REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.786 OF 2010 (Arising out of S.L.P.(C) No.26482/2008)

C.I.T., Mumbai ...Appellant(s)

Versus

M/s. Emptee Poly-Yarn Pvt. Ltd. ...Respondent(s)

With Civil Appeals Nos. 787 to 792 of 2010 (Arising out of S.L.P.(C) Nos.4186, 10269, 21390, 2102,  

1490 and 1582 of 2009

O R D E R

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  

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.

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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

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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

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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.

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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.   

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  texturising  or  twisting  per  se  in  

every matter amounts to manufacture.  It is the thermo  

mechanical process embedded in twisting and texturising  

when applied to a partially  oriented yarn which makes the

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process a manufacture.  In the circumstances, the judgment  

in the Swastik Rayon Processors's case (supra) will not  

apply.

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.

                                      ..................J.                        (S.H. KAPADIA)

                                      ..................J.                        (H.L. DATTU)

New Delhi, January 20, 2010.