrin Knit Works (1992) 109 CTR (P&H)(FB) 310 : (1993) 199 ITR 679 (P&H) (FB) : TC 28R.422]; the printing of balance sheets, P&L a/c, dividend warrants, pamphlets and share certificates [CIT vs. Ajay Printery Ltd. (1965) 58 ITR 811 (Guj) : TC 24R.877]; the conversion of mica mined into cut mica [Chrestian Mica Industries Ltd. vs. State (1961) 12 STC 150]; the mere crushing of limestone into rodi and powder [CIT vs. Best Chem & Limestone Industries Ltd. (1993) 113 CTR (Raj) 298 : (1994) 210 ITR 833 (Raj) : TC 28R.258]; and the twisting together of two types of yarn to produce a different type [Aditya Mills vs. Union (1989) 73 STC 195] have been held to be manufacturing processes. These illustrations show that it is not necessary that the original article should completely stand annihilated and changed beyond recognition. Indeed, the concept of total change and loss of identity of original material cannot be helpful in the context of all types of processes, particularly such a one as prevails in the present case. The film roll is by its very nature such a commodity that any change in its structure will totally destroy its basic quality. In cases like this, where the emphasis has to be on the preservation of its photo-magnetic quality and its sensitivity, the concept of change of that quality is irrelevant. What is important is to see whether the various processes carried out with respect to it are aimed at putting on the market commodities which, though seemingly the same, are in fact different from it in character and end use. Commercially speaking, the jumbo rolls imported by the company and the two kinds of film produced by it cannot be described as one and the same article with a difference only in physical shape and form. The end product is a refined article shaped out of the original rolls exploiting their qualities so as to produce different marketable commodities designed to meet the varied demands of society. The Authority is, therefore, of the opinion that the Indian company must be said to be engaged in manufacturing operations and that it has utilised the expertise and knowledge of the applicant, acquired by him over his long period of service with the UK company, in the performance of these operations.

The second aspect which came up for discussion at the time of hearing is a very interesting one. It is admitted that the applicant, though working in India and helping in the activities of the Indian company, continued to be an employee of the UK company. It is the UK company which paid him his salary and also paid the Indian income- tax on the applicant’s salary to the Indian treasury. No doubt, the Indian company provided the applicant with certain amenities but the value of these perquisites has also been added, as contemplated in the statute, to the salary income of the applicant and tax has been paid on the salary income so determined by the UK company to the Indian exchequer. On these admitted facts, the question that arises is whether the applicant is entitled to the benefits of s. 10(5B). The clause talks of a foreign technician “in the employment of a Government in India, a local authority in India, any corporation set up in India under its laws, an institution or body established in India for carrying on scientific research……. or in any business carried on in India”. One view could be that, having regard to the earlier collocation of words, it would be reasonable to infer that an exemption is intended only for an employee of an employer carrying on business in India and not an employee of a foreign employer as in the present case. It could be argued, for example, that if a foreign company were to depute its technician, as in the present case, to advise and help the Government, local authority, corporation or scientific research body, the exemption will not be available to such a technician as he cannot be said to be in the employment of—that is, he is not employed by—the Government, local authority, corporation or body and that the present case can be no better. This interpretation may also gather some support from cl. (vi) of s. 10(6) which provides an exemption for the remuneration received by “an employee of a foreign enterprise” for services rendered by him during his stay in India, subject to the fulfilment of certain conditions. It could be said that it is the special provision in s. 10(6)(vi) that should be resorted to for determining the exemption available to an employee of a foreign enterprise and that s. 10(5B) should be limited only to an employee of an Indian enterprise.

The Authority has come to the conclusion that no such limitations can be read into the language of s. 10(5B). It only talks of a technician employed in a business in India. The applicant, in the present case, is undoubtedly a technician “employed in a business in India”. The clause places no restriction regarding the status of the employer, that he should be an Indian and not a foreigner. The only conditions for exemption are about residential status and payment of the tax on the employee’s remuneration by the employer and these are fulfilled in the present case. If a foreign technician with the prescribed residential qualification is employed and paid by an Indian company, then, admittedly, the exemption would be available, provided the Indian company pays tax on such remuneration. It seems anomalous to hold that the exemption would cease to apply, though the services are rendered in a business in India, when it is the foreign employer who pays the tax (a situation more beneficial to the country). Such a distinction would be meaningless. Turning now to the question whether the provisions of s. 10(6)(vi) are helpful in limiting the scope of s. 10(5B), it may be pointed out, at the outset, that the suggestion to relegate all employees of foreign enterprises, regardless of the nature of the services rendered by them, to s. 10(6)(vi) may seem to confer an exemption of only the income of a period not exceeding 90 days and hence, attractive to the Revenue. But this is not necessarily so, for a careful perusal of the clause will show that it may not necessarily be to the advantage of the Revenue because that clause permits an exemption to be granted in respect of any number of assessment years if its other conditions are satisfied. This apart, it runs counter to the intention of the statute to accord a special treatment to foreign technicians. If we accept the interpretation suggested, it will mean that technicians sent on deputation by foreign enterprises to Indian industry will be entitled to an exemption even where their stay in India is quite long and the Indian employer is obliged to pay their taxes, whereas a technician who renders identical services in an Indian business will not have the advantage of such exemption although his foreign employer is prepared to meet his Indian tax liability. There seems no justification, in the object and purpose of s. 10(5B), to uphold such an anomalous and discriminatory interpretation. On the contrary, cl. (5B) and cl. (6)(vi) are independent provisions. They are clauses conferring different degrees of exemption on different categories of persons based on different criteria of eligibility. They can be looked at from two different perspectives for arriving at a proper interpretation. One will be to say that cl. (6)(vi) is a general provision covering all employees of foreign enterprises whereas cl. (5B) deals with a special category of employees called `technicians’. Applying the well settled rule that a special provision will override the general, cl. (5B) should be held to apply to all `technicians’. The suggestion that technicians employed by foreign enterprises should be outside the scope of this clause, is not acceptable for the reason already indicated. Hence, any `technician’ as defined under s. 10(5B), is entitled to the exemption under that clause, irrespective of whether he is the employee of an Indian enterprise or of a foreign enterprise.

The other approach is to look upon both the clauses as special provisions intended to deal with employees caught up in different types of situations. In this view, the language of each of the clauses should be construed in its full amplitude and neither should be allowed to restrict the scope of the other. Actually, the overlapping between the two provisions will be insignificant. Employees of foreign enterprises will not all be technicians; `technician’ is only a limited class of such employees. Even among them, only technicians who satisfy the requisite residential qualifications and have their tax paid by their employer can seek the benefit under cl. (5B). There may be some foreign technicians who are not eligible for relief under cl. (5B) but may qualify for relief under cl. (6)(vi). Equally there may be foreign technicians who do not fulfill the requirements of cl. (6)(vi). They may be the employees of an Indian enterprise, their stay in India in the previous year may exceed 90 days, their salary may be paid by an Indian collaborator who claims it as a deduction, or the foreign enterprise may also be carrying on a business in India. The two clauses, therefore, cater to two different sets of people. True, there may be a few cases where they overlap but this is a situation that has been considered in decided cases. It has been held that, if a case appears to be governed by either of two taxing provisions, it is clearly the right of the assessee to claim that he should be assessed under that one which leaves him with a lighter burden. Correspondingly, if, per chance, an assessee is eligible for relief under two different provisions, he should be either held entitled to claim both the reliefs (except where they are expressly, or by necessary implication, made mutually exclusive) or should be entitled to claim exemption under either of them at his choice : See Kanga & Palkivala on Income-tax, Fourth Edn., p. 4. The applicant can, therefore, either claim, under s. 10(6)(vi), that his income for 1995-96 (and perhaps, for subsequent assessment years as well, if any, if the conditions of the clause are fulfilled) should be exempt or, under s. 10(5B) that the tax paid by his employer on his income for a period of 48 months from the date of arrival should be exempt. Applying this principle, the present applicant is entitled to claim the wider relief available to him under cl. (5B).

For the reasons stated above, the Authority has come to the conclusion that the questions raised by the applicant should be answered in the manner set out below. The ruling given by the Authority is as follows : Ruling Question Answer (1) Whether,, on the facts and (2) Whether,, on the facts and in in the circumstances of the the circumstances of the case,, case, exemption under s. 10 the applicant would be considered (5B) of the IT Act, 1961 would as a “technician” for the purpose be available to the applicant ?, of s. 10(5B) of IT Act,, 1961 ?, Yes Yes

[Citation : 223 ITR 776]

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