High Court Of Karnataka
Puttur Petro Products (P.) Ltd. vs. ACIT, Circle 1(1), Mangalore
Assessment Year : 2001-02
Section : 80-IB
Dilip B. Bhosale And B. Manohar, JJ.
IT Appeal No. 393 Of 2007
October 7, 2013
Dilip B. Bhosale, J. – This income tax appeal is preferred by an assessee against the order dated 31st January 2007 rendered by Income Tax Appellate Tribunal, Bangalore Bench (B) (for short “Tribunal”) in ITA No. 121/Bang/2006, whereby, the assessee’s appeal came to be dismissed.
2. The assessee had preferred an appeal before the Tribunal against the order dated 16-11-2005 passed by the Commissioner of Income Tax Appeals (Appellate Authority)in appeal No.ITA/271/CIT(A)/MNG/2003-04. In the appeal before the Appellate Authority the assessee had challenged the order dated 25-2-2004, under Section 143 (3) of the Income Tax Act, 1961 (for short the “Act”) passed by the Assistant Commissioner of Income Tax, Circle-I, Bangalore (for short “Assessing Officer”). Thus, all the three authorities negatived the claim of the assessee seeking deduction under Section 80IB of the Act. The assessee had claimed deduction contending that bottling of LPG gas in the cylinders amount to production/manufacturing activity and hence eligible for deduction under Section 80IB of the Act.
3. The present appeal was admitted on the substantial questions of law raised/framed in paragraph 11(1) to 11(5) in the memorandum of appeal. However, with the assistance of the learned counsel for the parties, in the beginning of hearing of the appeal, we formulated the following question for our consideration:
“(i) whether on the facts and in the circumstances of the case, and in law, the authorities below were justified in holding that bottling of gas into gas cylinders is production activity for the purpose of Section 80IB (3) of the Act?”
4. We have heard the learned counsel for the parties on the aforesaid question and with their assistance gone through the order of the Tribunal and the judgments relied upon by them in support of their contentions.
5. At the outset, we would like to refer to the judgment of the Bombay High Court in CIT v. Hindustan Petroleum Corpn. Ltd. [IT Appeal Nos. 2131, 2133, 2134, & 2135 of 2012, dated 7-3-2013] wherein, almost identical question was considered and answered by the Division Bench. One of the questions that was framed by the High Court was “whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified in holding that bottling of gas into gas cylinders as a production activity for the purpose of Section 80HH, 80I/80IA ignoring the fact that no new product comes into existence in this process?” In other words, the controversy that was considered by the Bombay High Court was whether the activity of bottling of LPG gas amounts to production or manufacturing activity for the purpose of deduction under Section 80HH, 80I/80IA of the Act. After considering its other judgment and the judgment of the Gujarat High Court in Bharat Petroleum Corpn. Ltd. v. State of Gujarat [Special Civil Application No. 8646 of 2013, dated 17-7-2013] the Bombay High Court in paragraph-4 observed thus:
“4. Since the Tribunal in the impugned order has relied upon the decision of this Court and the consequent order of the Electricity Ombudsman to hold that the activity of bottling LPG Gas is a very specialized process and the same is considered to be an activity of manufacture. The Tribunal in the impugned order had observed to the effect that the word used in Section 80HH, 80I/80IA of the Act is manufacturing or production. The term production is wider then the word manufacture. Therefore, every activity which bring into existence a new product would constitute production. The impugned order records a finding of fact that the process of bottling the LPG Gas into cylinder makes the same marketable on execution of the process. It therefore follows that a new product comes into existence.The fact that the decision of this Court in HPL (supra) and the Gujarat High Court dated 6/5/2010 are rendered keeping in view of the fact that Gas Cylinder Rules 1984 which were not in force during the relevant assessment year would not in any way detract from the finding of fact arrived at by the Tribunal. In these circumstances, as the Tribunal has rendered a finding of fact and placed reliance upon the decision of this Court and also the Gujarat High Court dated 6/5/2010, we see no reason to entertain the proposed questions of law.” (Emphasis supplied)
6. In Pondicherry State Co-operative Consumer Federation Ltd. v. Union of Territory of Pondicherry,  10 VST 630 (SC),the Supreme Court was considering the case of assessee that whether purchase of Palmolive oil in bulk and packing it in small packages for the purpose of selling in retail would amount to manufacturing activity. The Supreme court while addressing the question, referred to its judgment in Vadilal Chemicals Ltd. v. State of Andhra Pradesh  6 SCC 292. In that case, the question that fell for consideration of the Supreme Court was whether the small scale industry which was engaged in bottling of anhydrous ammonia could be said to be entitled to the exemption from payment of sales tax on the ground that it was manufacturing such goods since there was a general exemption offered by the Andhra Pradesh Government by G.O.Ms.No.117 dated 17th March 1993 to the small scale industry. The question in short which the Supreme court considered in that case was whether the assessee could claim exemption on the facts of that case. The Supreme Court took the view that “the authorities have based the interpretation of work ‘manufacture’ on the law relating to excise and it was erroneous to do so. It was observed that in the State Sales Tax Act there was no provision relating to ‘manufacture’ and that concept was to be found only in the 1993 G.O. which had provided the exemption. The Court further observed that exemption was granted with a view to give a fillip to the industry in the State and also for industrial units of the State. The Court, therefore, took the view that a liberal interpretation of term ‘manufacture’ should have been adopted by the State authorities, more particularly, when the State ‘authorities had granted the certificate of eligibility after due consideration of the facts.”
7. Our attention was also invited to the order dated 28-8-2012 passed by the Supreme court in CIT v. Vinbros & Co.  210 Taxman 252/349 ITR 697/25 taxmann.com 367. The Supreme Court in that case confirmed the view taken by the Madras High Court that blending and bottling of Indian Manufactured Foreign Liquor (IMFL) would amount to ‘manufacture’ for the purpose of claiming deduction under Section 80IB.
8. Our attention was also invited by Mr. Aravind, learned counsel for the revenue to the judgment of the Supreme court in CIT v. Tara Agencies  292 ITR 444/162 Taxman 337 to contend that the bottling of gas into gas cylinders would not amount to either manufacturing or production and it would amount to processing. In that case, the assessee was dealing with tea of diverse grades and brands and blending the same by mixing different kinds of tea. There the Supreme Court considered all the three stages, viz., production, manufacturing and processing of tea, and observed that “tea is produced in tea gardens. This is first stage called production of tea. The second stage is manufacturing of tea. In this stage, the tea leaves are plucked from the tea bushes and by mechanical process, tea leaves are converted to tea. This second stage is considered manufacturing of tea. The third stage is blending of different qualities of tea in order to smoothen its marketability. This third stage is considered processing tea.”
9. Relying on this analogy, Mr. Aravind, vehemently submitted that the assessee is not a manufacturer of either gas or of empty cylinders and the assessee is involved only in processing of gas, viz., filling gas into gas cylinders and therefore, that would not amount to activity of manufacturing. He also placed reliance upon the judgment of the Supreme Court in CIT v. N.C. Budharaja & Co.  204 ITR 412/70 Taxman 312. In this judgment the Supreme Court considered the words ‘manufacture’ and production’ and observed thus :
“The words ‘manufacture’ and production’ have received extensive judicial attention both under this Act as well as the 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 characterized as production, every production need not amount to manufacture. The meaning of the expression ‘manufacture’ was considered by this Court in Dy. CST (Law) Board of Revenue (Taxes) v. Pio Food Packers  46 STC 63 (SC), among other decisions. In the said decision, the test evolved for determining 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. 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 I 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. 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.
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, The next word to be considered is ‘articles’ occurring in the said clause. What does it mean? The word is of the 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.”
10. It is true, in the present case, the assessee is neither a manufacturer/producer of gas nor of empty cylinders and the activity in which he is involved is only bottling of gas into gas cylinders. However, it cannot be overlooked that the activity of bottling of LPG gas requires a very specialized process. It requires independent plant and machinery, and what ultimately the assessee produces is “gas cylinder”. Unless, a gas cylinder is produced, in the form of “gas cylinder”, as is known in common parlance, it cannot be sold to the customers. In other words., neither loose gas nor an empty cylinders can be sold to customers and it is only “gas cylinder” containing gas is a marketable product which the assessee produces. When the assessee produces the gas cylinder containing gas, in our opinion, a new product comes into existence. Gas and cylinder are two independent products, which, the assessee does not produce or manufacture. The assessee, however, produces/manufactures “gas cylinder” and once the manufacturing process is complete, neither gas nor cylinder be regarded as original commodity and is recognized in the trade as a new and distinct commodity namely “gas cylinder”. The only inference, therefore, will have to be drawn is that the bottling of gas into gas cylinders would amount to production activity for the .purpose of Section 80IB of the Act.
11. In the result, as has been held by the Bombay High Court so also by the Supreme Court in Vinbros and Co.(supra), we are also of the view that the process of bottling of gas into gas cylinders, which requires a very specialized process and an independent plant and machinery, amount to production of ‘gas cylinders’ containing gas for the purpose of claiming deduction under Section 80IB of the Act. The judgments relied upon by Mr. Aravind, in our opinion, are of no avail to the revenue.
12. In the circumstances, the question framed by us is answered in favour of assessee and against the revenue. Consequently, the orders passed by the authorities below are set-aside with no order as to costs.
[Citation : 361 ITR 290]