IN HIGH COURT OF DELHI AT NEW DELHI ITA No. 141/2002 Reserved on: 19th September, 2014 Date of Decision: 22nd December, 2014 Commissioner of Income Tax Appellant Through Ms. Suruchi Aggarwal, Sr. Standing Counsel Versus M/s Harig India Limited Respondent Through Nemo. CORAM: HON BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE V. KAMESWAR RAO SANJIV KHANNA, J. present appeal by Revenue under Section 260A of Income Tax Act, 1961 (Act, for short) was admitted for hearing on 20th July, 2006, on following substantial question of law: Whether Income Tax Appellate Tribunal was right in holding that manufacture of gold jewellery on job work basis amounts to manufacturing activity by assessee entitling it to deductions under Section 80HHC(3)(a) of Income Tax Act? 2. appeal relates to assessment year 1998-99 and impugns findings recorded against Revenue by Income Tax ITA 141/2002 Page 1 of 19 Appellate Tribunal (Tribunal, for short) in their order dated 5 th November, 2001. respondent assessee public limited company, as per finding recorded in impugned order was engaged for past 35 years in business of manufacture and sale of hydraulics/machine tools, parts, components and assemblies. appellant had also started export of jewellery. 3. In return for assessment year 1998-99, assessee had claimed deduction under Section 88HHC of Act, on exports of hydraulic power lift system and gold jewellery. For computation of deduction under said Section, assessee had invoked and applied sub-section (3)(a) to Section 80 HHC claiming that it was manufacturer of exported goods including jewellery. assessee had computed deduction at Rs.68,58,239/- by applying clause (a) to sub-section (3) to Section 80HHC. Assessing Officer, however, held that assessee was both, manufacturer of exported goods i.e. hydraulic lifts, but was trader exporter in respect of jewellery items. Therefore, Assessing Officer invoked and applied sub-section (3)(c) to Section 80HHC of Act. Consequently, Assessing Officer calculated indirect cost of jewellery exported in proportion to total indirect cost of both hydraulics/machine tools and jewellery business in ratio of turnover of respective businesses, to calculate profits derived by respondent assessee from exports. On this basis, he arrived at negative figure of Rs.95,30,881/-. Thus, he denied deduction under Section 80HHC by computing it at NIL. ITA 141/2002 Page 2 of 19 4. aforesaid finding by Assessing Officer was affirmed by Commissioner of Income Tax (Appeals) [(C.I.T (A), for short)], who observed that assessee did not manufacture or process goods, namely jewellery, and should be treated as trader exporter of jewellery and, therefore, Assessing Officer had rightly invoked sub-section (3)(c) to Section 80HHC of Act. 5. Tribunal has decided controversy in favour of respondent assessee. Hence, Revenue is in appeal before us. 6. In order to appreciate controversy, we would like to first reproduce relevant portions of Section 80HHC of Act: (1) Where assessee, being Indian company or person (other than company) resident in India, is engaged in business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to pro-visions of this section, be allowed, in computing total income of assessee, deduction to extent of profits, referred to in sub-section (1B) derived by assessee from export of such goods or merchandise : Provided that if assessee, being holder of Export House Certificate or Trading House Certificate (hereafter in this section referred to as Export House or Trading House, as case may be), issues certificate referred to in clause (b) of sub-section (4A), that in respect of amount of export turnover specified therein, deduction under this sub-section is to be allowed to supporting manufacturer, then amount of deduction in case of asses-see shall be reduced by such amount which bears to total profits derived by assessee from export of trading goods, same proportion as amount of export turnover specified in said cer-tificate bears to total export turnover of assessee in respect of such trading goods. . . . xxxxxxxx (3) For purposes of sub-section (1), ITA 141/2002 Page 3 of 19 (a) where export out of India is of goods or merchandise manufactured or processed by assessee, profits derived from such export shall be amount which bears to profits of business, same proportion as export turnover in respect of such goods bears to total turnover of business carried on by assessee ; (b) where export out of India is of trading goods, profits derived from such export shall be export turnover in respect of such trading goods as reduced by direct costs and indirect costs attributable to such export ; (c) where export out of India is of goods or merchandise manufactured or processed by assessee and of trading goods, profits derived from such export shall, (i) in respect of goods or merchandise manufactured or processed by assessee, be amount which bears to adjusted profits of business, same proportion as adjusted export turnover in respect of such goods bears to adjusted total turnover of business carried on by assessee ; and (ii) in respect of trading goods, be export turnover in respect of such trading goods as reduced by direct and indirect costs attributable to export of such trading goods : Provided that profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by amount which bears to ninety per cent. of any sum referred to in clause (iiia) (not being profits on sale of licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, same pro-portion as export turnover bears to total turnover of busi-ness carried on by assessee. Explanation. For purposes of this sub-section, (a) adjusted export turnover means export turnover as reduced by export turnover in respect of trading goods ; (b) adjusted profits of business means profits of busi-ness as reduced by profits derived from business of export out of India of trading goods as computed in manner provided in clause (b) of sub- ITA 141/2002 Page 4 of 19 section (3) ; (c) adjusted total turnover means total turnover of busi-ness as reduced by export turnover in respect of trading goods ; (d) direct costs means costs directly attributable to trading goods exported out of India including purchase price of such goods ; (e) indirect costs means costs, not being direct costs, allocated in ratio of export turnover in respect of trading goods to total turnover ; (f) trading goods means goods which are not manufactured or processed by assessee. 7. Sub-section (1) to Section 80HHC of Act, states that assessee engaged in business of export of any goods or merchandise, in accordance with and subject to provisions of Section, shall be allowed deduction to extent of profits derived from export of such goods or merchandise. Sub-section 3 to Section 80HHC stipulates method to compute deduction under sub-section 1. Clause (a) applies when assessee is exporter of goods or merchandise manufactured or processed by said assessee. Clause (b) applies when assessee is engaged in exports of trading goods. As per Explanation clause (f) to Section 80HHC, trading goods means goods which are not manufactured or processed by assessee. Clause (c) applies when assessee is engaged in export out of India of goods or merchandise manufactured or processed by him and also of trading goods. By way of sub-clause (i) and (ii), method of computation of deduction, when clause (c) to Section 80HHC (3) applies, is stated. ITA 141/2002 Page 5 of 19 8. As method of computing deduction under Section 80HHC would vary on fact whether clause (a) or (c) to sub-section (3) to Section 80HHC applies, we have to decide and determine whether assessee had exported goods or merchandise processed or manufactured by him or assessee was both exporter of manufactured/processed goods and exporter of traded goods. This is core and central issue, which we have to determine. first aspect which requires consideration is whether conversion of pure gold into jewellery amounts to manufacture or processing. said aspect is covered by decision of this Court in ITA No. 1223/2011 titled CIT vs. Lovlesh Jain and other connected cases dated 20th December, 2011. said decision was related to Section 10A and 10B of Act and it has been held as under: 9. assessee converts standard gold into ornaments. standard gold has purity levels of 0.999/0.995, whereas ornaments have purity level of 22 carats or lower. Purity is reduced by mixing other metals like silver, copper, etc. This is necessary to give strength and durability to ornaments as gold with 0.999/0.995 purity is very soft and tends to bend or break easily. contention of Revenue is that conversion of standard gold into ornaments does not amount to manufacture or production of articles or things as primary material is same, i.e. gold, and no new product with different chemical composition or attributes comes into existence. term manufacture or production used in Section 10A and 10B have to be given strict and restrictive interpretation. 10. word manufacture can be given, both wider as well as narrower connotation. In wider sense, it simply means to make, fabricate or bring into existence article or product either by physical labour or by mechanical power. Given narrower connotation it ITA 141/2002 Page 6 of 19 means transforming of raw material into commercial product/ commodity or finished product which has new, separate entity but this does not necessarily mean that material by which commodity is manufactured must lose its identity. latter connotation has been accepted and applied with some moderation/clarification in several decisions, keeping in view context in which word manufacture has been used. Supreme Court in Graphic Company India Limited versus Collector of Customs, (2001) 1 SCC 549 and Union of India versus Delhi Cloth and General Mills Company Limited, AIR 1963 SC 791 has held that manufacture has to be understood to mean transformation of goods into new commodity commercially distinct and separate, and having its own character, use and name whether it be result of one or several processes. However, every change does not result in manufacture though every change in article may be result of treatment or manipulation by labour or/and machines. If operation or process that renders commodity or article fit for use, which it is otherwise not fit, change/process falls within meaning of word manufacture . 11. We may refer with profit to Supreme Court s elucidation in Commissioner of Income Tax, Kerala v Messrs Tara Agencies,[2007] 292 ITR 444 (SC). Herein Supreme Court has turned to definition provided in Central Excise Act, 1944 among other relevant definitions. relevant paragraphs of this decision are reproduced below: 11. term manufacture has not been defined in Income-tax Act, 1961. 12. term manufacture has been defined in section 2(f) of Central Excise Act, 1944. Parts (i) and (ii) of section 2(f) read as under:- 2(f). 'Manufacture' includes any process- (i) incidental or ancillary to completion of manufactured product; and (ii) which is specified in relation to any goods in Section or Chapter notes of ITA 141/2002 Page 7 of 19 Schedule to Central Excise Tariff Act, 1985 as amounting to manufacture". 12A. Clause (f) gives inclusive definition of term 'manufacture'. According to dictionary, term 'manufacture' means process which results in alteration or change in goods which are subjected to process of manufacturing leading to production of commercially new article. In determining what constitutes 'manufacture' no hard and fast rule can be applied and each case must be decided on its own facts having regard to context in which term is used in provision under consideration. 13. term manufacture has been defined by Black Law Dictionary (5th Edition) as under: 'Manufacture : process or operation of making goods or any material produced by hand, by machinery or by other agency; anything made from raw materials by hand, by machinery, or by art. production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labor or machine. 14. word 'manufacture' has been defined in Halsbury's Laws of England, 3rd Ed. Vol. 29 p.23 as under:- 'Manufacture has been defined as manner of adapting natural materials by hands of man or by man-made devices or machinery and as making of article or material by physical labour or applied power'; but practice is to accept as 'manufacture' wider range of industrial activities than such definition ITA 141/2002 Page 8 of 19 would suggest. It includes articles made in situ as well as articles made in factory. 15. Supreme Court of United States of America has defined term 'manufacture' century ago in Anheuser-Busch Brewing Assn. v. United States (1907) 52 L Ed. 336. definition has been followed in subsequent American, English and Indian cases. definition reads as under: Manufacture implies change, but every change is not manufacture, and yet every change in article is result of treatment, labour and manipulation. But something more is necessary. ..There must be transformation; new and different article must emerge, .having distinctive name, character or use. 12. As noticed above, Section 10A/10B is applicable when undertaking manufactures, or is engaged in production of articles or things. term production has larger magnitude and is more expansive and liberal than term manufacture . terms manufacture and produce were interpreted in Commissioner of Income Tax, Bombay City versus TATA Locomotive and Engineering Company Ltd. (1968) 68 ITR 325 (Bom.), and it was held:- In its roots word "manufacture" comes from Latin word "manus" which means "hand" (and "manu" is ablative of word "manus") and word "facere" which means "to make". In origin, therefore, word implied making of anything by hand, by with passing of time and in context of industrial development word has acquired number of shades of meaning. In connection with industry or in industrial undertaking, two shades of meaning are important. In Oxford ITA 141/2002 Page 9 of 19 Dictionary, vol. 6, two shades of meaning are given as follows : (1) first is "the action or process of making articles or material (in modern use, on large scale) by application of physical labour or mechanical power. " This is most generic meaning in its application to industry or industrial undertaking or establishments. (2) There is also another more limited meaning which is found referred to in authorities as meaning transforming of raw material into commercial commodity or finished product which has separate identity (Commissioner of Income tax v. Ajay Printery Pvt. Ltd.(1)). This shade of meaning is more appropriately used in past participle "manufactured". See Oxford Dictionary, Vol. 6, at page 143, sense No. 1, where meaning is "fabricated from raw material". In Aswathanarayana v. Dy Commercial Tax Officer (1) at page 801 one finds useful compilation of meaning attached to word "manufacture" from various dictrionaries and other sources. Similarly, word "produce" with reference to its meaning in industry or political economy has two different senses. In vol. 8 of Oxford Dictionary, at page 1422, two meaning are given as follows: "To bring forth, bring into being or existence (a) generally to bring (a thing) into existence from its raw materials or elements or as result of process" and " (d) To compose or bring out by mental or physical labour (a work of literature of art); to work up from raw ITA 141/2002 Page 10 of 19 material, fabricate, make, manufacture (material object) ". In Ajay Printer's case, Division Bench of Gujarat High Court pointed out that word "manufacture" has wider and narrower connotation. In wider sense it simply means to make, or fabricate or bring into existence article or product either by physical labour or by power. word "manufacture" in ordinary parlance would mean person who makes, fabricates or brings into existence product or article by physical labour or power. other shade of meaning which is narrower meaning implies transforming raw materials into commercial commodity or finished product which has entity by itself, but this does not necessarily mean that materials with which commodity is so manufactured must lose their identity. Thus both words "manufacture" and "produce" apply as well to bringing into existence of something which is different from its components. One manufactures or produces article which is necessarily different from its components. 13. difference in words manufacture , production (to produce) and process was examined by Supreme Court in Commissioner of Income Tax, Kerala v. Tara Agencies, (2007) 6 SCC 429. On question of what is meant by term production , it has been elucidated and explained as under:- 16. In Black's Law Dictionary (5th Edn.), term production has been defined as under: Production. Process or act of producing. That which is produced or made; i.e. goods. Fruit of labor, as productions of earth, comprehending all vegetables and fruits; productions of intellect, or genius, as ITA 141/2002 Page 11 of 19 poems and prose compositions; productions of art, as manufactures of every kind. 17. term produce , as defined in New Webster's Dictionary of English Language (Deluxe Encyclop dic Edition), is as follows: Produce. To bring forth into existence; to bring about; to cause or effect, esp. intellectually or creatively; to give birth to; to bear, furnish, yield; to make accrue; to bring about performance of, as movie or play; to extend, as line. To bring forth or yield appropriate offspring, products, or consequences. 14. In Income Tax Officer versus Arihant Tiles and Marbles Private Limited, [2010] 320 ITR 79 (SC), it was observed that cutting of marble blocks into slabs or tiles per se may not amount to manufacture but activity would constitute production . Further, when one refers to word "production", it means process plus something in addition thereto. Every manufacture can qualify as production but every production need not amount to manufacture. original marble block does not remain block when it becomes slab or tile and undergoes polishing, etc. and, therefore, amounts to production and qualifies for deduction under Section 80IA of Act. Even though chemical composition or basic material may be same but in commercial parlance, two products were different. In this case, Supreme Court noticed and observed that if contention of Revenue is accepted, it would have negative revenue consequences as assessees are also liable to pay excise duty, sales tax, etc. because of processing involved, resulting in said change. aforesaid change was held to be sufficient. After referring to CIT versus N. C. Budharaja & Co. (1993) 204 ITR 412 (SC), it was observed that word production when used in juxtaposition with word manufacture takes within its ambit bringing into existence new goods by process which may or may not amount to manufacture. word production takes in ITA 141/2002 Page 12 of 19 all by-products, intermediate and residual products, which emerge in course of manufacture of goods. 15. In CIT versus Emptee Poly Yarn (P.) Ltd. (2010) 320 ITR 665, thermo mechanical process that converts partially oriented yarn into textured yarn, which is new and distinct product or article was regarded as manufacture as it brings about structural change in yarn itself. Partially oriented yarn cannot be used in warp or weft but texturized yarn can be used. It was held that structure, character, use and name of product are indicia, which are to be taken into account while deciding question whether process amounts to manufacture or not. We have referred to said decision, as chemical composition of partially oriented yarn and textured yarn is similar, but use, name and character of yarn becomes different after texturizing. 16. In present case, manufacture as well as production of goods, articles or things is covered under Section 10A/10B. activity for converting gold bricks, biscuit or bars, into jewellery amounts to production or manufacture of new article. gold, silver or platinum in bar, biscuit or brick form, is converted by manual labour and by use of implements/tools or by machinery, culminating into entirely new article/thing called jewellery or ornaments. Jewellery is wearable item and is used by both men and women. This process has been referred to above in paragraph 6.4, while adverting to factual matrix in case of Shashi Kant Mittal. Jewellery/ornaments in common parlance or in commercial terms has distinct identity, treated as new article and not same as raw or standard gold in form of bricks, biscuits or bars. As result of said processing, commercially different saleable product comes into existence. Jewellery has distinctive name, character and use. It can no longer be regarded as original commodity, has separate consumers and is new commercial commodity. activity of respondent assessee amounts to manufacture or production and, therefore, qualifies for deduction under Section 10A/10B. 9. We may note here that Explanation 4 to Section 10B, inserted by Finance Act 2003, w.e.f. 1st April, 2004, states that for purpose of said Section manufactured or produced would include ITA 141/2002 Page 13 of 19 cutting and polishing of precious and non-precious stones. said Explanation would not be applicable and does not relate to manufacture or production of jewellery, but in view of ratio in Luvlesh Jain (supra), it could be appropriately held that respondent assessee was engaged in processing of goods or merchandise as activity of converting raw gold into jewellery or ornaments amounts to processing, if not manufacture of goods or merchandise. Jewellery has distinctive name, character and use and is different and new commercially saleable product. 10. next aspect or question is whether assessee was engaged in manufacture or processing of jewellery or was merely procuring jewellery from market as trader and thereafter exporting same. In latter case, he would be trader exporting jewellery and not manufacturer or processor. Assessing Officer has recorded that assessee had purchased gold from MMTC and had swapped same for readymade jewellery by paying extra amount and got it prepared from jewellers. Thus, assessee was neither manufacturer nor processor of jewellery exported. C.I.T (A) had held that assessee had purchased gold from MMTC and thereafter paid labour and other charges to artisans who had manufactured jewellery on job work basis as per specifications provided by overseas buyers to assessee. Contention of assessee that to be manufacturer or processor, they need not carry on manufacturing or processing activities by employing own labour or workers was specifically raised, but not accepted. It was observed that that assessee had swapped gold ITA 141/2002 Page 14 of 19 and had procured gold jewellery from reputed manufacturers, without giving further details. assessee, as observed by C.I.T (A), had paid fixed rate as making charges. Thus, C.I.T (A) held that assessee was not manufacturer of jewellery and had also not processed gold to make jewellery/ornaments, hence was trading in jewellery. 11. factual finding recorded by Tribunal on said aspect is to contrary and reads: 6. We have carefully considered facts of case and rival submissions made before us. It is noticed that there is basic difference between those of subject case and those for assessment year 1996-97. In year before us, position was that exports were affected of jewellery and ornaments were being manufactured for gold obtained from MMTC was handed over to job workers with designs and directions who thereafter have made jewellery and ornaments and handed over to appellant for export for which they were paid making charges. All that has been done admittedly as per directions and under supervision and control of appellant. question for consideration is whether such arrangement would constitute manufacture. It has been held by Allahabad High Court in Talwar and Khullar Supra that where assessee was getting brass articles manufactured from artisans as per designs, shapes and pattern suggested by assessee and assessee was advancing money and was supervising and controlling task, assessee was manufacturer. Facts of subject case are similar to Allahabad case with only difference that instead of advancing money to artisans, appellant was advancing raw material in form of gold obtained from MMTC. Another decision which has been cited by assessee on this point which is identical to facts of present case is that reported in Shri Rangam Brothers and ors. Supra where it was held that any statute dealing with sales tax meaning manufacture must mean to bring into existence in form in which it is capable of being sold or supplied in course of business. term manufacture must, therefore, mean necessarily one which brings into being from raw materials to finish goods which were ITA 141/2002 Page 15 of 19 capable of being sold. In that case, it was further held that though exemption clause in statute must be constitute strictly but even so it should not be so constitute to make exemption practically illusory. facts in that case were that petitioner carried on business of selling gold and silver ornaments. They claimed exemption from sales tax under notification in respect of sale of gold ornaments. sales tax authorities found that petitioner did not have factory for manufacture of ornaments but supplied goods to some independent artisans who made it into ornaments with help of their tools. In some instances, artisans worked in their own houses and in others they worked in shop of petitioner where they were given electricity factilies and provided sitting arrangements. petitioner paid labour charges to artisans for converting gold into ornaments and then sold ornaments to consumers showing in their bills value of gold and cost of manufacturing separately. In some instances gold was supplied to petitioner by consumer themselves and petitioner after getting it made into ornaments with help of artisans charged consumer for cost of manufacture plus some margin of profit themselves. sales tax officer refused to grant exemption on ground that petitioner was not manufacturer but was merely supplier. In that situation their Lordships of Orissa High Court ruled out that expression manufacture accruing in exemption clause meant first owner of supplied finished product for whom it was made either by his paid employees or even by independent artisans on receipt of raw materials and labour charges from him. ratio of cited case applies squarely to facts of appellant. other two sales tax cases relied upon on behalf of appellant similarly confirm manufacture even if carried out through third party assistance. In other decision reported in CIT vs. Talwar Khullar Pvt. Ltd., Supra states that where there is conversion of raw material through process into commercial article manufacture follows. In view of pluralities of authorities as applicable to facts of appellant s case, we have no hesitation in holding that act of appellant in handing over gold to artisans on job work basis and receiving them back in form of jewellery and ornaments of very specified shape and sizes constitute act of manufacture. ITA 141/2002 Page 16 of 19 11A. factual findings of Tribunal is that after buying gold from MMTC, it was handed over to job workers with design and directions to make jewellery and ornaments. work undertaken by job workers was under supervision and control of assessee. assessee had paid labour charges to artisans. Thus, factual finding recorded is that assessee had handed over gold to artisans and received same in form of jewellery and ornaments as per assessee s directions and instructions. 12. contention of Revenue that assessee was not processor or manufacturer of jewellery because it had engaged job workers and had not employed their own workers has to be rejected. Delhi High Court in Orient Longman Ltd. vs. Commissioner of Income Tax, Delhi II (1981) 130 ITR 477 (Del), had approved view taken by Calcutta High Court in Additional CIT vs. A. Mukherjee and Co. (P) Ltd. (1978) 113 ITR 718 (Cal.), that publisher who got manuscript for publication prepared after getting them printed and bound from third parties, was engaged in manufacturing activity. This was inspite of fact that assessee did not possess or own any printing press. This, it was held, was not necessary as long as printing and binding was done under supervision of assessee. It was not necessary that assessee should own printing press or be book binder himself, provided that assessee who had acted as publisher and got book printed and bound from binder who was only acting as contractor of assessee. In said case, High Court was examining whether assessee was engaged in manufacture or processing of ITA 141/2002 Page 17 of 19 goods. same view has been taken by Bombay High Court in case of CIT v. Neo Pharma Private Ltd. [1982] 137 ITR 879 (Bom.), CIT vs. Acrow India Ltd. [1991] 188 ITR 485 (Bom.) and CIT vs. Anglo French Drug Co. (Eastern) Ltd. (1991) 191 ITR 92 (Bom.). In these cases, it has been held that assessee was not trader but manufacturer/processor engaged in manufacturing and processing activities, when these activities were undertaken by third person, under control and supervision of assessee. In present case we are not examining and deciding whether respondent-assessee was industrial undertaking, but narrower and specific question, of distinction between manufacturer and trader, arises for consideration. manufacturer of jewellery or ornaments might not require huge investment in machinery etc. Mode and manner of engaging and undertaking manufacturing activity could be variable. Aforesaid decisions are relevant as they differentiate between trader and manufacturer/processor, on principle of control and supervision, when manufacturing activity is undertaken. same test has been applied by Tribunal. 13. In view of findings recorded above, it has to be held that sub-clause (a) to sub-section (3) to Section 80 HHC of Act, would be applicable in view of factual finding recorded by Tribunal that aforesaid work was undertaken by job workers under supervision and control of assessee and under their directions/check. ITA 141/2002 Page 18 of 19 14. substantial question of law is accordingly answered in favour of assessee and against appellant Revenue. appeal is disposed of. No costs. (SANJIV KHANNA) JUDGE (V. KAMESWAR RAO) JUDGE December 22nd, 2014 kkb ITA 141/2002 Page 19 of 19 Commissioner of Income-tax v. M/s. Haring India Limited