ORDER
R.K. Bali, A.M.
1. These two cross appeals one by the assessee and the other by the Revenue relating to asst. yr. 1987-88 are taken up together and disposed of by a common order for the sake of convenience.
2. ITA No. 357/Ahd/1994 is the appeal filed by the assessee wherein the following substantive grounds have been raised :
1. Having held that the assessee-company was entitled to deduction under s. 80-I, the CIT(A) grossly erred in restricting such relief to 25 per cent of the amount admissible under s. 80-I.
2. The CIT(A) has erred in confirming the disallowance of Rs. 78,822 on account of sales-tax liability by invoking the provisions of s. 43B.
3. The CIT(A) has erred in directing the AO to recompute the interest chargeable, if any under s. 215 after giving appeal effect.
3. ITA No. 742/Ahd/1991 is the appeal filed by Revenue wherein the following grounds have been raised :
The learned CIT(A) has erred in law and on facts in –
1. allowing deduction under s. 80-I of the Act on 25 per cent of the admissible amount :
2. allowing deduction under s. 80G;
3. reducing the disallowance under s. 37(2A) by Rs. 1,37,882 and; in
4. directing the AO to recompute the interest chargeable under s. 215 after excluding the disallowance confirmed under s. 80-I and 43B of the Act.
4. The assessee is an Indian company engaged in the production of drugs, tablets, injections, liquids, ophthalmic solutions, etc. It purchases its own raw materials for the said purpose and has claimed that the formulation of the various components of the finished products, tablets, injections, etc. is done by the assessee. Mixing of raw materials and the blending is done in accordance with the instructions and supervision of the assessee at its factory premises by its own technical staff. Thereafter the tablets and injections, etc. are prepared at their premises by Torrent Laboratories (P) Ltd. and Asoj Soft Capsules (P) Ltd. and after testing and investigation of the finished products, these are packed and packing activity is carried on by the assessee at its factory and godown.
5. For the first time the assessee claimed deduction under s. 80-I for the asst. yr. 1986-87 which claim was rejected by the AO and the action of the AO was confirmed by the CIT(A) which decision was accepted by the assessee as no second appeal was filed to the Tribunal.
6. For asst. yr. 1987-88 which is the year under appeal, again the assessee claimed deduction under s. 80-I and submitted before the AO that its claim for deduction under s. 80-I was rejected by the Departmental authorities on the ground that the assessee was not having its own factory wherein its own machineries were installed and the assessee did not employ ten or more workers and it was submitted before the AO that on these facts prevailing in the accounting year relevant to asst. yr. 1986-87 the assessee was advised not to go in appeal before the Tribunal. However, in the accounting period relevant to asst. yr. 1987-88 the position has changed in so much so –
(i) The assessee has taken on rent its own factory and has paid factory rent of Rs. 12,000.
(ii) The assessee has installed machinery valued at Rs. 10,88,760.
(iii) The assessee has used the machinery installed in the factory which is apparent from the fact that it incurred electricity expenses relating to the factory amounting to Rs. 20,989.
(iv) The fact that the machinery was actively used in the manufacturing activity is also apparent from the fact that the assessee purchased spare parts of the machinery amounting to Rs. 30,657 in the assessment year under appeal.
(v) The assessee also employed the requisite number of employees as prescribed in s. 80-I(2)(iv).
Accordingly it was claimed before the AO that the assessee is entitled to deduction under s. 80-I for asst. yr. 1987-88.
7. The AO, however, relying on its earlier order for asst. yr. 1986-87 which was confirmed by the CIT(A), held that the assessee is not entitled to deduction under s. 80-I because it was not an independent industrial undertaking but dependent on production process of others relying on the decision of the Bombay High Court in the case of CIT vs. Associated Cement Co. Ltd. (1979) 118 ITR 406 (Bom). According to the AO, even according to the assessee the manufacturing activity of the assessee involved three stages; viz. –
(a) Formulation;
(b) Processing; and
(c) Packing.
and it was in fact only the third process which was packing was being undertaken by the assessee on the basis of the list of machinery installed by the assessee and the earlier two processes were carried on by sister concern of the assessee allegedly under the supervision and control of the assessee. Accordingly the AO denied the claim of deduction under s. 80-I to the assessee.
8. On appeal, the learned CIT(A) partly accepted the plea of the assessee and held that the assessee has carried out the process of formulation throughout the year. However, the process of actual manufacture was carried out by it on a small scale for only a part of the year and the process of packing for almost 50 per cent of the year because the machineries purchased and installed by the assessee in the assessment year under consideration did not work for the entire year. Accordingly the CIT(A) directed the AO to allow relief under s. 80-I to the assessee of 25 per cent of the admissible amount during the assessment year under appeal.
9. The Revenue as well as the assessee both are aggrieved with the above decision of the CIT(A). The assessee has challenged the action of the CIT(A) on the ground that having held that the assessee is entitled to deduction under s. 80-I, there was absolutely no justification for restricting the claim to 25 per cent of the amount admissible under s. 80-I as there is no such warrant in the provisions of s. 80-I to partially disallow the claim. On the other hand, the Revenue is aggrieved even with the action of granting deduction to the assessee under s. 80-I to the extent of 25 per cent of the admissible amount.
10. Before us, Shri S. N. Soparkar, the learned representative of the assessee as well as Shri Dilip Shivpuri, the learned Departmental Representative both argued at length in favour as well as against the claim of the assessee for deduction under s. 80-I. Both of them have filed written submissions also which have been taken into consideration while adjudicating this issue.
11. The undisputed facts which are relevant for the assessment year under consideration are that in the assessment year under consideration the assessee has installed machinery worth Rs. 10,88,760 comprising of 11 different machines as detailed below :
———————————————————————–
Particulars Amount Machinery
put in use
on date
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1. Blister packing machine type 3,29,259.85 15-12-1985
2. Gansons strip packing machine 97,682.46 20-12-1985
3. Packing canvas conveyor belt size
12' 16,338.60 --
4. Cadmach 35 station rotary tablet
machine 1,40,313.60 25-1-1986
5. Installing charges of Blister packing
machine 3,000.00 --
6. Packing canvass conveyor belt 16.3'
length 37,584.00 --
7. Blister packing machine 3,81,165.20 20-3-1986
8. Installing charges of blister packing
machine 3,000.00 --
9. Automatic super high speed label code
importing machine 27,144.00 25-5-1986
10. Blisterip automatic tablet-caps.
recovery machine 21,372.00 10-6-1986
11. semi automatic ropp. bottles sealing
machine 21,036.60 20-6-1986
12. Pre-operation expenses 10,864.00 --
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10,88,760.31
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According to the assessee the manufacturing process of a medicine can be broadly broken into three groups :
(1) Formulation; (2) Processing; and (3) Packing.
The formulation is a process by which bulk drugs are processed by adding the right amount of moisture, adhesive compounds to bind granulate with the addition of certain chemicals which regulate time-limit for release of drugs at an appropriate time after it is consumed. Bulk drugs are tested before they are converted into tablets, injections and other smaller units.
On the basis of the above formulation of the bulk drugs, processes are carried out and medicines prepared are immediately packed on being produced in order to retain its intensity and applicability for use before any climatic phenomena affects the usefulness of the medicines.
After preparation of the medicines in small units packing is required to be carried out as required by Drugs and Cosmetics Act, 1940 and the various Government agencies monitoring the medicinal field which require various items to be mentioned on the packing of the medicine like Lot No. with specific indication of batch of medicine manufactured, maximum retail price, date of manufacture and expiry, details of important compositions of various drugs included in the medicine; whether the medicine can be sold on prescription only or it is a OTC medicine; any specific direction/side effects of the medicine and immediate steps required to be taken in case of side effects and reversal medication to be administered in such cases along with the direction for storage of the medicine.
12. The learned Departmental Representative strongly relied on the order of the AO and submitted that to decide the controversy in issue the following questions are required to be adjudicated :
1. Was the assessee carrying on any activity of manufacture or production of an article or thing ?
2. Did it own any machinery or plant which was being used in the process of manufacture or production of an article or thing ?
3. Did the assessee employ 10 or more workers in a manufacturing process carried on with the aid of power or 20 or more workers in a manufacturing process carried on without the aid of power ?
These requirements are essential for claiming deduction under s. 80-I. According to the Departmental Representative the assessee was not doing any manufacturing activity which resulted into production of an article or thing so as to entitle it to deduction under s. 80-I and it was for this reason that its claim for deduction under s. 80-I for asst. yr. 1986-87 was rejected by the Departmental authorities and that decision was accepted by the assessee also. It was submitted that even as per the submission of the assessee that in the assessment year under consideration it has owned plant and machinery valuing of more than Rs. 10 lakhs and it has also engaged ten workers in the manufacturing process which has been divided into three stages by the assessee viz., 1. formulation of drugs, 2. processing of drugs and 3. packing of drugs. It was submitted by the learned Departmental Representative that the second activity i.e. processing of drugs, is being done by other sister concerns Torrent Laboratories (P) Ltd. and Asoj Soft Capsules (P) Ltd. under the supervision and control by the assessee. While the first and third activities are claimed to have carried out by the assessee-company itself. It was submitted that the list of machineries owned by the assessee-company clearly indicates that these are mainly used for packing. It was submitted that factually what the assessee was doing comprised of the following only :
1. Purchase of bulk drugs.
2. Processing the bulk drugs into either tablet form or capsule form or suspension form. In the case of capsule form, the empty capsules are purchased as such and medicine is put inside the cavity of the capsule. In the case of suspension, the bulk drug is mixed with syrup base for easy and convenient use.
3. Packing of the finished product in smaller units.
It was submitted that in fact the bulk drugs purchased did not suffer any process of transformation from one commodity to another and the raw material, being bulk drugs purchased by the assessee-company, retained their properties and identity and the final product only has perhaps a change of shape and it remained the same as the raw material which is the bulk drugs. The learned Departmental Representative referred to the case of drug Diclomax-50, which is being sold under the brand name of Diclofenic Sodium. It was submitted that both the bulk drug as well as the drug sold on the counter by a retail chemist are essentially the same. It was further submitted that the assessee-company does not own any machinery which is utilised in the so-called manufacturing process, but it only uses the machinery for making strips, tablets etc. Accordingly it was submitted that in view of the decision of the Supreme Court in the case of CIT vs. N. C. Budharaja & Co. & Anr. (1993) 204 ITR 412 (SC) the assessee cannot be said to be a manufacturer of any article or thing so as to be entitled to deduction under s. 80-I. It was submitted that the assessee’s own machinery pertains to the packing of the drugs and this activity alone cannot be called a manufacturing process. Reliance was placed on the following decisions :
(1) Vita (P) Ltd. vs. CIT (1995) 211 ITR 557 (Bom);
(2) Mahendra Kumar Agarwal vs. ITO (1987) 27 TTJ (Del) 529; and
(3) ITO vs. Bhavnagar Bone & Fertilisers Co. (P) Ltd. in ITA No. 573/Ahd/1977-78.
13. The learned representative of the assessee submitted that the word “manufacture” has been interpreted by the Supreme Court to be inclusive of process incidental or ancillary to the completion of the manufactured product. It was submitted that the assessee-company is engaged only in the production of tablet, injection, etc. and the process incidental to, ancillary to the production of tablets, injections, etc. and in making the same marketable are multiple as under :
(1) Purchase of own raw materials for the said purpose and delivery of purchased raw materials at the factory premises of the assessee.
(2) Formulation of various components of the tablets, injections, etc. This process is also entirely performed by the assessee-company at its own factory.
(3) Mixing of the raw materials and the blending is done according to the assessee’s instructions and supervision at the factory premises.
These three steps are known as formulation and are being carried out by the assessee. The next stage viz., preparation of tablets, injections, etc. was carried out by Torrent Laboratories (P) Ltd. and Asoj Soft Capsules (P) Ltd. – sister concerns of the assessee at their premises under the supervision and control of the assessee. It was explained that as per the Drugs and Cosmetics Act, 1940, it is the responsibility of the assessee to ensure that the said preparation is carried out as per the stipulations laid down in the Drugs and Cosmetics Act, 1940.
(4) The next process of testing and investigation of tablets, injections, etc. is done by the assessee.
(5) The next process of packing is carried out by the assessee at its factory and godown.
(6) The next process of labelling is also carried on by the assessee at its factory.
Accordingly, it was submitted that all the process incidental to, ancillary to and employed in making the tablets, injections, etc. to the stage of making them marketable are carried on by the assessee at its own factory with the exception of the preparation of the tablets, injections, etc. which process is done at the premises of Torrent Laboratories (P) Ltd. and Asoj Soft Capsules (P) Ltd. But even that process is done under the technical staff of the assessee in accordance with the requirements laid down under the Drugs and Cosmetics Act, 1940. Accordingly it was submitted that the assessee is entitled to deduction under s. 80-I of the Act. Reliance was placed on the following decisions :
(1) CIT vs. Anglo-French Drug Co. (Eastern) (1991) 191 ITR 92 (Bom);
(2) CIT vs. Neo Pharma (P) Ltd. (1982) 137 ITR 879 (Bom);
(3) Addl. CIT vs. A. Mukherjee & Co. (P) Ltd. (1978) 113 ITR 718 (Cal);
(4) CIT vs. Rajmohan Cashews (P) Ltd. (1990) 185 ITR 472 (Ker);
(5) Orient Longman Ltd. vs. CIT (1981) 130 ITR 477 (Del);
(6) CIT vs. Penwalt India Ltd. (1992) 196 ITR 813 (Bom); and
(7) Addl. CIT vs. Chillies Export House Ltd. (1978) 115 ITR 73 (Mad).
14. As regards the submissions made by the learned Departmental Representative with reference to Dislomax-50 which is sold under the brand name Diclofenic Sodium and which is also shown as bulk drug in the stock, it was submitted that the conclusion drawn by the Departmental Representative is misconceived because Diclomax-50 tablet consists of the following ingredients :
(a) Diclofenic Sodium USP 50.000 mg. (b) Microcrystalline Cellulose IP 80.000 mg. (c) Starch IP 27.000 mg. (d) Hydroxy Propyl Cellulose (Klucel LF) USP/NF 2.000 mg. (e) Purified Water IP -- (f) Magnesium Stearate IP 1.000 mg. (g) Sodium Starch Glycolate IP 10.000 mg
Accordingly it was submitted that though generic name remains the same yet the composition of the retail prescribed drug is entirely different from the bulk drugs which is evident from the detailed composition given above.
15. We have considered the rival submissions and have also gone through the orders passed by the AO as well as CIT(A) and the written submissions filed by the learned Departmental Representative as well as on behalf of the assessee. It is undisputed that it is the assessee-company who is holder of licence to manufacture drugs under the Drugs and Cosmetics Act, 1940. The process of manufacture of drugs/medicines by the assessee-company involve three broad stages; viz.
(1) Formulation of drugs;
(2) Processing of bulk drugs into tablets, capsules, injections etc.; and
(3) Packing of drugs/medicines in the form of tablets, capsules, injections, etc. in blister strips or syrup into smaller bottles and then packing them into cartons along with the fixing of labels, etc.
The activity of formulation of bulk drugs and its reduction into tablets, capsules, injections, etc. was carried on by the assessee upto the asst. yr. 1986-87 through the agency of its sister concerns viz. Torrent Laboratories (P) Ltd. and Asoj Soft Capsules (P) Ltd. and it was only packing into blister strips and then into cartons and labelling thereof which was carried on by the assessee. Accordingly the AO denied deduction to the assessee under s. 80-I for asst. yr. 1986-87 and the order of the AO was confirmed by the CIT(A) and it appears the assessee also accepted the findings of the Departmental authorities in this regard. However, for the asst. yr. 1987-88 the assessee installed machineries worth Rs. 10,80,760 between the period 2nd December, 1985, onwards to 16th June, 1986 on different dates, the accounting period of the assessee being the year ending 30th June, 1986, which indicates that partly the working of preparing tablets, etc. was also being carried out by the assessee as “Cadmack-35 station rotary tablet machine” valuing Rs. 1,40,313 was installed by the assessee in its rented premises on 25th January, 1986. It is also noticed that the assessee paid electricity expenses in respect of its factory amounting to Rs. 20,989 and has also used the spare parts of machinery valuing Rs. 30,657. The assessee has also employed requisite number of employees as prescribed under s. 80-I(2)(iv). It has also paid factory rent of Rs. 12,000 and these factors are quite apparent from the statement of accounts furnished along with the return and have not even been doubted by the Departmental authorities. Thus it is clear that the assessee has been getting its products manufactured earlier through associate concerns under its supervision and control but almost from the middle of the accounting year relevant to the assessment year under consideration the assessee also started a part of process No. 2 like making of tablets also in its own factory. Thus, it is seen that in the earlier part of the year the assessee was only carrying out the process of making formulation of bulk drugs by adding certain materials required to bind, granulate, etc. with a view to fix the time-limit for release of drugs at an appropriate time after it is consumed and the process of converting the bulk drugs after making certain additions into tablets, capsules, injections, etc. was being carried out at the premises of Torrent Laboratories (P) Ltd. and Asoj Soft Capsules (P) Ltd. under the supervision and control of the technical staff of the assessee. Thereafter the tablets, capsules and injections, etc. were being packed as per the requirements of Drugs and Cosmetics Act, 1940, at the premises of the assessee in accordance with the provisions of the Drugs and Cosmetics Act, 1940 and the requirements of various Government Institutions monitoring medical field which required mentioning of various details on the packing like Lot No. with specific batch No.; date of manufacture and expiry, maximum retail price, dosages i.e. quantity to be taken by various persons of various age groups, necessary directions for storage, details of necessary composition, etc. During the middle of the assessment year under consideration the assessee also started a part of process No. 2 viz. conversion of bulk drugs into tablets also at its rented factory. Thus it can be said that the assessee was exercising sufficient control including the quality control, etc. while getting drugs/medicines manufactured through Torrent Laboratories (P) Ltd. and Asoj Soft Capsules P. Ltd. and taking an overall view it is to be held that the assessee was engaged in the business of manufacturing drugs/medicines in question.
The Hon’ble Bombay High Court in CIT vs. Neo Pharma (P) Ltd. (supra) has held that conversion of raw materials into drugs and pharmaceuticals must be regarded as manufacture. In fact at p. 883 of the report it is mentioned that “……… Mr. Butani, the learned counsel for the CIT, did not dispute that the conversion of raw materials into drugs and pharmaceuticals did amount to manufacture”. But it was argued before the High Court that the manufacturing activity was conducted not by the assessee but by M/s Pharmed to whom the machinery and plant belonged and not by the assessee. Even on these facts the Hon’ble High Court held that although the plant and machinery employed for the purpose of manufacture belonged to Pharmed and the services of certain employees of Pharmed were also utilised in that process, the manufacturing activity was really that of the assessee and as such the assessee was an industrial company entitled to the concessional rate of tax. Similar is the view of the Bombay High Court in the case of CIT vs. Anglo-French Drug Co. (Eastern) Ltd. (supra) wherein the High Court followed its earlier decision in the case of CIT vs. Neo Pharma (P) Ltd. (supra). Reliance of the Departmental Representative on the case of CIT vs. N. C. Budharaja & Co. (supra) rather supports the case of the assessee because in the said decision at p. 415 of 204 ITR the Hon’ble Supreme Court held that “The test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity”. Applying the above test to the facts of the case we have no hesitation in holding that the medicines/drugs manufactured/produced by the assessee in the form of blister strips of capsules, tablets or injections, etc. in different packing sold by retailers are distinct commodities from the bulk drugs which is subjected to the process of formulation by adding certain adhesive chemical compounds required for binding, granulating and also determining the time-limit for the release of the drugs at an appropriate time after it is consumed, and the process involved in this conversion is the process of manufacture and as such the assessee is entitled to deduction under s. 80-I. In the result, ground No. 1 by the assessee is allowed and ground No. 1 by the Revenue is dismissed.
16. Regarding ground No. 2 relating to the disallowance of Rs. 78,822 under s. 43B in the appeal filed by the assessee we restore the issue to the file of the AO to be readjudicated in the light of the Supreme Court decision in the case of Allied Motors (P) Ltd. vs. CIT (1997) 224 ITR 677 (SC).
17. Regarding ground No. (2) in the Revenue’s appeal we are of the opinion that the CIT(A) was justified in directing the AO to allow deduction under s. 80G in view of the decision of the Supreme Court in the case of CIT vs. Ogale Glass Works Ltd. (1954) 25 ITR 529 (SC) because after encashment of the cheque the payment relates back to the date of issue of the cheque.
18. Regarding ground No. (3) in the Revenue’s appeal with regard to the action of the CIT(A) in reducing the disallowance under s. 37(2A) by Rs. 1,37,882, we have to observe that the CIT(A) has discussed this issue in paras 5.1 of the impugned order as under :
“5. The next ground of appeal is against non-deduction of Rs. 6,173 being tickets for Doctors’ Conference and Rs. 1,52,882 being 25 per cent of Rs. 6,11,528 under s. 37(A) r/w Expln. 2. It has been noted by the AO that the amount is spent on organising symposium and seminars in various hotels and clubs, includes expenses for dinner, food, hotel-booking, etc. In the absence of any break-up of the conference expenses into these constituents, a sum of Rs. 1,52,882 being 25 per cent was disallowed. The AO’s action has been disputed on legal as well as factual grounds. Furnishing the list of details, it has been claimed that at the worst, only a sum of Rs. 14,000 or so could be taken to be in the nature of entertainment expenses. The other expenses are for conference and paid to the various organisers of the conference and not to the hotels or clubs or restaurants. Even if the expenses are paid for lunch or dinner in the conference, they are admissible. Reliance in this connection has been placed on the Tribunal judgment in the case of Trichy Distilleries & Chemicals Ltd. vs. ITO (1990) 36 TTJ (Mad) 620. It has been argued by the learned counsel that once the payment is made to the organisers of the conference, the funds get mingled with other funds raised by such organisers. The appellant does not have any control over the destination of the funds contributed by it. In the circumstances, even if the conferences are spending a part of their funds on lunch or dinner, no disallowance can be made in the hands of the appellant as the expenses have been incurred exclusively for business to promote medicines.”
“5. I have carefully gone through the assessment order, the submissions made, the details of the expenses and the judgment of the Tribunal relied on by the appellant. I agree with the basic proposition that where the contribution has been made directly to the conference or the organisers, ultimately, the disposal of the funds is not within the control of the appellant and, therefore, no part of the sums contributed towards can be disallowed as entertainment expenditure. However, while going through the details, I find some of the payments like the sum of Rs. 2,580 on 2nd May, 1986, and sum of Rs. 3,060 on 7th May, 1986 have not been paid to conference or symposium but to a hotel. There are other similar payments. Keeping in view the nature and extent of these amounts, I feel it will be reasonable to restrict the disallowance to Rs. 15,000 on account of such payments to hotels, clubs, etc. In the result, the appellant gets a relief of Rs. 1,37,882.”
After hearing the parties to the dispute we are of the opinion that the order of the CIT(A) requires no interference. Accordingly we will uphold the same and adjudicate this issue also against the Revenue and in favour of the assessee.
19. Ground No. 3 in assessee’s appeal and ground No. (4) in the Revenue’s appeal relates to charging of interest under s. 215. No specific arguments were advanced by both the parties in relation to this ground. Accordingly both these grounds are dismissed. The AO is, however, directed to charge interest under s. 215, if any, after giving appeal effect to this order.
20. In the result, the assessee’s appeal is partly allowed whereas the Revenue’s appeal is dismissed.