REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 3649-3650 OF 2003

M/s India Cine Agencies ...Appellant

Versus

Commissioner of Income Tax, Madras ...Respondent

WITH

Civil Appeal No. 1522 of 2007

Civil appeal No. 3720 of 2007

Civil appeal Nos. 451-452 of 2008

Civil appeal Nos. 6835-6836 of 2005

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1.In all these appeals common questions are involved

relating to the entitlement of benefit in terms of Section 32AB,

Section 80HH and Section 80I of the Income Tax Act, 1961 (in

short the ‘Act’). In all these cases the issue is the effect of

conversion of Jumbo rolls of photographic films into small

flats and rolls in the desired sizes. The assessees’ contention

was that the same amounted to manufacture/production as

the case may be. Stand of the revenue was that it was not

either manufacture or production. In some cases the High

Court held that in any event because of Item 10 of the

Eleventh Schedule, no deduction was permissible. The High

Court decided in favour of the revenue and therefore these

appeals have been filed by the assesses.

2.As noted above, the core issue is whether activity

undertaken was manufacture or production.

3.In Black’s Law Dictionary, (5

th

Edition), the word

‘manufacture’ has been defined as, “the process or operation

of making goods or any material produced by hand, by

machinery or by other agency; by the hand, by machinery, or

by art. The production of articles for use from raw or prepared

materials by giving such materials new forms, qualities,

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properties or combinations, whether by hand labour or

machine”. Thus by process of manufacture something is

produced and brought into existence which is different from

that, out of which it is made in the sense that the thing

produced is by itself a commercial commodity capable of being

sold or supplied. The material from which the thing or product

is manufactured may necessarily lose its identity or may

become transformed into the basic or essential properties.

(See Deputy Commissioner of Sales Tax (Law), Board of

Revenue (Taxes), Ernakulam v. M/s. Coco Fibres (1992 Supp.

(1) SCC 290).

4.Manufacture implies a change but every change is not

manufacture, yet every change of an article is the result of

treatment, labour and manipulation. Naturally, manufacture

is the end result of one or more processes through which the

original commodities are made to pass. The nature and extent

of processing may vary from one class to another. There may

be several stages of processing, a different kind of processing

at each stage. With each process suffered, the original

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commodity experiences a change. Whenever a commodity

undergoes a change as a result of some operation performed

on it or in regard to it, such operation would amount to

processing of the commodity. But it is only when the change

or a series of changes takes 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. Process

in manufacture or in relation to manufacture implies not only

the production but also various stages through which the raw

material is subjected to change by different operations. It is

the cumulative effect of the various processes to which the

raw material is subjected to that the manufactured product

emerges. Therefore, each step towards such production would

be a process in relation to the manufacture. Where any

particular process is so integrally connected with the ultimate

production of goods that but for that process processing of

goods would be impossible or commercially inexpedient, that

process is one in relation to the manufacture. (See Collector

of Central Excise, Jaipur v. Rajasthan State Chemical Works,

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Deedwana, Rajasthan (1991 (4) SCC 473).

5.‘Manufacture’ is a transformation of an article, which is

commercially different from the one, which is converted. The

essence of manufacture is the change of one object to another

for the purpose of making it marketable. The essential point

thus is that, in manufacture something is brought into

existence, which is different from that, which originally existed

in the sense that the thing produced is by itself a

commercially different commodity whereas in the case of

processing it is not necessary to produce a commercially

different article. (See M/s. Saraswati Sugar Mills and others v.

Haryana State Board and others (1992 (1) SCC 418).

6.The prevalent and generally accepted test to ascertain

that there is ‘manufacture’ is whether the change or the series

of changes brought about by the application of processes take

the commodity to the point where, commercially, it can no

longer be regarded as the original commodity but is, instead,

recognized as a distinct and new article that has emerged as a

result of the process. There might be borderline cases where

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either conclusion with equal justification can be reached.

Insistence on any sharp or intrinsic distinction between

‘processing and manufacture’, results in an oversimplification

of both and tends to blur their interdependence. (See Ujagar

Prints v. Union of India (1989 (3) SCC 488).

7.To put it differently, the test to determine whether a

particular activity amounts to ‘manufacture’ or not is: Does a

new and different good emerge having distinctive name, use

and character. The moment there is transformation into a new

commodity commercially known as a distinct and separate

commodity having its own character, use and name, whether

be it the result of one process or several processes

‘manufacture’ takes place and liability to duty is attracted.

Etymologically the word ‘manufacture’ properly construed

would doubtless cover the transformation. It is the

transformation of a matter into something else and that

something else is a question of degree, whether that

something else is a different commercial commodity having its

distinct character, use and name and commercially known as

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such from that point of view, is a question depending upon the

facts and circumstances of the case. (See Empire Industries

Ltd. v. Union of India (1985 (3) SCC 314).

8.The aforesaid aspects were highlighted in Kores India

Ltd., Chennai v. Commissioner of Central Excise, Chennai

(2005 (1) SCC 385) in the background of Central Excise Act,

1944 (in short the ‘Excise Act’) and Central Excise Rules, 1944

(in short the ‘Excise Rules’) and Central Excise Tariff Act,

1985 (in short the ‘Tariff Act’). The stand of the revenue was

that it amounted to “manufacture”, contrary to what has been

pleaded in these cases. This Court held that it amounted to

manufacture.

9.The matter can be looked at from another angle. In

Commissioner of Income Tax v. Sesa Goa Ltd. (2004 (271) ITR

331) this Court considered the meaning of word ‘production’.

The issue in that case was whether the extraction and

processing of iron ore amounted to manufacture or not in view

of the various processes involved and the various processes

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would involve production within the meaning of Section 32A of

the Act. It was inter alia observed as under:

“There is no dispute that the plant in respect

of which the assessee claimed deduction was owned

by it and was installed after March 31, 1976, in the

assessee's industrial undertaking for excavating,

mining and processing mineral ore. Mineral ore is

not excluded by the Eleventh Schedule. The only

question is whether such business is one of

manufacture or production of ore.

-

The issue had

arisen before different High Courts over a period of

time. The High Courts have held that the activity

amounted to "production" and answered the issue

in question in favour of the assessee. The High

Court of Andhra Pradesh did so in CIT v. Singareni

Collieries Co. Ltd. [1996) 221 ITR 48, the Calcutta

High Court in Khalsa Brothers v. CIT [1996] 217

TTR 185 and CIT v. Mercantile Construction Co.

[1994] 74 Taxman 41 (Cal) and the Delhi High

Court in CIT v. Univmine (P.) Ltd, [1993] 202 ITR

825. The Revenue has not questioned any of these

decisions, at least not successfully, and the position

of law, therefore, was taken as settled.

The reasoning given by the High Court, in the

decisions noted by us earlier, is, in our opinion,

unimpeachable. This court had, as early as in 1961,

in Chrestian Mica Industries Ltd. v. State of Bihar

[1961] 12 STC 150, defined the word "Production",

albeit, in connection with the Bihar Sales Tax Act,

1947. The definition was adopted from the meaning

ascribed to the word in the Oxford English

Dictionary as meaning "amongst other things that

which is produced; a thing that results from any

action, process or effort, a product; a product of

human activity or effort". From the wide definition

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of the word "production", it has to follow that

mining activity for the purpose of production of

mineral ores would come within the ambit of the

word "production" since ore is "a thing", which is

the result of human activity or effort. It has also

been held by this court in CIT v. N.C. Budharaja and

Co. [1993] 204 ITR 412 that the word "production"

is much wider than the word "manufacture". It was

said (page 423) :

"The word `production' has a wider

connotation than the word

`manufacture'. While every manufacture

can be characterised as production, every

production need not amount to

manufacture .

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 reside rodeos

which emerge in the course of

manufacture of goods."

10.In “Words and Phrases” 2

nd

Edn. by Justice R. P. Sethi

the expressions ‘produce’ and ‘production’ are described as

under:

“In Webster’s New International Dictionary,

the word “produce” means something that is

brought forth either naturally or as a result of effort

and work; a result produced. In Black’s Law

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Dictionary, the meaning of the word ‘produce’ is to

‘bring into view or notice; to bring to surface’. A

reading of the aforesaid dictionary meanings of the

word ‘produce’ does indicate that if a living creature

is brought forth, it can be said that it is produced.

(See Commissioner of Income Tax v. Venkateswara

Hatcheries (P) Ltd. (1999 (3) SCC 632),

Commissioner of Income Tax, Orissa and Ors. v.

M/s N.C. Budharaja and Company and Ors. (1994

Supp 1 SCC 280).

Production or produce- 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

byproducts, intermediate products and residual

products, which emerge in the course of

manufacture of goods. The expressions

‘manufacture’ and ‘produce’ are normally associated

with movables articles and goods, big and small but

they are never employed to denote the construction

activity of the nature involved in the construction of

a dam or for that matter a bridge, a road and a

building. (See Moti Laminates Pvt. Ltd. and Anr. v.

Collector of Central Excise, Ahmedabad (1995 (3)

SCC 23).

11.In Advanced Law Lexicon, 3

rd

Edn. by P. Ramanatha

Aiyar, the expressions ‘production’ and ‘manufacture’ are

described as under:

“’Production’ with its grammatical variations

and cognate expressions; includes-

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(i)packing, labeling, relabelling of

containers.

(ii)re-packing from bulk packages to retail

packages, and

(iii)the adoption of any other method to

render the product marketable.

‘Production’ in relation to a feature film,

includes any of the activities in respect of the

making thereof. (Cine Workers and Cinema Theatre

Workers (Regulations of Employment) Act (50 of

1981) S.2(i).

The word ‘production’ may designate as well a

thing produced as the operation of producing; (as)

production of commodities or the production of a

witness.

‘Manufacture’ includes any art, process or

manner of producing, preparing or making an

article and also any article prepared or produced

by manufacture. (Patent and Designs Act (2 of

1911), S.2(10).

‘Manufacture’ includes any process-

(i)incidental or ancillary to the completion

of a manufactured product; and

(ii)which is specified in relation to any goods

in the section or Chapter notes of the First

Schedule to the Central Excise Tariff Act, 1985 (5 of

1986) as amounting to manufacture, or, and the

word ‘manufacturer’ shall be constructed

accordingly and shall include not only a person who

employs hired labour in the production or

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manufacture of excisable goods but also any

person who engages in their production or

manufacturer on his own account.

(iii) which is specified in relation to any

goods by the Central Government by notification in

the Official Gazette as amounting to manufacture.

(Central Excise Act (1 of 1944) S.2(f))

12.The matter can yet be looked from another angle. If there

was no manufacturing activity, then the question of referring

to Item 10 of the Eleventh Schedule for the purpose of

exclusion does not arise. The Eleventh Schedule, which was

inserted by Finance (No.2) Act, 1977 w.e.f. 1.4.1978 has

reference to Sections 32A, 32AB, 80CC (3)(a)(i), 80-I(2), 80J(4)

and 88A (3)(a)(i) of the Act.

13.In view of what has been stated above the appeals

deserve to be allowed which we direct.

………………………………….J.

(Dr. ARIJIT PASAYAT)

………………………………….J.

(Dr. MUKUNDAKAM SHARMA)

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New Delhi,

November 12, 2008

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