Girnar Industries v. Commissioner Of Income-Tax

The Judgment of the Court was delivered by

C.N Ramachandran Nair, J.:— The assessee-appellant has an industrial unit located in the special economic zone at Kakkanad, Kochi, where it is engaged in blending and repacking of tea for export. For the assessment year 2004-05, the assessee claimed deduction of export profit in respect of the blended tea exported from the industrial unit under section 10A of the Income-tax Act, 1961 (hereinafter called “the Act”). However, the assessing authority held that “blending” does not answer the description of manufacture or processing and so much so, the assessee is not entitled to deduction of export profits claimed under section 10A of the Act. It is the specific case of the Department that blending can be treated as a manufacturing activity only after the definition clause of “manufacture” contained in section 2(r) of the Special Economic Zones Act, 2005, is incorporated in the provisions of section 10AA of the Income-tax Act with effect from February 10, 2006. Even though first appeal was allowed by the Commissioner of Income-tax (Appeals) holding that the subsequent amendment is clarificatory in nature, on further appeal filed by the Department, the Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and confirmed the disallowance on the ground that blending and export of tea by the assessee qualifies for benefit only after incorporation of the definition clause of “manufacture” from the Special Economic Zones Act in section 10AA of the Income-tax Act. It is against this order of the Tribunal the assessee has filed the appeal. We have heard senior counsel, Sri Firoze Bandhya Rujina, appearing for the appellant-assessee and senior standing, counsel, Sri P.K.R Menon, appearing for the respondents.

2. The short question that arises for consideration is whether blending and packing of tea for export in the industrial unit in the special economic zone amount to manufacture or production of an article qualifying for exemption under section 10A of the Act, that is, during the period prior to introduction of “blending” as “manufacture” with effect from February 10, 2006. There is no dispute on the facts inasmuch as the assessee is admittedly engaged in purchase of tea produced in various estates from various auction centres and in the industrial unit they blend the tea so procured into various grades of blended tea, repack in their name and export it to various countries.

3. The Development Commissioner, Special Economic Zone, has issued permanent registration certificate to the assessee declaring that the assessee is engaged in manufacture and export of blended tea (in bulk, in consumer packs and tea bags). The case of the Department is that unless the item exported is treated as a product manufactured in the industrial unit of the assessee, the assessee is not entitled to exemption. On the other hand, the assessee's case is that every unit in the special economic zone enjoys income-tax exemption on the profit derived on the export of their products. Prior to the passing of the Special Economic Zones Act, 2005, the assessee's industry was located in the zone previously known as the Cochin Export Processing Zone which is a free trade zone covered by section 10A of the Act. Since the assessee's eligibility for exemption has to be considered under section 10A, the relevant portion of the said section is extracted hereunder for easy reference:

“10A. Special provision in respect of newly established undertakings in free trade zone, etc.— (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee:

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years:

Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-sec-tion shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or produce such articles or things or computer software in such free trade zone or export processing zone:

Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent, of the profits and gains derived by an undertaking from the export of such articles or things or computer software: Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010, and subsequent years.

(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be hundred per cent, of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter fifty per cent, of such profits and gains for further two assessment years.

(2) This section applies to any undertaking which fulfils all the following conditions, namely:—

(i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year—

(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or

(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park or, as the case may be, software technology park;

(c) commencing on or after the 1st day of April, 2001, in any special economic zone;…”

4. It is clear from the above provision that deduction is of the profits and gains derived by the industrial undertaking from the export of articles or things or computer software manufactured or produced by it. The contention of the assessee is that since there is no definition of the word “manufacture” or “processing” in the Income-tax Act, the definition of “manufacture” contained in the Export Import Policy of 2002-07 under which free trade zone is established, applies. According to the counsel, even though blending as such is not specified in the definition clause contained in the policy, it falls within the definition clause of “manufacture” contained in the policy by necessary implication. The definition contained in Chapter IX of the EXIM Policy under clause 9. 30 is as follows:

“‘Manufacture means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, repacking, polishing, labelling, reconditioning repair, remaking, refurbishing, testing calibration, re-engineering. Manufacture, for the purpose of this policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining.”

5. It is worthwhile to refer to the definition of “manufacture” contained in section 2(r) of the Special Economic Zones Act, 2005, which is incorporated later under section 10AA of the Income-tax Act with effect from February 10, 2006. It reads as follows:

“2. (r) ‘manufacture’ means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining.”

6. We notice from the above two definition clauses that though both the definition clauses are very similar, blending is not specifically stated in the definition clause of “manufacture” contained in the EXIM Policy, whereas blending is specifically covered by section 2(r) of the Special Economic Zones Act. Counsel for the assessee contended that both the definition clauses are very similar and though processes referred to therein such as refrigeration, repacking, polishing, labelling, reconditioning repair, etc., are not real manufacturing activities involving production of a new article having distinctive name, character or use as required under the first part of the definition clauses, such activities are also treated as manufacture both under the EXIM Policy and under the Special Economic Zones Act.

7. Even though there is no court decision directly on the question raised, senior counsel appearing for the appellant-assessee has relied on various decisions of the Supreme Court on the general principles of construction on exemption clause and also on the Central Board of Direct Taxes Circular No. 794, dated August 9, 2000, ([2000] 245 ITR (St.) 21) explaining the scope of section 10A of the Income-tax Act. We do not think there is any need to refer to all the decisions cited before us because the position canvassed is one and the same, i.e, adoption of a liberal construction pertaining to the exemption clause. However, it is worthwhile to refer to at least one of the decisions of the Supreme Court in Cit, Bombay v. M/S Gwalior Rayon Silk Manufacturing Co. Ltd., [1992] 196 ITR 149 (SC), wherein the Supreme Court has stated the law as follows (headnote):

“It is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. It is equally settled law that, if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.”

8. We have already noticed that in substance the provisions of section 10A and section 10AA later introduced serve the very same purpose of granting exemption on the profits earned by industrial units in the free trade zones/special economic zones. These provisions introduced in the Income-tax Act are essentially implementation of the EXIM Policy periodically announced by the Government providing incentives to export oriented units located in free trade zones/special economic zones mainly to augment foreign exchange earnings. In fact, it is pertinent to note that though section 10A did not contain a definition for “manufacture”, the definition of the said term contained in section 2(r) of the Special Economic Zones Act, 2005, is incorporated in section 10AA with effect from February 10, 2006. Admittedly, the said definition covers blending also. Therefore, blending and packing of tea done by the appellant-assessee qualifies for exemption under section 10AA from February 10, 2006, onwards. The question to be considered is whether the benefit is available to the appellant-assessee for the year 2004-05 for the reason that the then existing provision section 10A did not contain a definition clause. Admittedly, section 10A also provides for exemption in respect of goods manufactured or produced and sold by units in the free trade zone. Going by the decision of the Supreme Court abovereferred, the exemption clause has to be considered with reference to the object with which it is enacted. Nobody can have doubt that exemption to industries in the free trade zone is granted based on the EXIM Policy framed by the Government periodically. In this context, it is pertinent to refer to the definition of “manufacture” contained in Chapter IX of the EXIM Policy extracted above. We notice that “manufacture” is given a very wide definition to take in even processing involving conversion of something to another with distinct name, character and use. Further, even refrigeration of an item which involves only freezing, repacking, labelling, etc., are also covered by the definition of “manufacture”. Blending of tea is mixing of different varieties of teas produced in estates located in different regions having different altitudes, climate conditions, etc. It is common knowledge that new flavours of tea are generated by blending different varieties. In our view, it would not be incorrect to say that in the course of blending the product obtained, namely, the blended tea, certainly has different characteristics inasmuch as flavour, taste, etc., of the blended tea is different from that of the various varieties of tea used in blending. We are of the view that since the purpose of exemption under section 10A is to give effect to the EXIM Policy of the Government, the definition of “manufacture” contained in the EXIM Policy is applicable for the purpose of the said provision. We have already noticed that “manufacture” as defined under the EXIM Policy has a wide and liberal meaning covering tea blending as well and so much so, blending and packing of tea qualifies for exemption under section 10A. Besides this, the appellant-industry presently in the special economic zone engaged in the same process of blending and packing of tea is specifically brought under the exemption clause through incorporation of section 2(r) of the Special Economic Zones Act, 2005, in the provisions of section 10AA of the Income-tax Act. We are, therefore, of the view that the later amendment is only clarificatory and the definition of “manufacture” contained in section 2(r) of the Special Economic Zones Act, 2005, incorporated in section 10AA of the Income-tax Act with effect from February 10, 2006, which is essentially the same as the definition contained in the EXIM Policy, applies to section 10A also. We, therefore, hold that blending of tea is a manufacturing activity which entitles the appellant-assessee for exemption under section 10A of the Income-tax Act for the assessment year 2004-05. Accordingly, the appeal is allowed by vacating the order of the Tribunal and by restoring the order of the first appellate authority.