By TIOL News Service

CHENNAI, JULY 25, 2018: THE issue is - Whether process of filling mushroom powders into the empty gelatine capsules amounts to manufacture. And the verdict is YES.

Facts of the case

The assessee-company, engaged in the business of manufacturing Ayurvedic drugs, filed returns for the relevant AYs and assessment was completed. In determining the income, the AO disallowed the claim for deduction made by the assessee u/s 80IB, on the ground that the assessee was not engaged in any manufacturing activity and instead, it was only doing trading of mushroom powders in capsules. On assessee's appeal, the CIT(A) upheld the decision. On further appeal by the assessee, the Tribunal also upheld the decision of the AO and CIT(A) and dismissed the appeals.

The High Court held that,

++ it is not in dispute that the manufacturing unit is located in an Industrial area. Though all these licences were obtained by the assessee, none of the three authorities including the Tribunal, have made an attempt to examine from that angle as to whether the process done by the assessee would tantamount to manufacture, especially when the word "manufacture" was not defined under the Act at that relevant time. As pointed out earlier, the order passed by the Tribunal rejecting the claim under Section 80IB is based on its personal opinion and not borne out by any records. Recently, the First Bench of this Court, in the case of M/s.Chettinad Builders P.Ltd., Vs. The Deputy Commissioner of Income Tax, has considered a similar term, the word "manufacture". The assessee therein was engaged in the preparation of ready mix concrete and it was pointed out that preparation of ready mix concrete resulted in transformation of stone, chips, sand, cement, fly ash and other articles into a new and distinct object having a different name, character and use, and once the ready mix concrete is prepared, the ingredients used lose its original character and never can be restored to its original character. So far as the product dealt by the assessee is concerned, mushroom powder was put in the gelatine capsules and the process of manufacture has been described by the assessee, during his submission made before the Assessing Officer. This submission has been outrightly rejected by the Assessing Officer as well as CIT(A) and ITAT, largely based upon the statement given by the employee of the assessee that too behind the back of the assessee. The various licences granted to the assessee clearly states that the products consists of more than one material in a particular proportion. The process has been explained by the assessee and it undoubtedly involves a sterile process and it would be incorrect to state that the entire process is reversible, as stated by the Tribunal. The Tribunal in its order has stated that if the product is taken out of a gelatin capsule, it will retain its original character. For this finding, there is no material before the Tribunal;

++ unless there is a manufacturing unit, the question of payment of excise duty does not arise. For the subsequent years, the assessee's claim has been accepted and the Revenue's appeals have been dismissed. Therefore, the assessee's earlier assessment order cannot be sustained. We support this finding with some more additional reasons. In the assessment year, the Assessing Officer has culled out the admitted facts. On perusal of the order, it is seen that the Assessing Officer has accepted that the assessee has obtained the Central Excise Registration Certificate dated 23.02.2004 for manufacturing of excisable goods. Further, it is admitted that a copy of the return dated 07.12.2005 for excisable goods and availment of CENVAT credit for the month of November 2005, to the Superintendent of Central Excise, Range II-B was produced. Further the Assessing Officer states that the return shows that it classified the goods under CETSH No.3004.90.11, on which excise duty was paid along with necessary description of receipts and consumption of principle inputs and finished products were cleared and waste and scrap arising during process were not cleared, but destroyed;

++ even as per statement given by the employee of the assessee to the officials of the Department when they inspected the unit, the process involved in the production activity was described. The same has been quoted in paragraph No.6 of the order passed by the Tribunal, which would clearly show that the bulk powders are filled in the power hopper and the empty gelatine capsules are filled in capsules hopper of semi-automatic filling machine, and the filling machine would be operated by machine operators and it will be set in such a manner to achieve the weight required for filing each capsules, that the prescribed weight for RG capsule is 270 mg and GL capasule is 450 mg. During production process, it should be ensured that the temperature and humidity are within the limits and the weight of the filled capsules are within the limit. Simultaneously, quality control would carry out necessary tests like disintegration test, microbiological test, moisture content test, stability test, weight test parameters and specification test etc, of the filled capsules, for which, separate records are maintained in the production department. Thereafter, the capsules are polished and quality check was done in Polishing Section, which also maintains a separate job record. Thereafter sorting and inspection is done, followed by a Quality Check Inspector and personnel, who would reject and remove the defective capsules, after which, the product, the sorted out capsules are sent to Counting and Bottling Section, then to Labelling Section, Batch Printing Section, Shrink Pack Section and Packing Section. Further it is stated that all such manufacturing process of each section in production shall be done in the specified temperature and humidity as well as quality control and testing and manufactures as per schedule T of Drugs and Cosmetics Rules, 1945. The statement given by the employee of the assessee, would in fact substantiate the stand taken by the assessee with regard to the manufacturing process adopted by them. Therefore, for such reasons also, we hold that no prejudice was caused to the assessee on account of not making available his former employee for cross-examination;

++ the Tribunal came to the conclusion that the activity does not bring any new article or product and the mushroom powder even after capsulation remains the same and if it is removed from the capsule, the mushroom powder emerges out of it. It is not known as to how the Tribunal rendered such a finding as there was no material available before the Tribunal that there is no change in the composition of the drug on capsulation. As already pointed out, the Tribunal gave a finding wholly unsubstantiated by any material that the bulk form of the drug can be nakedly consume without putting them in an enclosure such as gelatine capsule. It is relevant to note that the agreement between the assessee and the International parent company dated 26.4.2004 states that the Indian Company (assessee) has set up a factory at Pondicherry with an intent to manufacture similar products and has requested the foreign company to make available the know-how to the Indian Company and after negotiations, the foreign company has agreed to make available the know how on the terms and conditions set out in the agreement. The agreement specifically states that the foreign company shall supply to the Indian company all materials such as know how of materials, such as process sheets, calculation sheets, standards and other information as is necessary to understand the utilisation of the said know how and to implement the same in the manufacture of the said product.

(See 2018-TIOL-1446-HC-MAD-IT)