Order
1. Leave granted. Heard learned counsel on both sides. The short question which arises for determination in this batch of civil appeals is:
Whether twisting and texturizing of partially oriented yarn (“POY”, for short) amounts to “manufacture” in terms of Section 80-IA of the Income Tax Act, 1961?
2. The lead matter in this batch of civil appeals is CIT v. Emptee Poly-Yarn (P) Ltd. [civil appeal arising out of SLP (C) No. 26482 of 2008], in which the relevant assessment year is 1996-1997.
3. This Court has repeatedly recommended to the Department, be it under the Excise Act, the 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 not see possibility of any counter-opinion to the opinion given by Mumbai University, vide letter dated 10-7-1999.
4. With the above preface, we are required to examine the above question as to whether twisting and texturizing 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 texturizing would constitute “manufacture” in every case. In each case, one has to examine the process undertaken by the assessee.
5. 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 texturizing and twisting of yarn constitutes “manufacture” in the context of conversion of POY into texturized yarn.
6. At this stage, we may also reproduce, hereinbelow, para 10 of our judgment in CIT v. Oracle Software India Ltd. (2010) 2 SCC 677, (2010) 1 Scale 425:
“12. … 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 falls within the meaning of the word ‘manufacture’.”
(emphasis supplied)
7. Applying the above test to the facts of this case, it is clear that POY simpliciter 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 texturized yarn, which, in turn, is used for the manufacture of fabric.
8. One more point needs to be mentioned. Under the Income Tax Act, as amended in 2009, the test given by this Court in Oracle Software case (2010) 2 SCC 677, (2010) 1 Scale 425 has been recognised when the definition of the word “manufacture” is made explicit by the Finance Act 2 of 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 brings 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 manufacture or not.
9. 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 CCE v. Swastik Rayon Processors (2009) 17 SCC 513, (2007) 209 ELT 163 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 texturized yarn by reason of the thermo-mechanical process. POY is unfit for the 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 the manufacture of fabric. If this definition is kept in mind, the judgment in Swastik Rayon Processors case (2009) 17 SCC 513, (2007) 209 ELT 163 will not apply to the facts of the present case.
10. We once again repeat the caution which we have mentioned hereinabove. Our judgment in the present case is to be confined to the facts of the present case. We are not saying that texturizing or twisting per se in every matter amounts to manufacture. It is the thermo-mechanical process embedded in twisting and texturizing when applied to a partially oriented yarn which makes the process a manufacture. In the circumstances, the judgment in Swastik Rayon Processors case (2009) 17 SCC 513, (2007) 209 ELT 163 will not apply.
11. Applying the above test to the facts of the present case, we find no infirmity in the impugned judgments of the High Court. Accordingly, the civil appeals filed by the Department are dismissed with no order as to costs.