2002-VIL-184-ITAT-CHD

Equivalent Citation: ITD 083, 408, TTJ 088, 1013,

Income Tax Appellate Tribunal CHANDIGARH

Date: 14.03.2002

ASSISTANT COMMISSIONER OF INCOME-TAX

Vs

OSCAR LABORATORIES (P.) LTD.

BENCH

Member(s)  : B. R. MITTAL., JOGINDER PALL.

JUDGMENT

Per Bench.--By this order we shall dispose of this bunch of seven appeals filed by the revenue against the respective orders of the CIT(A), Chandigarh for the consecutive assessment years 1988-89, 1989-90, 1990-91, 1991-92, 1992-93, 1993-94 and 1994-95. Since the issues involved in these appeals are common, these were heard together and are being disposed of by this consolidated order for the sake of convenience.

2. The first common effective issue raised in all these appeals is that the CIT(A) was not justified in allowing special deduction under section 80-I of the Income-tax Act for the assessment years under consideration. The identical facts are that in the respective returns filed for the aforesaid assessment years, the assessee had claimed deduction under section 80-I of the Income-tax Act. However, the Assessing Officer noted that prior to the assessment years under reference, the company was being assessed in the name of M/s Hemkund Drugs (P.) Ltd., but in the accounting year relevant to assessment year 1988-89, it had changed its name to M/s Oscar Laboratories Pvt. Ltd. He also noted that in the accounting year relevant to assessment year 1988-89, the assessee had purchased plant and machinery worth Rs. 47,996, laboratory equipment Rs. 5,609 and furniture and fixtures Rs. 8,072 for the administrative office. While scrutinizing the details, the Assessing Officer noted that plant and machinery purchased by the assessee was meant only for carrying out the final performance of the activity on medicines, namely, capsule filling machine or strip sealing or for batch printing on the labels. The main manufacturing activities was done by M/s Ranbaxy Laboratories Ltd., Delhi to whom the assessee had paid processing charges of Rs. 3,01,990. Besides, the assessee had paid testing charges of Rs. 47,875 to M/S. Analytical Testing Services Ltd. for testing the quality of raw material, packing material and finished goods. Thus, the Assessing Officer observe that the assessee had not carried out any manufacturing activity, rather it got the manufacturing activity done from M/s Ranbaxy Laboratories Ltd. to whom processing charges had been paid. According to the Assessing Officer, the assessee was not an industrial undertaking engaged in the business of manufacturing or production of articles and, therefore, not entitled to special deduction under section 80-I. Accordingly, the claim of the assessee was not allowed for the assessment year 1988-89 and similar disallowance was made for the subsequent assessment years for the reason given in the assessment order for the assessment year 1988-89.

3. Being aggrieved, the assessee took the matter in appeals before the CIT(A). The learned first appellate authority observed that the assessee had hired the premises at Okhla and also purchased certain plant and machinery such as capsule filling machine, strip sealing machine and other packing machine. The assessee also secured the status of small-scale industry from the Director of Industries and obtained Drug Licence in its name from the Drug Controller to manufacture medicines. The assessee had only got processing of goods done from M/s Ranbaxy Laboratories Ltd. by paying processing charges. But according to the CIT(A), the overall control and supervision remained with the assessee. He also relied on the two judgments of Bombay High Court in the cases of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 and CIT v. Anglo French Drug Co. (Eastern) Ltd. [1991] 191 ITR 92. Besides, he referred to the judgment of Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co. P. Ltd. [1978] 113 ITR 718 (Cal.). According to the CIT(A), the assessee was engaged in the manufacturing of goods entitled to deduction under section 80-I. Accordingly, the CIT(A) held that the assessee was entitled to deduction under section 80-I for the assessment year 1988-89. In the subsequent years, the CIT(A) allowed the claim by following appellate order for assessment year 1988-89. Revenue is aggrieved by the orders of the CIT(A). Hence, the present appeals before us.

4. The ld. D.R., Smt. Rachna Singh, submitted that in the returns of income, the assessee had claimed the status of an 'industrial undertaking'. The assessee purchased machinery worth Rs. 47,996 in the form of filling machine, as strip sealing machine, packing machine etc. She submitted that the assessee did not own any plant and machinery used in manufacturing the medicines and drugs, pharmaceuticals, etc. Instead, the assessee entered into an agreement with M/s Ranbaxy Laboratories Ltd. and the same is at pages 19 to 24 of the paper book. She drew our attention to page 19 of the paper book, which mentions that M/s Ranbaxy Laboratories Ltd. had the necessary facilities for manufacture of medicinal and pharmaceutical products and holds a valid drug manufacturing licence. Clause I of the agreement at page 20 of the paper book clearly mentions that M/s Ranbaxy Laboratories Ltd. shall undertake the manufacturing of the products mentioned in Annexure-A. Clause 2 of the said agreement refers to the scope of activities of the assessee as per which the assessee was required to procure the raw-material of standard quality and specification required for manufacturing and packing drugs. Clause 4 of the agreement further mentions that the assessee was required to provide to the manufacturer necessary quality and quantity specifications for manufacturing those drugs and M/s Ranbaxy Laboratories Ltd. shall ensure manufacturing these drugs as per the required specifications. Clause 5 of the agreement further mentions that it is the responsibility of M/s Ranbaxy Laboratories Ltd. to affix on the finished products registered trademark of the assessee. Clause 6 of the said agreement clearly mentions that testing of manufactured drugs was required to be done by M/s Analytical Testing Services Pvt. Ltd. and in case M/s Ranbaxy Laboratories Ltd. failed to manufacture the goods as per the required specifications, the cost of the raw-material and inputs shall be borne by M/s Ranbaxy Laboratories Ltd. Clause 7 further stipulates that it shall be the responsibility of M/s Ranbaxy Laboratories Ltd. to arrange transportation of the finished stock to assessee's godown for which the responsibility of unloading of the goods at assessee's godown shall be that of the assessee. By referring to these clauses of the agreement, the ld. D.R. submitted that it was obvious that the entire manufacturing of the drugs and medicines was being done by M/s Ranbaxy Laboratories Ltd. to whom the assessee had paid service charges of Rs. 3,01,990. She further submitted that even the testing of finished products was to be done by another company, namely, M/s Analytical Testing Services Pvt. Ltd. to whom service charges of Rs. 40,875 were separately paid. She further submitted that even the transportation of finished goods was the responsibility of M/s Ranbaxy Laboratories Ltd. Thus the assessee could not be said to be engaged in the business of manufacturing or production of goods and articles and, therefore, the basic condition of allowing deduction under section 80-I was not fulfilled. She further submitted that the judgments relied on by the CIT(A) in allowing special deduction under section 80-I were clearly distinguishable on facts and, therefore, not applicable to the facts of present cases. She submitted that in the case of Neo Pharma P. Ltd. the facts before the Bombay High Court were that various drugs and medicines were got manufactured under the direct supervision and quality control of the assessee but in this case the assessee did not exercise such control and the entire manufacturing activity and quality control was the responsibility of M/s Ranbaxy Laboratories Ltd. Similarly, she submitted that the other decision of Bombay High Court in the case of CIT v. Penwalt India Ltd. [1992] 196 ITR 813, relied on by the CIT(A) would not be applicable because in that case only for a part of the manufacturing activity the assessee had engaged the services of somebody else. But she submitted that in this case, the entire manufacturing activity was undertaken by M/s Ranbaxy Laboratories Ltd. She further submitted that the decision of Bombay High Court in the case of Anglo French Drug Co. (Eastern) Ltd. was not applicable because earlier the assessee was manufacturing the various pharmaceutical goods of its own and thereafter transferred the entire plant and machinery to its associate concern retaining its control over the manufacture. Thus, the Bombay High Court held that the assessee could be said to be in the business of manufacturing of goods. But in the present cases, the entire manufacturing activity is being done by M/s Ranbaxy Laboratories Ltd. She further submitted that the decision of Calcutta High Court in the case of A. Mukherjee & Co. (P.) Ltd., was also not applicable because that related to printing of books. She therefore, submitted that in the present cases, the assessee did not undertake any manufacturing 414 Income-tax Tribunal Decisions activity and, therefore, the assessee would not be entitled to deduction under section 80-I.

5. The ld. Counsel for the assessee, on the other hand, strongly supported the orders of the CIT(A). He submitted that the Assessing Officer had wrongly mentioned in the assessment order that the present concern was formed on reconstruction of the old business being carried on by M/s Hemkund Drugs Pvt. Ltd. He submitted that earlier the business was being carried on in the name and style of M/s Hemkund Drugs Pvt. Ltd. but subsequently only the name was changed as M/s Oscar Laboratories Pvt. Ltd. w.e.f. 16-1-1987. He submitted that it was clear from the certificate issued by Registrar of Companies. Thus, it was not formed on reconstitution or reconstruction of business, rather it was the same old business being carried on in the name and style of M/s Hemkund Drugs Pvt. Ltd. Thus it was not a case of reconstruction of business. He reiterated the submissions made before the lower authorities that the assessee hired the premises at X-62, Okhla, New Delhi for carrying on its business, i.e. to manufacture various drugs and medicines. The company also purchased certain plant and machinery like capsule filling machine, strip-scaling machine and packing machine. The company also obtained a drug licence in its name from the Drug Controller to manufacture medicine. The assessee also obtained the status of a small-scale industry from the Director of Industries, New Delhi. The assessee also paid excise duty on the goods manufactured by the assessee in its own name and trademark. Thereafter, the assessee made arrangements with another company, namely, M/s Ranbaxy Laboratories Ltd. to manufacture the goods on its behalf and under its supervision for which the packaging, etc., was done by the assessee. Overall control and supervision however, remained with the assessee. He drew our attention to clauses 2 and 4 of the agreement with M/s Ranbaxy Laboratories Ltd. at pages 19 and 24 of the paper book as per which it was the responsibility of the assessee to procure/obtain and to make necessary arrangements at its cost the required basic raw material of standard quality and specifications. He further submitted that the specifications for manufacturing the various drugs were provided by the assessee itself. He submitted that for carrying out the required test to ensure that items manufactured by M/s. Ranbaxy Laboratories Ltd. were of the desired specifications, the assessee engaged the services of M/s Analytical Testing Services Pvt. Ltd. Thus he submitted that though the goods were manufactured by M/s Ranbaxy Laboratories Ltd. yet the supervision and overall control was that of the assessee. He submitted that the judgment of Supreme Court in the case of CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412, was not applicable to the facts of the present case because in that case the assessee was engaged in the business of laying 'pressure filling' foundation For buildings and other structures and it was held that assessee was not manufacturing or producing articles or things. But the same is not the case here. The assessee is manufacturing medicines under its own supervision and control. He submitted that all the judgments relied on by the CIT(A) in his order were applicable to the facts of present cases because the goods were being manufactured under assessee's own control and supervision. He further relied on Board's Circular No. 347, dated 7-7-1982, where by referring to the decision of Calcutta High Court in the case of A. Mukherjee & Co. P. Ltd. the Board has clarified to its field officers that book publishing companies even though they may themselves not be engaged in the printing or binding of books, qualified to be treated as industrial companies for the purpose of section 104. In addition, he relied on the following judgments:

(i) CIT v. Walter Bushnell P. Ltd. [1996] 218 ITR 486, 489-90 (Cal.);- where the High Court has held that the assessee had set up a new industrial unit for manufacture of pharmaceutical products and that new plant and machinery were installed in this new unit which was engaged in the manufacture of various drugs and medicines, The assessee was held to be entitled to deduction under section 80-I.

(ii) Griffon Laboratories P. Ltd. v. CIT [1979] 119 ITR 145 (Cal.);- where the High Court held that the Tribunal was not correct in holding that assessee must own or possess the manufacturing plant or machinery before it could be said to be a manufacturer of goods.

(iii) CWT v. Smt. Premlatabai [1982] 137 ITR 329 (MP); - in this case the assessee purchased raw-cotton, got it ginned and pressed in factories through outside agencies and then packed the same into bales before putting them under section 271(1)(c) for sale. The Madhya Pradesh High Court held that the undertaking need not itself carry out the entire processing of goods and part of the processing can be carried out by outside agency and, therefore, the assessee was entitle to exemption mentioned in section 5(1)(xxxi) of the Wealth-tax Act.

(iv) CWT v. Mubark Ali Khan [1980] 123 ITR 101 (All.); in this case, assessee was engaged in the business of manufacture of biris for which the assessee purchased tendu leaves and tobacco. These were given to contractors for getting the biris manufactured. On these facts, the Allahabad High Court held that the assessee was an industrial undertaking for the purpose of section 5(1)(xxxi).

(v) CIT v. Indian Resins & Polymers [1999] 235 ITR 5 (Ker.); in this case, the assessee was engaged in the business of export of cashew kernels and shell oil. The assessee purchased cashew nuts and entrusted to a third party for processing. Similarly, roasting and dehusking of cashew kernels was got done from a third party under assessee's own supervision. On these facts, it was held that assessee was an industrial undertaking entitled to special deduction under section 80HH. The ld. Counsel drew our attention to page 47 of the paper book, where the licence to manufacture the various drugs was issued in assessee's name and even the names of employees were approved by the drug licensing authority, Delhi. Items to be manufactured have been mentioned at page 48 of the paper book, which were covered in the licence issued by the drug licensing authority. He, therefore, submitted that the assessee was an industrial undertaking engaged in the business of manufacture of drugs and medicines and, therefore, qualified for special deduction under section 80-I.

6. The ld. D.R. stated in rebuttal that in all the cases cited by the ld. Counsel the goods were got manufactured from third party under assessee's own control and supervision but in the present cases, even the control and supervision was with the third party. She therefore, submitted that the various decisions relied upon by the ld. Counsel were not applicable to the facts of the present cases.

7. We have heard both the parties at some length and carefully considered the rival submissions. We have also examined the facts, evidence and material on record and referred to the various judgments to which our attention has been drawn. The orders of the lower authorities have also been carefully perused. Section 80-I applies to any industrial undertaking, which fulfils the following conditions:

(i) it is not formed by the splitting up or reconstruction of a business already in existence;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;

(iii) it manufactures or produces any article or thing other than specified in the List in the XIth Schedule; and

(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs 10 or more workers in a manufacturing process carried on with the aid of power or employs 20 or more workers in a manufacturing process carried on without the aid of power. Now in this case, it is obvious that the assessee was not formed by the splitting up or the reconstruction of business already in existence. In fact, there was only a change in the name and without any splitting up or transfer to a new business. Thus, these conditions are considered as fulfilled. Similarly, it is not the case of the Department that the assessee is not an industrial undertaking because it has not employed 10 or more workers in the manufacturing process carried on with the aid of power. No such objection has been raised in the assessment order. The only objection for which the revenue has disallowed the special deduction is that the assessee is not engaged in the business of manufacturing or production of articles and things. Now the question that requires to be considered by this Bench is, what is the meaning of 'manufacture'? The Hon'ble Supreme Court has held in the case of Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 that manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation, a new and different article must emerge having a distinctive character, name and use. Thus, it is clear that every process does not tantamount to manufacture and it is only when the process results in the emergence of a new and different articles having a distinctive name, character or use that 'manufacture' can be said to have taken place. In fact, 'production' is still wider than manufacture, though every manufacture can be characterized as a production. From the wording of section 80-I, it is very clear that the intention of Legislature is to extend such benefit only to such industrial undertaking, which is engaged in the business of manufacture and not to an undertaking engaged in the business of processing. In the present cases, the assessee is no doubt engaged in the business of manufacturing of drugs and medicines. The assessee does not have necessary machinery for manufacturing the drugs itself. It is an admitted fact that the assessee has got the manufacturing done from M/s Ranbaxy Laboratories Ltd. for which raw material, specifications and the specific requirements are being given by the assessee. It is also a fact that the assessee does not have the requisite testing facilities of its own. For this purpose, the assessee has hired the technical services of M/s Analytical Testing Services Pvt. Ltd. In fact, after manufactured goods have been received by the assessee, it has only done capsule filling, strip sealing, etc., which are essentially marketing activities. If we take into account purely these activities without taking into account the manufacturing activities, which the assessee got it done from M/s Ranbaxy Laboratories Ltd., the same would not fall in the category of manufacturing or production, though these activities are essential in order to sell the commodity in the market. Their Lordships of Karnataka High Court in the case of V.M. Salgaocar Bros. P. Ltd. v. CIT [1996] 217 ITR 849, held that improving marketability of article does not constitute manufacture or production of articles. The High Court has held that the test is not whether articles produced as a result of the process carried out in the plant becomes more saleable from an otherwise less saleable article. Simply because a process carried out on a particular article adds to its value or improves its marketability on account of process like shining, polishing, removal of impurities etc. may not by itself be sufficient to hold that the products so finished are commercially different from the ones on which such process has been carried out. In the present cases, even such process of shining, polishing and removal of impurities are not being done by the assessee as the entire manufacturing is being done by M/s Ranbaxy Laboratories Ltd. The assessee only does capsule filling, strip sealing and other packing activities.

8. The jurisdictional High Court of Punjab & Haryana in the case of Niemla Textile Finishing Mills P. Ltd. v. ITO [1985] 152 ITR 429 (FB) has held that the assessee engaged in dyeing, scouring, signing, milling and finishing of all types of woollen, silken or cotton fabrics, which result in giving a good finish to a particular article manufactured or produced to make it better marketable does not mean that the assessee is engaged in the business of manufacture or production of textile. Therefore, by applying these tests it could be said that the technical activities carried on by the assessees by themselves do not constitute manufacture or production of articles.

9. Now, the next question arises as to whether, the activities which the assessee had got done from M/s Ranbaxy Laboratories Ltd. and testing through M/s Analytical Testing Services Pvt. Ltd. are to be considered along with the activities being performed by the assessee so as to hold that assessee is engaged in the business of manufacture and production of articles or things? From the facts detailed above, it is obvious that the assessee obtained the licence for manufacturing drugs in its own name, items manufactured are also being sold in its own trademark and the assessee had also paid excise duty in respect of the goods manufactured through M/s Ranbaxy Laboratories Ltd. Now the question is whether the assessee would still be eligible for deduction under section 80-I even if these activities were done from others. From the facts detailed above, it is obvious that the CIT(A) has relied on the judgments of Bombay High Court in the cases of Neo Pharma P. Ltd. Anglo French Drug Co. (Eastern) Ltd. and the judgment of Calcutta High Court in the case of A. Mukherjee & Co. P. Ltd. The contention of the ld. D.R. that in all these cases, goods were manufactured from others under its own control and supervision has been carefully considered. In the case of Neo Pharma P. Ltd. the facts before the Bombay High Court were that the assessee was incorporated mainly with the object of engaging itself in the business of manufacturing and processing pharmaceuticals. It entered into an agreement with another company to make available to the assessee their premises, plant and machinery and services of the staff for carrying on the manufacturing activities for and on behalf of the assessee. The goods manufactured by the company were as per the quality and specifications prescribed by the assessee. In the light of these facts, Bombay High Court held that although the plant and machinery employed for the purpose of manufacture belonged to another company and the services of certain employees were also utilized in that process, the manufacturing activity was really that of the assessee. Therefore, it could not be said that it was not engaged in the business of manufacture of drugs and pharmaceuticals. We find that even in this case also, the assessee had carried out all other activities, i.e. obtaining drug manufacturing licence, entering into an agreement with M/s Ranbaxy Laboratories Ltd. for manufacture of drugs and Pharmaceuticals as per specifications given by the assessee, employed the services of professionals, namely, M/s Analytical Testing Services Pvt. Ltd., for ensuring that items manufactured by M/s Ranbaxy Laboratories Ltd. are as per the desired specifications and finally carried on activities such as capsule filling, strip sealing, packing etc. In fact, the responsibility of manufacturer was only to ensure the quality and quantity control as per the specifications given by the assessee and in case any batch was found below such specifications, M/s Ranbaxy Laboratories Ltd. was required to reimburse the cost of all inputs including cost of raw-materials and packing materials used in the said batch, Thus, we are of the view that goods were being manufactured by M/s Ranbaxy Laboratories Ltd. under the control and supervision of the assessee and, therefore, the ratio laid down by the various judgments cited by the CIT(A) in his appellate order and those relied on by the ld. Counsel and as discussed above would be squarely applicable to the facts of the present cases. Moreover, section 80-I does not impose any condition to the effect that the assessee would not be entitled to deduction under section 80-I if the manufacturing is got done from third parties. Further, the assessee has also paid excise duty, which is imposed by the Excise Department on the manufacture of goods. As regards the two judgments of Karnataka High Court and Punjab & Haryana High Court B.M. Salgaocar Bros. P. Ltd.'s case and Niemla Textile Finishing Mills P. Ltd.'s case it is mentioned that the assessees were carrying on part of the activities. The nature of these activities was such which did not result in manufacture and production of new articles or things. It was not a case where the assessee got the cloth manufactured under its control or supervision. In this case, the assessee is carrying on compete activities partly through it and partly through others. Therefore, the ratio of the aforesaid two judgments would not be applicable to the facts of the present cases. In the light of the facts and the legal position discussed above, we are of the considered opinion that the assessee satisfies the condition regarding manufacture and production of articles and things and, therefore, is entitled to deduction under section 80-I. Accordingly, the orders of the CIT(A) are upheld and the appeals of the Department are dismissed.

10 to 15. [These paras are not reproduced here as they involve minor issues.]

 

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