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,  (5th 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” 2nd 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,  3rd 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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