Gujarat H.C : The assessee was entitled to the higher rate of development rebate of 25 per cent under s. (1)(b)(B)(i) of the IT Act, 1961, though it did not produce the prescribed articles or things for the first time but processed such articles or things ?

Counsel Appeared

S.N. Shelat with R.P. Bhatt of M/s R.P. Bhatt & Co., for the Revenue : H.M. Talati, for the Assessee

M.P.THAKKAR, J. :

Development rebate at a higher rate is admissible on the manufacture of certain articles under s. 33(1)(b)(B). The articles in respect of which development rebate at a rate higher than the ordinary rate is admissible have been specified in the Fifth Schedule to the IT Act of 1961, as it stood at the material time for the asst. yrs. 1971-72 and 1972-73. A manufacturer of an article covered by the entries listed in Schedule V would be entitled to the development rebate at such higher rate. The assessee purchases special steel, subjects it to heat treatment in the course of processing, and manufactures wires as an end-product. The assessee contends that he, as a manufacturer of wires by the aforesaid process, is entitled to development rebate at a higher rate which is admissible to a manufacturer of special steels. The contention has been accepted by the Tribunal. Thereupon at the instance of the Revenue the following question has been referred to us under s. 256(1) of the IT Act, 1961 :

“Whether, the Tribunal was right in law in holding that the assessee was entitled to the higher rate of development rebate of 25 per cent under s. (1)(b)(B)(i) of the IT Act, 1961, though it did not produce the prescribed articles or things for the first time but processed such articles or things ?”

2. The facts found by the Tribunal which has upheld the contention of the assessee as incorporated in para. 12 of its decision dated August 8, 1977, as per annex. ‘C’, are as under: “The facts as they have come out before us are that the assessee was buying billets of special steel and was manufacturing different articles of special steel after a process of heating and drawing of wires. Admittedly, the assessee was not the person who produced for the first time the special steels. However, following, with respect, the decision of the Kerala High Courtin (1976) CTR (Ker) 117 : (1977) 108 ITR 207 (Ker) (CIT vs. Mittal Steel Re-Rolling and Allied, Industries (P) Ltd.), we hold that the higher rate of development rebate is also available to those who process the articles or things specified in the list in the 5th Schedule. We, therefore, agree with the learned AAC that the assessee is entitled to higher development rebate.” (Emphasis italicised in porint, Supplied) Admittedly, therefore, the assessee was buying billets of special steel. Thereafter he subjected the special steel to a process of heat and manufactured wire therefrom. Admittedly, as mentioned in para. 12, the assessee was not manufacturing special steel itself for the first time. Special steel purchased from the market was the input which was subjected to heat treatment. The output or the ultimate product manufactured by the assessee was the wire drawn from special steel. “Special steel” as a product manufactured by an industry is one product. Wire manufactured from out of special steel after subjecting it to a process of heating and drawing is a distinct product. This aspect cannot be over-emphasised, the answer to the problem hinges on this distinction in the basic character of the two products. What the assessee produces is the latter category of article (wire drawn from special steels) and not the former (special steel in itself). Can it then be said that the assessee was manufacturing “special steel” in order to claim development rebate at a higher rate ? The assessee will have to establish that he is manufacturing an article listed in the Fifth Schedule. The entry on which reliance is placed is entry 1 reading as under: “Iron and Steel (metal), ferro-alloys and special steels.” Emphasis must be laid on the distinction between the manufacture of special steel and the manufacture of an article from special steel. The article manufactured must itself be special steel. If the article manufactured is “not” special steel but an article manufactured “from” special steel, it cannot be said that the assessee is manufacturing “special steel”. One may manufacture furniture from special steel. Can it be said that one is manufacturing special steel ? It must also be realised that development rebate at a higher rate is allowed presumably because the manufacture of the articles listed in the Fifth Schedule is considered to be vital for the economy or necessary for the economic development deserving encouragement by way of a concession. When the manufacture of special steel is accorded a concessional treatment by way of allowing a development rebate at a higher rate, the concession would be available only when that particular article is produced. In other words, the article manufactured must be special steel and not an article manufactured from special steel. An illustration may be helpful in considering this question. Supposing the production of milk is accorded a concessional treatment in order to increase the production of milk, can a manufacturer of an icecream from the milk purchased from the market contend that he is producing milk? He manufactures “ice-cream” from the milk. He does not produce “milk”. So also the assessee manufactures wire from the special steel. Special steel admittedly is purchased by him from outside. Somebody else manufactured the special steel. If what the assessee has purchased from the market in order to manufacture his end-product is itself special steel, it is obvious that the end-product is not special steel. Of course, it is an article manufactured “from” special steel or an article “made of” special steel. That, however, is not the article which is listed in the Fifth Schedule. The article which is listed in the Fifth Schedule in respect of which development rebate at a higher rate is admissible is manufacture of “special steel”. In other words, the article manufactured itself must be special steel. What is manufactured by the assessee is wire of special steel purchased by him from outside. The end-product manufactured by him will not be marketed by him as “special steel”. It will be marketed by him as “wire”. The fact that in order to draw wire from the ingot of special steel, the special steel has to be subjected to a heat treatment in the course of processing makes no difference. We are not concerned with the intermediary process. We are concerned with the item of manufacture, viz., ultimate or end product which is manufactured and marketed by the assessee. It is difficult to comprehend how the article manufactured by the assessee can ever fall within the description of special steel as distinguished from an article “of” special steel or an article manufactured “from” special steel. The Tribunal appears to have sought support from a decision rendered by the Kerala High Court in CIT vs. Mittal Steel Re-Rolling and Allied Industries (P.) Ltd. (supra) The argument in that case turned on the user of the expression “metal” within brackets occurring on the heels of the expression ” Iron and steel”. The entry in question read as “Iron and steel (metal)”. After considerable discussion the Court came to the conclusion that the M. S. Rods produced by the assessee concerned in the said case would fall within the description of iron and steel (metal). We are unable to discern any reasoning or principle enunciated in that decision which can be called into aid by the assessee. We are concerned with an altogether different entry in that we are not concerned with a different end-product, viz., “wire” manufactured from a special steel. Merely because M. S. Rods were considered to fall within the description of “Iron and steel (metal)”, it does not follow that what was manufactured was special steel and would fall within the description of special steel. We are not prepared to hold that the manufacture of wire “from” special steel is manufacture “of” special steel within the meaning of the relevant entry r/w the aforesaid provision. It may be mentioned that the Calcutta High Court has taken a different view in the context of the entry which has been construed in favour of the assessee by the Kerala High Court in Indian Steel & Wire Products Ltd. vs. CIT (1977) 108 ITR 802 (Cal). It would show that merely because the iron and steel can be treated up to a certain stage as raw material which can take many shapes, it cannot be said that an article manufactured after further processing would also fall under the said description. The view has been taken that item No. 1 “Iron and steel (metal)” is required to be considered separately as a thing or an article as contradistinguished from an article made or produced from such a thing or an article. This decision buttresses the reasoning which has commended itself to us. Incidentally it may be stated that reliance was placed by the Kerala High Court on a decision of the Supreme Court in the course of the discussion. The Kerala High Court construed the said decision in support of the proposition canvassed by the assessee which found favour with it. The Calcutta High Court adverted to this very decision, viz., State of M.P. vs. Hiralal (1966) 17 STC 313 (Cal), and has rightly pointed out the point of distinction in the following passage (p. 816 of 108 ITR) : ” Similarly, in the case of Iron bars, Flats and Plates case, State Of Madhya Bharat vs. Hiralal (1966) 17 STC 313 (SC), it was found as a fact that iron or steel in the shape of bars, flats and plates retained their character as a raw material and could not be held to be goods manufactured from iron and steel. To be noted is that the item in the Madhya Bharat Sales Tax Act did not read ‘Iron and steel (metal)’ as in the statute before us and no other goods made out of iron and steel was specifically exempted.”

It is a decision in the facts of that particular case and no principle of law has been enunciated which would make us take a view different from the view which we are taking. We will be required to amend the entry in the guise of interpreting it by reading the entry special steel,”as if it reads as” articles manufactured from special steel in order to uphold the contention of the assessee. We cannot do so by recourse to any known canon of construction. In fact we would be legislating instead of interpreting, which is outside the orbit of our jurisdiction. We are, therefore, unable to uphold the view taken by the Tribunal.

Counsel for the assessee called our attention to an argument which appealed to the AAC, inter alia, in the context of an entry, which reads as under: “Iron and steel (metal), ferro-alloys and special steel.” He also relied on the entry extracted from the Import Trade Journal (Vol. II), being Entry at Sr. No. A-48, which reads as under :

The AAC was of the opinion that this entry supported the view canvassed by the assessee. In our opinion, in point of fact these entries lend support to the view which we are inclined to take rather than to the view which has found favour with the AAC. Entry at Sr. No. A-48, in terms, provides for exemption in respect of export of “steel wire Products made of special steel”. What we wish to emphasize is that the entry in terms provides for exemption in respect of steel wire products of special steel. It does not refer to special steel simpliciter. This would go to show that where there was an intention to grant exemption in respect of products manufactured from special steel, the entry was so worded as to bring within its circumstance an article manufactured from special steel. In the present case the entry adverts to “special steel” and not to “articles made out of special steel”. We are, therefore, unable to accede to the argument advanced by counsel for the assessee.

In the result, the question referred to us is answered in the negative and against the assessee. There will be no order regarding costs.

Sl. A-48. Export product No. Material permitted for import

Steel wire products made of wire finer than 0.457 Against export of springs, patented & hard drawn spring mm. and/or of special steel steel wires-round, square, such as high carbon/ high rectangular & trapezoidal sections tensile Stainless steel. oil hardened and tempered valve spring stee l wire alloyed and unalloyed, cold rolled spring steel strips-high carbon alloyed, steel wires & strips (springhard quality) will be allowed (25 per cent).”

[Citation : 141 ITR 223]