JUDGMENT
Tirath S. Thakur, J.
1. The Income-tax Appellate Tribunal, Bangalore, has at the instance of the petitioner-assessee referred to this court the following three questions for opinion :
“(1) Whether, in the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the applicant’s ‘Iron ore sizing and washing plant’ did not constitute an industrial undertaking for the purposes of Section 80J of the Act and thereby rejecting the applicant’s claim for relief under Section 80J of the Act in respect of the said plant ?
(2) Whether, in the facts and in the circumstances of the case, the Tribunal was right in law in holding that purifying and upgrading the iron ore does not amount to manufacture or production of any article for the purpose of Section 80J of the Act and thereby rejecting the appellant’s claim for relief under Section 80J of the Act in respect of ‘Iron ore sizing and washing plant’ ?
(3) Whether, in the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant is not entitled to claim relief under Section 80J of the Act in respect of ‘Pilot plant’ being part of ‘Iron ore sizing and washing plant’ ?”
2. The assessee is a private limited company engaged in the mining and sale of iron ore. For the assessment year 1981-82, it claimed the benefit admissible to a new industrial undertaking under Section 80J of the Income-tax Act, 1961, in respect of a new plant brought into use by it called the “Iron ore sizing and washing plant”. Prior to the year under consideration, iron ore extract from the mines belonging to the assessee was screened in what was known as a “screening plant”. This plant segregated iron ore on the basis of size. With better technology and the added need for greater sophistication in mining and other operations, the petitioner appears to have installed and commissioned into use the new mechanism mentioned above. The function of this plant, is to remove impurities from the ore by hydraulic washing process and simultaneously segregating the ore on the basis of sizes.
3. Upon consideration, the Income-tax Officer, rejected the claim made by the assessee on precisely speaking two distinct grounds. In the first place, it was held that the process of washing and sizing of the ore was not tantamount to manufacture or production of a new article or commodity so as to qualify for the benefit admissible under Section 80J of the Act. Secondly, it was held that the plant in question was a part of the bigger plant called the “beneficiation plant” which had not been commissioned by the assessee and that so long as the bigger plant was not commissioned the question of granting any benefit to the petitioner qua the sizing and washing plant did not arise.
4. Aggrieved by the order passed by the Income-tax Officer, the assessee went up in appeal before the Commissioner of Income-tax (Appeals), who concurred with the view taken by the Income-tax Officer and held that the process undertaken by the iron ore sizing and washing plant did not amount to an industrial activity resulting in the manufacture or production of any article commercially different from the one which was subjected to such process for the benefit claimed by the assessee. As regards the second ground taken by the Income-tax Officer for refusal of the benefit to the assessee, the Commissioner of Income-tax (Appeals) held that the same was not very material and therefore expressed no opinion on the said aspect.
5. The assessee went up in a further appeal to the Appellate Tribunal, who upheld the view taken by the officers below and dismissed the appeal. The Tribunal reaffirmed that the use of the sizing and washing plant set up by the assessee could not be said to be tantamount to any manufacturing or production activity within the meaning of Section 80J. The Tribunal also turned down the claim made by the assessee for a similar benefit in respect of its pilot plant on grounds similar to those taken in respect of the iron ore sizing and washing plant.
6. Dissatisfied, the petitioner has secured the present reference to this court on the three questions reproduced earlier.
7. Appearing on behalf of the assessee, Mr. Sarangan, learned senior counsel, strenuously urged that the view taken by the Tribunal and the income-tax authorities was erroneous and legally unsustainable. He argued that the process of sizing and washing the ore must in the very nature of things be deemed to be a process resulting in the production of a new commodity within the meaning of Section 80J. He contended that even if the said process cannot be treated to be a manufacturing process, it must be deemed to be a process of production of a commercially saleable commodity different from the one which was earlier to the said process wholly unsaleable. The upgradation of the ore was, according to Mr. Sarangan, a material change brought about by the process to which the ore obtained from the mines was subjected and since the end result of the said process made a material difference in the marketability of the product, it must be considered to be an altogether different commodity than the one that passed through the plant set up by the petitioner. Value addition, contended the learned counsel, was an important test for determining whether a particular process to which a certain commodity or raw material has been subjected can be said to have produced a new and commercially distinct article. Judged from the angle of value addition and the marketability of the product, argued Mr. Sarangan, the process by which the impure ore obtained from the mines, gets upgraded to an ore with higher iron content with better saleability in the market, must be held to be tantamount to production of a new commodity entitling the petitioner to the benefit claimed.
8. We have given our anxious consideration to the submission made by Mr. Sarangan, but find ourselves unable to accept the same. It is common ground that an industrial undertaking will qualify for benefit under Section 80J of the Act, only in case, it is found to be engaged in any manufacturing or production activity. That is one of the conditions of eligibility prescribed for the grant of the benefit under Sub-section (4) of Section 80J, which reads thus :
“80J. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under Section 80HH or Section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in Sub-section (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) :….
(4) This section applies to any industrial undertaking which fulfils all the following conditions, namely :-
(i) it is not formed by the splitting up, or the 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 articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking.”
9. As to what will amount to manufacture or production of an article within the comprehension of the provision reproduced above, has not been defined. Courts have, therefore, given to the said expressions a meaning that is understood in common parlance. Judicial pronouncements on the subject provide a fairly broad spectrum as to what would or would not amount to manufacture or production of a commodity, with a considerable amount of diversity in the views taken. We, however, consider it unnecessary to refer to all these judgments except a few, particular reliance whereupon was placed by learned counsel for the parties.
10. In CIT v. Sri Venkateswara Hatcheries (P.) Ltd. [1988] 174 ITR 231, a Division Bench of the High Court of Andhra Pradesh held that the term “produce” was of a much wider amplitude than “manufacture”, inasmuch as the former covered both animate and inanimate objects whereas the latter was confined only to production of inanimate objects and articles by some mechanical or manual process. The court held that chicks produced on a commercial scale by efforts of both men and machines was tantamount to production thereby qualifying for the grant of benefit to an industrial undertaking under Section 80HH of the Act.
11. In CIT v. Marwell Sea Foods [1987] 166 ITR 624, the High Court of Kerala held that processed and frozen prawns could be said to have been produced or manufactured for purposes of grant of benefit to an industrial undertaking under Section 80HH of the Act. In arriving at the said conclusion the court noted that Clause (B) of Section 33 of the Act was attracted to machinery or plant that was installed for manufacture or production of articles mentioned in the Fifth Schedule, and observed that since the articles mentioned in the said schedule included processed frozen fish and fish products, the legislative intent could be gathered and attributed to be the same in respect of identical expressions appearing in the other provisions of the same statute.
12. In CIT v. Baraka Overseas Traders [1993] 201 ITR 827, a Bench of this court was considering the question as to whether marine products including raw beef, their packing for. export could constitute manufacture or production. Relying upon the judgment of the High Court of Kerala in the case mentioned earlier, this court held that the process of cleaning, removing bones and fat by chemical and scientific methods, bifurcating chunks, trimming and finally packing the meat in a fit condition for the export market was tantamount to manufacturing or production of an article or thing for the purpose of Section 80HH of the Act.
13. To the same effect are the judgments of the High Court of Madras in CIT v. Orient Marine Products Pvt. Ltd. [1995] 214 ITR 44 and the High Court of Calcutta in CIT v. Union Carbide India Ltd. [1987] 165 ITR 550.
14. In Peirce Leslie India Ltd. v. State of Karnataka [1985] 59 STC 302, this court went a step further and held that cashew and cashew kernels are commercially two different commodities meaning thereby that removal of cashew kernel from cashewnuts may amount to a process of manufacturing.
15. In Deputy CST (Law), Board of Revenue (Taxes) v. Pio Food Packers , the question that fell for consideration before the apex court was whether pineapple fruit processed into pineapple slices for purposes of being sold in sealed cans could be said to have been manufactured. Their Lordships quoted with approval the following passage from East Texas Motor Freight Lines v. Frozen Food Express (100 L Ed. 917 ; 110 ET 917) in support of the view that the manufacturing process would imply transformation of the material used into a new and different article having a distinct name and character (at page 66) :
“Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment,
labour and manipulation. But something more is necessary. . . . There must be transformation ; a new and different article must emerge, ‘having a distinctive name, character or use’.
16. And further ;
‘At some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been “manufactured”.'”
17. The court then proceeded to formulate the following test for purposes of determining whether any manufacturing process has taken place in respect of any commodity (at page 65) :
“The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity.”
18. In CST v. D.S. Bist and Sons , the Supreme Court was considering whether tea grown by an agriculturist was different from that which was eventually sold to the public after subjecting the same to different processes. The processes to which the green tea leaves plucked from the tea gardens were subjected included withering, crushing, roasting, fermentation sizing, grading, etc. Notwithstanding these processes, the Supreme Court held that there was no substantial change in the character of the leaves and that the leaves continued to be known as tea leaves till such time the same were sold in the market. The court rejected the plea raised by the Revenue that the process which the leaves underwent brought about a commercially different commodity in the following words (at page 395) :
“Unlike many agricultural products tea leaves are not marketable in the market fresh from the tea gardens. Nobody eats tea leaves. It is meant to be boiled for extracting juice out of it to make tea liquor. Tea leaves are, therefore, only fit for marketing when by a minimal process they are made fit for human consumption. Of course, the processing may stop at a particular point in order to produce inferior quality of tea and a bit more may be necessary to be done in order to make it a bit superior. But that by itself will not substantially change the character of the tea leaves, still they will be known as tea leaves and sold as such in the market. In my opinion, all the six processes enumerated above from the primary findings of fact recorded in the order of the revising authority were necessary for the purpose of saving the tea leaves from perishing, making them fit for transporting and marketing them. The process applied was minimal. Withering, crushing and roasting the tea leaves will be surely necessary for preserving them. The process of fermentation or final roasting with charcoal for obtaining suitable flavour or colour and also the process of grading them with sieves were all within the region of minimal process and, at no point of time, it crossed that limit and robbed the tea leaves, the agricultural produce, of their character of being and continuing as such substantially. In my opinion, therefore, the view expressed by the High Court is quite justified and sustainable in law.”
19. A similar question arose before a Division Bench of this court in Lipton India Ltd. v. State of Karnataka [1994] 95 STC 225. The question there was whether blending of tea could be said to be manufacture of a commercially different product from the tea leaves which were used for purposes of such blending. Relying upon the judgment of the Supreme Court, in the case referred to earlier, this court rejected the claim made by the assessee and held that the process of blending different types of teas to secure the most popular blend with better market potential did not bring about any new product different from the one used for the purposes of blending and that any such blending could not be said to be a manufacture to entitle the assessee to the benefit of tax exemption under the provisions of the Karnataka Sales Tax Act.
20. The facts of the present case are, however, nearest to those in Chowgule and Co. Pvt. Ltd. v. Union of India . That was a case where the assessee was carrying on business of mining iron ore and selling it in the export market after dressing, washing, screening and blending it. The entire activity of the assessee was divisible into seven different operations one following upon the other, namely, (1) extraction of the ore from the mine ; (2) conveying the ore to the dressing plant ;
(3) washing, screening and dressing the ore ; (4) conveying of the ore from the mine site to the riverside ; (5) transport of the ore from riverside to the harbour by means of barges ; (6) stacking of the ore at the harbour in different stock piles according to its physical and chemical consumption ; and (7) blending of the ore from different stock piles with a view to producing ore of a required specification and loading it into the ships by means of mechanised ore handling plant. Two questions arose for consideration before the Supreme Court, namely, (1) Whether the blending of ore while loading it in the ships by means of the mechanical ore handling plant constituted manufacture or processing of ore for sale within the meaning of Section 8(3)(b) of the Central Sales Tax Act read with Rule 13 of the Central Sales Tax (Registration and Turnover) Rules, 1957, and (2) Whether the process of mining, conveying the mined ore from the mining site to the river site, carrying it by barges to the harbour and then blending and loading it into the ship through the mechanical ore handling plant constituted one integrated process of mining and manufacture or processing of ore for sale, so that the goods purchased for use in every phase of this integrated operation could be said to be goods purchased for use in mining and manufacturing or processing of ore for sale falling within the scope and ambit of Section 8(3) and Rule 13 (supra).
21. Relying upon the judgment in Pio Food Packers’ case , the first question was answered by their Lordships in the negative holding that the blending of different qualities of ore possessing different chemical and physical compositions so as to produce ore of the contractual specifications could not be said to involve any manufacturing process since the ore that is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together. The following passage from the judgment clearly brings out the ratio of the decision (at page 130 of 47 STC) :
“The test that is required to be applied is : does the processing of the original commodity bring into existence a commercially different and distinct commodity ? On an application of this test, it is clear that the blending of different qualities of ore possessing differing chemical and physical composition, so as to produce ore of the contractual specifications cannot be said to involve the process of manufacture, since the ore that is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together. What is produced as a result of blending is commercially the same article, namely, ore, though with different specifications than the ore which is blended and hence it cannot be said that any process of manufacture is involved in blending of ore.”
22. The second question was, however, answered in the affirmative by the court on the ground that the quantities of ore possessing different chemical and physical composition when blended together with a view to produce ore of the requisite chemical composition demanded by the foreign purchaser would amount to processing of the ore. It was held that when the chemical and physical composition of each kind of ore which goes into blending is changed, there can be no doubt that the operation of blending would amount to processing of ore within the meaning of Section 8(3)(b) and rule 13 (supra). The court observed that what was necessary in order to characterise an operation as processing was that the commodity must as a result of any such operation, experience some change regardless of how drastic the change was. It was immaterial whether the change was brought about by use of some mechanical force or otherwise. The court accordingly held that blending of ore in the course of loading through a mechanical ore handling plant amounted to processing of ore within the meaning of Section 8(3) and Rule 13, and that the mechanical ore handling plant fell within the description of machinery, plant and equipment used in the processing of ore for sale.
23. From a review of the case law on the subject, the following principles can in our opinion be safely deduced :
(a) The terms “manufacture” or “produce” appearing in Section 80) of the Income-tax Act, not having been defined under the Act, shall have to be given their meaning as understood in the ordinary parlance ;
(b) The term “produce” is wider in its amplitude than the term “manufacture”, for while the latter can be used only in regard to inanimate objects, and articles, the former can be used even in regard to animate things and objects. For instance, the hatcheries produce chicks and the Universities produce graduates. It may be inappropriate to say that the hatcheries manufacture chicks or the Universities manufacture graduates. In other words, all that is manufactured can be said to have been produced but all that has been produced may not necessarily have been manufactured. In that view, therefore, the term “produced” would have a wider connotation than manufacture ;
(c) All “manufacturing or production” activities involve some process or the other but all processes need not necessarily amount to production or manufacturing of an article. It is only when a change or series of changes take the commodity subjected to such processes to a point where it can no longer be regarded as the original commodity but is instead recognised as a new and a distinct article, that such a process may be said to have resulted in a “manufacture”, or “production”, of a new article. In other words, where there is no difference in the identity of the original commodity and the processed article, it is not possible to say, that a commodity has been manufactured ;
(d) As to whether an article has been manufactured or produced will depend upon whether the same is commercially different from the commodity out of which the same has been produced. This would vary from case to case.
24. Applying the above test to the facts of the instant case, it is apparent that the use of the iron ore “sizing and washing plant” installed by the assessee does not result in the production or manufacture of any commodity different from the one which is fed into the plant for being washed or segregated into different sizes. The iron ore with impurities which is subjected to the washing and sizing process in the plant continues to remain commercially the same commodity as it was before the same was subjected to the said process. There is no change in the commercial nomenclature of the article nor is there any transformation or production of a new or different article. It is, therefore, difficult to accept the assessee’s plea that the mere process of washing the iron ore with a view to clear it of the impurities or the process of separating the ore into different sizes would by itself amount to production of a new commodity or article so as to entitle the plant to the benefit admissible to an industrial undertaking under Section 80J of the Act.
25. Mr. Sarangan’s submission that the process of sizing and washing carried out with the help of the plant in question brings about a commercially different commodity inasmuch as the ore which was subjected to the said process was converted from an unsaleable commodity to a saleable commodity does not impress us. The test is not whether what is produced as a result of the process carried out in the plant becomes more salable from an otherwise less saleable article. The test is whether the article produced or manufactured can be said to be commercially distinct or different from the one which has been subjected to the said process. Equally untenable appears to us to be the submission of Mr. Sarangan that since the commercial value of the iron ore which has been subjected to the process of washing is higher than that which was fed into the plant, the ore of a higher iron content must be deemed to be a commercially different commodity from that which was excavated from the mine. Simply because a process carried out on a particular article adds to its value or improves its marketability on account of processes like shining, polishing, removal of impurities, etc., this may not by itself be sufficient to hold that the products so finished are commercially different from the ones on which such a process has been carried out. Value addition therefore does not by itself constitute production or manufacture and cannot be made the sole test for determining whether an article has been produced or manufactured. The universally applicable test is as to whether what is subjected to a particular process can be said to be commercially different from the end product. It is only if the answer is in the affirmative, that it may be possible to say that the process has resulted in the production or manufacture of another article. It follows as a corollary that the very fact that a certain process has been carried out in respect of a particular commodity does not mean that the said process has resulted in the production or manufacture of a new article. As observed by their Lordships of the Supreme Court, in Chowgule and Co.’s case [1981] 47 STC 124, wherever 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. The nature and extent of the change is not material. What is important is that the commodity has as a result of the operation experienced some change. But it is only when the change or a series of changes that are experienced by the commodity takes the commodity to the point of being known commercially as a distinctly different commodity, that the process can be said to have resulted, in manufacturing or production. The fact that the iron ore is subjected to the process of sizing and washing may therefore at best be said to be a process but not a process which results in any production or manufacture.
26. The above reasoning holds good even for the pilot plant, for, Mr. Sarangan was not able to make any distinction between “the sizing and the washing plant” and the “pilot plant”. The pilot plant, it was admitted by Mr. Sarangan, was only meant to carry out some exploratory exercises with a view to finding out whether the excavation of the ore from a particular spot or a particular grade was economically viable. It did not itself result in the manufacture or production of any new article. That being so, the Pilot plant can also not be said to be used in the manufacture or production of any article so as to qualify for the benefit claimed by the assessee.
27. In the light of what we have stated above, our answers to all the three questions would be in the affirmative. We, accordingly, hold that the Income-tax Appellate Tribunal was right in law in denying the benefit of Section 80J of the Act to the petitioner in respect of the iron ore “sizing and washing plant” and the “pilot plant”. The reference is disposed of accordingly. No costs.