The Commissioner of Income-Tax, Bombay City-IV, Bombay v. M/s. Emptee Poly-Yarn Pvt. Ltd

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(High Court Of Judicature At Bombay) Income Tax Appeal No. 1393 Of 2000 | 27-02-2008 The Commissioner of Income-Tax, Bombay City-IV, Bombay v. M/s. Emptee Poly-Yarn Pvt. Ltd Author: ..................J. Bench: S.H. Kapadia, H.L. Dattu Issues : Various questions have been framed as questions of law. It is, however, essential to reframe the questions as Questions A, B, D. E, and F as framed are referable to only one question. The questions as reframed and on which the Appeal is admitted and finally heard are as under:-

"A. Whether on the facts and circumstances of the case, twisting and texturising of POY, amounts to manufacturing or production of an article or thing distinct from the commodity involved in the manufacture and, therefore, entitled for deduction under Section 80IA of the Income Tax Act?

B. Whether the Tribunal is correct in holding that the view taken by the A.O. in earlier years cannot be changed in subsequent years and thereby importing the maxim of res judicata in income-tax proceedings.?" The Commissioner of Income-Tax, Bombay City-IV, Bombay v. M/s. Emptee Poly-Yarn Pvt. Ltd Facts : The relevant assessment year is assessment year 1996-97. The Assessing Officer passed an order of assessment disallowing claim under Section 80HH and 80I and 80IA on the ground that the activity of processing is not an industrial activity. An Appeal was preferred by the assessee before the Commissioner of Income Tax (Appeal), who by order dated 16th February, 2000 was pleased to dismiss the Appeal. The assessee aggrieved preferred an Appeal before the ITAT which was numbered as ITA No.1324/MUU/2000. By order dated 11th July, 2000 the learned Tribunal held that texturing and twisting of yarn amounts to manufacture and consequently allowed the Appeal. The questions now framed arise from this order.

3. What we are called upon to answer firstly, is whether twisting and texturising of POY amounts to manufacture or production of a distinct article. We may at once note that a learned Bench of this Court in Commissioner of Income Tax Vs. Bipinali Textiles Pvt. Ltd., 189 ITR 61 placing reliance on the Circular dated November 22, 1985 of the Central Board of Direct Taxes noted that the said circular has clarified that the activities of twisting and crimping of yarn are also to be treated as manufacturing activities. These instructions, it was held, are binding on the Department. In the light of that the Application for reference was dismissed. The Commissioner of Income-Tax, Bombay City-IV, Bombay v. M/s. Emptee Poly-Yarn Pvt. Ltd Reasoning : On behalf of the Revenue it was sought to be contended that there is a distinction in the words "process" on the one hand and "manufacture" or production on the other. Reliance was placed in the judgment of Collector of Central Excise, Jaipur Vs. Banswara Syntex Ltd. 1996 (88 E.L.T. 645 (S.C.). The issue before the Supreme Court was whether doubling or multifolding of the single yarn brings into existence a new product. On the facts there the Court held that in the manufacture of single ply yarn an excisable item comes into existence and it becomes liable to pay excise duty at that stage itself and that the respondents could not be allowed to contend that levy of excise duty is postponed to a point of time when the yarn is removed after doubling or multifolding. The Court also held that mere doubling or multifolding of the single yarn does not bring into existence a new product. judgement : The short question which arises for determination in this batch of Civil Appeals is: Whether twisting and texturising of partially oriented yarn ('POY' for short) amounts to 'manufacture' in terms of Section 80IA of the Income Tax Act, 1961?


The lead matter in this batch of Civil Appeals is C.I.T., Mumbai Vs. M/s. Emptee Poly-Yarn Pvt. Ltd. (Civil Appeal arising out of S.L.P.(C) No.26482/2008), in which the relevant Assessment Year is 1996-97.


Repeatedly this Court has recommended to the Department, be it under Excise Act, Customs Act or the Income Tax Act, to examine the process applicable to the product in question and not to go only by dictionary meanings. This recommendation is not being followed over the years. Even when the assessee gives an opinion on a given process, the Department does not submit any counter opinion wherever such counter opinion is possible. Prima facie, however, in this case, we do no see possibility of any counter opinion to the opinion given by the Mumbai University, vide letter dated 10th July, 1999.


With the above preface, we are required to examine the above question as to whether twisting and texturising of POY amounts to 'manufacture'. At the outset, we wish to clarify that our judgment should not be understood to mean that per se twisting and texturising would constitute 'manufacture' in every case. In each case, one has to examine the process undertaken by the assessee.


Having examined the process in the light of the opinion given by the expert, which has not been controverted, we find that POY is a semi-finished yarn not capable of being put in warp or weft, it can only be used for making a texturized yarn, which, in turn, can be used in the manufacture of fabric. In other words, POY cannot be used directly to manufacture fabric. According to the expert, crimps, bulkiness etc. are introduced by a process, called as thermo mechanical process, into POY which converts POY into a texturized yarn. If one examines this thermo mechanical process in detail, it becomes clear that texturising and twisting of yarn constitutes 'manufacture' in the context of conversion of POY into texturized yarn. At this stage, we may also reproduce, hereinbelow, para 10 of our judgment in the case of C.I.T. Vs. M/s. Oracle Software India Ltd., reported in 2010 (1) SCALE 425.


"The term "manufacture" implies a change, but, every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process fall6 s within the meaning of the word "manufacture".


Applying the above test to the facts of this case, it is clear that POY simplicitor is not fit for being used in the manufacture of a fabric. It becomes usable only after it undergoes the operation/process which is called as thermo mechanical process which converts POY into texturised yarn, which, in turn, is used for the manufacture of fabric. One more point needs to be mentioned. Under the Income Tax Act, as amended in 2009, the test given by this Court in M/s. Oracle Software's case (supra) has been recognised when the definition of the word 'manufacture' is made explicit by Finance Act No.2/2009 which states that 'manufacture' shall, inter alia, mean a change in bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Applying this definition to the facts of the present case, it may be mentioned that the above thermo mechanical process also bring about a structural change in the yarn itself, which is one of the important tests to be seen while judging whether the process is manufacture or not. The structure, the character, the use and the name of the product are indicia to be taken into account while deciding the question whether the process is a manufacture or not.


Before concluding, we may point out that the learned counsel appearing for the Department cited before us a judgment of a Division Bench of this Court in the case of Commissioner of Central Excise, Mumbai-V vs. Swastik Rayon Processors, reported in 2007 (209) E.L.T. 163 (S.C.), in which it has been held that twisting of cellulosic filament yarn with a blended yarn comprising of polyester and viscose will not amount to manufacture under Section 2(F) of the Central Excise Act. In our view, the said judgment has no application to the facts and circumstances of this case. As stated above, POY is a semi-finished product. It is a raw material/input. That raw material or input gets converted into a texturised yarn by reason of the thermo mechanical process. POY is unfit for manufacture of fabric. POY, as stated above, means partially oriented yarn whereas a cellulosic filament yarn is a final product in the sense that it can be used directly for manufacture of fabric. If this definition is kept in mind, the judgment in the case of Swastik Rayon Processors's case (supra) will not apply to the facts of the present case.