M/S Titanor Components Ltd. vs Cit & Anr.
2011 Latest Caselaw 655 Del

*                       THE HIGH COURT OF DELHI AT NEW DELHI

%                                                Judgment reserved on : 17.01.2011
                                                 Judgment delivered on: 04.02.2011

+                                        ITA No. 24/1999


M/S TITANOR COMPONENTS LTD.                                         ......APPELLANT

                                                 Vs


CIT & ANR.                                                          ..... RESPONDENTS

Advocates who appeared in this case:

For the Appellant : Mr.C.S. Jain and Mr. G. Tushar Rao, Advocates For the Respondent : Ms. Prem Lata Bansal, Advocate

CORAM :-

HON'BLE MR JUSTICE SANJAY KISHAN KAUL
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.      Whether the Reporters of local papers may
        be allowed to see the judgment ?                            Yes
2.      To be referred to Reporters or not ?                        Yes
3.      Whether the judgment should be reported                     Yes
        in the Digest ?

RAJIV SHAKDHER, J

1. This is an appeal preferred under Section 260A of the Income Tax Act, 1961

(hereinafter referred to as „IT Act‟) by the assessee against the judgment of the Income

Tax Appellate Tribunal (hereinafter referred to as the „Tribunal‟) dated 24.04.1999

passed in ITA No. 2079/D/98 pertaining to assessment year 1994-95.

1.1 The appellant is aggrieved by the impugned judgment inasmuch as it has resulted

in denial of deduction claimed by the assessee under the provisions of Section 80IA of

the I.T. Act. The captioned appeal against the impugned judgment was admitted on

18.08.2000. By this order, the following questions of law were framed :-

"(i). Whether coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an

electrolytic process is "manufacture" or "production" of "article" or "thing" within the meaning of section 80-IA of the Income Tax Act, 1961?

(ii). Whether the conclusion, drawn by the Income Tax Appellate Tribunal that by coating electrode or titanium anodes the appellant was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80IA(2) of the Income Tax Act, 1961, is erroneous being -

(a). Contrary to mandatory provision of section 80IA;

(b). Contrary to and inconsistent with the evidence on record?"

2. The brief facts which have led to the present appeal are as follows:

2.1 The assessee applied to the Government of India through Ministry of Industry,

Department of Industrial Development for a licence to set up a plant to manufacture

coated metal electrodes at Kundaim Industrial Area in north Goa. The assessee was

issued a licence on 16.10.1990. The assessee also applied for and was issued a

registration certificate by the Excise Department vide letter dated 26.06.1993. In the

interregnum, i.e., on 26.02.1993 the assessee had entered into an agreement (in short

„agreement) with a company by the name of M/s UHDE India Limited (hereinafter

referred to as „UHDE‟) for coating titanium substrates. This contract was evidently

executed between the assessee and UHDE with the knowledge of another company by

the name of Indian Petro Chemicals Corporation Ltd. (hereinafter referred to as „IPCL‟).

2.2 It appears that UHDE had undertaken an obligation to supply coated titanium

substrates to IPCL for the use in their chlorine-caustic soda plant. By virtue of this

agreement IPCL was to supply the titanium substrates through UHDE to the assessee free

of cost, to enable the assessee to execute the job work, which entailed coating of, the

titanium substrates, in terms of the specifications provided for in the aforementioned

agreement.

2.3 Under the said agreement the assessee was required to coat the titanium substrates

numbering 1212 at a total cost of Rs 6,42,84,480/-. The per square metre cost of coating

titanium substrates was pegged at Rs 19,500/-. Importantly, the cost agreed to did not

include excise duty which was required to be reimbursed by UHDE. Furthermore, the

assessee was also obliged to dispatch the coated titanium substrates to another company,

i.e., one Alpha Label India Ltd (hereinafter referred to as „Alpha‟) alongwith necessary

documentation, which included, the excise gate pass; so as to enable the said entity from

claiming MODVAT credit in respect of the excise duty. Evidently, Alpha was required

to undertake further fabrication work to manufacture "membrane cell elements". It is not

disputed that the assessee executed the contract arrived at between itself and UHDE.

3. With this background the assessee filed its return for the relevant assessment year,

i.e., 1994-95. The assessee‟s return was a loss return which, pegged the loss at Rs

1,28,71,873/-. During the course of assessment, the assessing officer noted that the

assessee had claimed a deduction under the provisions of Section 80IA of the I.T. Act

amounting to Rs 2,62,20,996/- against a gross total income of Rs 1,33,49,093/-.

3.1 It is pertinent to note that the assessee avers in the appeal that the claim for

deduction under Section 80IA of the IT Act was evidently reduced to a sum of Rs

1,46,24,648/- and furthermore, the overall deduction under Section 80IA of the I.T. Act

would be limited to the gross total income under Section 80A(2) of the I.T. Act.

4. The assessing officer was evidently of the view that the deduction under Section

80IA of the I.T. Act was not available to the assessee as the "process" whereby, the

titanium substrates were coated by the assessee did not constitute "manufacture" within

the meaning of the said provision. The assessee, however, on its part attempted to furnish

an explanation vide letters dated 28.02.1997 and 07.03.1997.

4.1 Briefly, the assessee attempted to explain that titanium substrates were received

by it through UHDE as free issue material which, the assessee was required to coat with

chemicals (Noble Metal Oxide), as per the specifications contained in its agreement with

the UHDE. For its efforts the assessee had received consideration, as stipulated in the

aforementioned agreement against an expenditure of Rs 1,67,80,525/- incurred by it

towards raw material consisting of Noble Metals, such as, ruthenium and iridium. In

addition the assessee claimed it had paid excise duty to the tune of Rs 1,60,45,945/-.

4.2 The sum and substance of the explanation furnished by the assessee was that a

commercially distinct product had come into existence after it was processed by the

assessee.

4.3 Before the assessing officer reliance was placed on the provisions of Section 80IA

and, in particular, sub-section 2(iii) read with sub-section 12(b) and, the explanation to

Section 33B to contend that the word "manufacture" in Section 80IA necessarily would

include processing of goods.

5. The assessing officer, however, rejected the contention of the assessee and

proceeded to hold that the processing of goods could not be equated with manufacture

and production of articles. In his view, chemical coating of titanium substrates did not

result in it being transformed into an entirely new commercial commodity. Thus, the

assessing officer concluded that processing in the instant case, did not partake the

attributes of manufacture or production of an article or thing as envisaged in Section

80IA of the I.T. Act.

6. Aggrieved by the order the assessee preferred an appeal to the Commissioner of

Income Tax (Appeal) [hereinafter referred to as „CIT(A)‟]. The CIT(A) sustained the

order of the assessing officer. In arriving at his conclusion, the CIT(A) placed reliance

on the judgment of the Bombay High Court in the case of CIT vs Sterling Foods (Goa)

213 ITR 851, even though the said decision pertained to the provisions of Section 80HH

of the I.T. Act, since it used the same expression „manufacture‟ or „production‟ of

articles.

6.1 On facts, the CIT(A) more or less replicated the view of the assessing officer by

holding that coating of titanium substrates by the assessee did not result in its conversion

into an entirely new commodity. The underlying theme of CIT(A)‟s order is that

titanium substrates and titanium anodes are one and the same thing; therefore, all that the

assessee did was to coat the said articles with noble metal oxides which, according to the

CIT(A), did not result in emergence of an entirely new commodity.

7. The assessee being aggrieved preferred an appeal to the Tribunal. The Tribunal

sustained the view of the authorities below.

7.1 The thrust of the Tribunal‟s view appears to be that the expression used by the

assessee in its agreement with UHDE to describe the articles received, i.e., titanium

substrates (which, as noticed above, were free issue material supplied for the purposes of

coating them with noble metal oxides) was a "misnomer". For this purpose, the Tribunal

relied upon the observations set out in the encyclopedia of chemical technology authored

evidently by Kirk and Othmer (volume 15 at pages 172-183).

7.2 In other words, the Tribunal was of the view that what the assessee was receiving

under its agreement with UDHE as free issue material was nothing but uncoated titanium

metal anodes which on receipt were subjected to a process of coating by the assessee. In

the opinion of the Tribunal the process of coating carried out by the assessee only

enhanced the "longevity" and the "utility" of the original article by making it resistant to

corrosion and, increasing its "conductivity" and "dimensional stability". In sum and

substance the Tribunal concluded that a distinct commercial commodity did not emerge

by virtue of the process employed by the assessee on the original article. According to

the Tribunal, what the assessee received were titanium electrodes. These were, as per the

Tribunal, nothing but titanium metal anodes; which remained unaltered in its character

even after the conclusion of the process of coating. The discussion in this regard is found

in paragraphs 22 and 24 of the impugned judgment of the Tribunal.

7.3 The Tribunal went on to support the aforementioned analysis by adverting to the

fact that the assessee‟s agreement with UHDE disclosed that the coated titanium metal

anodes had to be dispatched by it, for further fabrication, to one Alpha for the purposes of

manufacturing membrane cell element. In the Tribunal‟s wisdom, this demonstrated that

in order to convert a coated titanium metal anode into a "useful commercial commodity"

it would require further processing. Consequently, the Tribunal repelled the contention

of the assessee in regard to its claim for deduction under Section 80IA of the I.T. Act.

8. The instant appeal impugns this very reasoning of the Tribunal.

8.1 In support of the appeal, arguments on behalf of the assessee were addressed by

Mr.Jain, while in opposition Ms Bansal appeared on behalf of the department.

8.2 Mr Jain briefly reiterated the grounds taken before the authorities below and, in

particular, stressed on the opinions rendered by two experts, i.e., Dr. (Mrs.) K. Gadgil and

Mr M.K. Sarkar, professors with the Indian Institute of Technology, Delhi (in short, I.I.T.

Delhi) to demonstrate that the process undertaken by the assessee actually resulted in

production of an anode and hence, a new article emerged contrary to what had been held

by the authorities below. Mr Jain submitted that the test for ascertaining as to whether a

new article was produced was: as had been settled by courts in several decisions rendered

in the past; the coming into existence of a new marketable commodity. It was contended,

the fact that this article had been subjected to a process which resulted in manufacture,

and that the manufactured article was marketable was apparent on perusal of the material

placed on record, i.e., invoices, excise gate passes and the agreement entered into by it

with UHDE as also the opinion of the experts. In support of his submissions the learned

counsel relied upon the following : CIT vs Oracle Software India ltd. (2010) 2 SCC 677;

Vijay Ship Breaking Corpn. & Ors. vs CIT (2008) 14 DTR (SC) 74; CIT vs Tamil Nadu

Heat Treatment and Fetting Services (P.) Ltd. (1999) 238 ITR 529; CIT vs Laxmi Art

Studio (2001) 249 ITR 710; and CIT vs Emptee Poly-Yarn Private Limited (2010) 2

SCC 720.

9. As against this, Ms Bansal largely relied upon the judgment of the Tribunal and

the authorities below. In particular, Ms Bansal stressed upon the fact that what the

assessee had undertaken was job work and, in lieu thereof, the consideration received was

nothing but job work charges. The learned counsel contended that the findings of fact

returned by the Tribunal and the authorities below, clearly demonstrated that no new

commodity had came into existence as contended by the assessee. In support of this

submission she laid great stress on the observations made by the Tribunal in paragraph 25

of its judgment (which have already been noticed by us hereinabove) to the effect that the

coated titanium substrates required further fabrication and, for this purpose they had to be

dispatched under the agreement with UHDE by the assessee to one Alpha. The learned

counsel in support of her contentions relied upon the judgment in the case of Bhagat

Construction Co. Pvt. Ltd. vs CIT (1998) 232 ITR 722.

10. We have heard the learned counsel for the parties and perused the judgment and

orders of the authorities below, including the material placed before us.

10.1 On consideration of the material, in our view the following facts have emerged :

(i) the assessee had applied for a licence to set up an industry to manufacture coated

titanium metal anodes. This licence was issued to the assessee on 16.10.1990;

(ii) On 26.02.1993 the assessee had entered into an agreement with UHDE for coating

titanium substrates. It is pertinent to note at this stage (as noticed above) that while the

department all along has contended that the titanium substrates are nothing but uncoated

titanium metal anodes, the assessee on the other hand has taken the stand that titanium

substrates are nothing but supports, which after coating are transformed into anodes;

(iii) the assessee was issued a registration certificate by the Excise Department on

26.06.1993 in respect of the process of coating it undertook qua the article it received

from UDHE. We are consciously not using, at this juncture, either the expression

titanium substrate or titanium metal anode as there is contest between the parties on this

very aspect;

(iv) the assessee has in its invoices issued to UHDE sought recovery of both, the

charges towards coating of the article received as well as in respect of excise duty

leviable on it. Towards excise duty the assessee has paid a sum of Rs 1,60,45,945/-.

There is no dispute raised before us with regard to production of invoices and the relevant

gate passes before the assessing officer for scrutiny;

(v) In terms of the agreement arrived at between the assessee and UHDE the coated

articles were sent to an entity by the name of Alpha for further fabrication to manufacture

membrane cell elements;

vi). the assessee had placed before the authorities below, a flow chart with respect to

the process employed in converting the article received from UDHE into a finished

product. For the sake of convenience the same is extracted hereinbelow:

FLOW CHART OF PROCESS OF CHEMICAL ACTIVATION Process Machinery/ Equipment involved

INSPECTION OF TITAMIUM SUBSTRATE

NYLON BRUSH AND SOAP SURFACE CLEANING & SOLUTION DEGREASING

STRESS RELIEVING ELECTRIC FURNACE

PICKLING PVDF VAT WITH HEATERS

CLEANING

DE-ACIDIFICATION WASHING CABINET WITH DEMINERALISED WATER

STEAMING (DRYING) DRYING TUNNEL, COATING CHEMICAL ACTIVATION CABINET, CONVEYOR, (THERMIC ELECTROSTATIC HANGERS, ELECTROSTATIC NOBLE METAL DEPOSITION) GENERATOR, HOT AIR GENERATOR, AIR DRYER, AIR COMPRESSOR, TROLLEY ETC.

                 BAKING

                                                            FURNACE, CARRIAGE,
                                                            COOLING FANS

                 POST TREATMENT



                 QUALITY ASSURANCE TESTS                     SEP APPARATUS, XRF
                                                             ANALYSER, ETC.



                 COATED METAL ANODE
                 (FINISHED PRODUCT)

vii). the assessee had supported its contention made to the effect that, the process

undertaken by it involved a transformation of the original material into a distinctly new

marketable product, by relying upon the following material: extracts from the

encyclopedia of chemical technology authored by Kirk and Othmer (volume 15 page

172-183); the opinion of professors Dr. (Mrs) K. Gadgil and Mr Sarkar of I.I.T., Delhi,

who, in their opinion had placed reliance on relevant contents of the aforementioned

encyclopedia of chemical technology; and lastly on invoices and excise gate passes; to

which reference is already made hereinabove by us.

11. With aforesaid material on record let us examine what it briefly reveals :-

11.1 A reading of the extracts from the encyclopedia of chemical technology seems to

suggest that in a chlor-alkali industry electrolytic process is inevitably used. An

electrolytic process broadly involves de-composition of a liquid, which contains ions, by

electrolysis. Electrolysis is nothing but de-composition of the substance by application of

electric current. Therefore, what was crucial for IPCL, who happens to be manufacturer

of Chlorine-Caustic Soda that they had, for their purposes in place anodes, which allowed

passage of electricity without building up non-corrodible oxide coating on the surface.

11.2 As is therefore evident that an anode is really one of the terminals through which

electrons pass in an electrolytic process; the other terminal is commonly referred to as a

cathode. 11.3 The Tribunal upon reading the following passage came to the conclusion

that what was supplied to the assessee was nothing but an uncoated anode. For the sake

of convenience the passages are extracted hereinbelow:

"In response to the needs of the aerospace industry, an important technological breakthrough in the development of metal anodes took place in the 1950s when titanium became commercially available in large quantities. The excellent corrosion resistance of titanium in a variety of solutions and its self-oxidizing, valve-metal characteristic quickly were recognized to be of value for electrochemical systems. Titanium as an anode does not pass current satisfactorily because of the build up of noncorrodible oxide coatings on the surface, but with the addition of a noncorrodible metal coating, a useful anode can be produced. Extensive

research work culminated in the filing of patents in 1957 in the Netherlands the U.K. (5-6) in 1958, which led to a group of patents (7-9) where oxides of noble metals are used in the coating of titanium, in particular, ruthenium oxide in combination with other metals and oxides. These precious metal oxide coatings have received worldwide acceptance in the chlor-alkali industry and have resulted in considerable power savings in the production of chlorine. By optimizing the characteristics of these anodes, new cell designs and technology for the production of chlorine have been developed."

11.4 A perusal of a further extract from the very same encyclopedia of chemical

technology would show that a commercially distinct product, which is ubiquitously

described as precious metal anode or noble metal coated titanium or dimensionally stable

anodes etc., come into existence. The relevant extract from the said encyclopedia

succeeding the extract set out hereinabove reads as follows :-

"A Second group of patents (10-12) covers platinum and mixtures of platinum-iridium deposited thermally or electrolytically on the titanium substrate. Such anodes have their main application in cathodic protection and the production of sodium chlorate.

These composite anodes, with titanium as the base metal, have been described variously as precious metal anodes (PMA), noble-metal coated titanium (NMT), dimensionally stable anodes (DSA), and platinized titanium anodes (PTA)."

11.5. The fact that there is a distinct different product produced is borne out from the

following extracts under the heading "ruthenium titanium oxides".

"Scanning electron micrographs of ruthenium titanium oxide coatings show a characteristic microcracked surface (23). This cracking occurs early in the coating preparation, as solvent evaporates from the surface to form a gel of unreacted ruthenium and titanium compounds. As the coating is baked at higher temperatures, the cracks increase in size because of volume contraction of the gel. A fully baked anode coating has the appearance shown in Figure I and a surface area factor of 180-230 times the geometrical area, as measured by BET (Brunauer-Emmett-Teller) nitrogen adsorption. This large surface area contributes to the low

chlorine discharge potential of these types of coatings, providing a large number of catalytic sites for gas evolution while minimizing concentration polarization......

Chlorine-Caustic. The widest application and most rapid acceptance of metal anodes has been in the chlorine-caustic industry, where ruthenium-

titanium oxide DSA coatings are used. In the mid 1960s, chlorine producers were shifting worldwide to mercury cells to take advantage of the high current densities attainable. For this reason, and because of more favourable economics, the DSA initially was first operated commercially in mercury cells. Anode structures were designed to replace graphite anodes and conversion could be completed without modification of the cells (see Alkali and chlorine products)." (emphasis is ours)

11.6. Prof. Dr. (Mrs.) K. Gadgil and Mr Sarkar of the IIT, Delhi while relying upon the

said encyclopedia opined as follows:

"In manufacture of caustic soda-chlorine by electrolytic process, the positive terminal Anode should have the property that it should facilitate liberation of chlorine and suppress production of Oxygen from the aquous electrolyte (sodium chloride solution). This requires operations at a very low current density with high resistance to oxidation corrosion).

Pure titanium metal cannot be used because of quick coverage of surface by non-conducting Titanium dioxide which increases the resistance and voltage quickly to a level where high amount of oxygen is produced, besides reducing conducting surface area in a very short time. Bare Titanium is not a Anode. Consequently industrial chlorine cannot be produced. Best solution to this problem was found by coating the surface of Titanium with Noble metal oxides (which are conducting) in particular, Ruthenium oxide with or without other noble metals, such as Iridium.

Coated Titanium Metal Anodes are manufactured by coating of Titanium substrate with solution of mixed metal oxides, followed by drying and controlled baking, with strict process control. The formulae of coating solutions and process of their manufacture are closely guarded secrets of Technology suppliers.

It has been found that such coated metal titanium anodes have micro- cracked surfaces having internal surface area around 200 times that of

geometrical surface, with high amount of conductivity even in presence of Titanium oxides. Through these micro-cracks high rate of chlorine release is facilitated. IN ABSENCE OF THE NOBLE METAL OXIDE COATING, THE CURRENT WILL FACE ENORMOUS RESISTANCE TO PASS THROUGH THE BASE TITANIUM SURFACE DUE TO THE FORMATION OF TITANIUM OXIDE FILM AND ELECTROLYSIS DOES NOT TAKE PLACE TO PRODUCE INDUSTRIAL CHLORINE....

TITANIUM ONLY ACTS AS A SUBSTRATE (SUPPORT) FOR SUPPORTING THE REAL ANODE WHICH IS NOBLE, METAL OXIDES

In summary, it can be stated that bare titanium metal is not an Anode and therefore, cannot be used as a Metal Anode for caustic soda - chlorine manufacture by electrolytic process. Whereas, mixed metal oxide coated titanium metal Anode provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine by electrolytic process all over the world. Technology of coating composition and methods of manufacture of anodes, however, tend to get upgraded continuously through R&D efforts of Technology suppliers." (emphasis is ours)

11.7. A reading of the aforesaid opinion alongwith the extracts from the encyclopedia

quite clearly indicates that, according to the experts, titanium substrates is only used for

the purpose of supporting production of a real anode, that is, a noble metal oxide. A bare

titanium is not an anode.

11.8. It is important to bear in mind that the department did not produce any material by

way of affidavit of any chemical analyst or an expert in chemical technology to counter

the view of professor Mr. Sarkar and Dr. (Mrs.) K. Gadgil. The authorities below had

donned upon themselves the role of an expert by reading an extract in a manner which

perhaps suited their conclusion.

11.9. In our view such an approach is flawed; while sitting as an adjudicator, courts

have to base at times, their decision; on material produced before it on an issue which

requires expert input - therefore its decision not to accept material placed before it should

ordinarily also be based on a similarly persuasive evidence, unless the material placed

before it is completely unreliable. As noted above, the department did not adduce any

evidence in support of its contention, which was contrary to that raised by the assessee.

12. What lends credence to the submissions made on behalf of the assessee which is

that, coating of titanium substrates leads to emergence of a distinct product, is the fact

that the process undertaken by the assessee has been subjected to excise duty by another

statutory authority of the State. This crucial aspect of the matter we find has not been

adverted to by any of the authorities below including the Tribunal even though the

material as well as submission with regard to this aspect was squarely putforth by the

assessee.

12.1 It is trite law that only that process is recognized as constituting manufacture

which results in emergence of a distinct article on being subjected to either treatment, or

labour or even manipulation. [see UOI vs Delhi Cloth & General Mills (1963) Supp (1)

SCR 586]. The Supreme Court in the aforementioned case while, quoting from the

Permanent Edition Of Words And Phrases Vol. 26 cited with approval the following

passage:

"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 name, character or use."

12.2 But for the purposes of imposition of excise duty it is not enough that

manufacture takes place, it should result in production of an article which is marketable

though not necessarily marketed. This aspect of the matter has been dealt with by the

Supreme Court in several decisions. We do not wish to burden the judgment with all

those cases; however only to highlight the contours of this principle we intend to refer to

the following two judgments.

12.3 First being: South Bihar Sugar Mills Ltd. vs UOI & Ors. (1968) 3 SCR 21. In

South Bihar Sugar Mills (supra) case [in which Delhi Cloth Mills (Supra) was cited

with approval] the Supreme Court after analyzing the scientific evidence put forth both

by the assessee and the department came to the conclusion that, in manufacture of sugar,

kiln gas was produced by the assessee, which was not carbon die oxide as known to the

market and hence, could not be made amenable to imposition of excise duty. The

relevant observations is extracted hereinbelow:

"16. The Act charges duty on manufacture of goods. The word „manufacture‟ implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. They duty is levied on goods. As the act does not define goods, the legislature must be taken to have used that word in its ordinary, dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market. That it would be such an article which would attract the Act was brought out in Union of India Vs. Delhi Cloth & General Mills Ltd. [1963] Suppl. 1 SCR 586...."

12.4 The second being: A.P. State Electricity Board vs Collector of Central Excise

(1994) 2 SCC 428. In this case once again the Supreme Court was called upon to

adjudicate as to whether pre-stressed cement concrete poles manufactured by Andhra

Pradesh State Electricity Board (APSEB) were goods within the meaning of Section 3 of

the Central Excise Act Sale Act, 1994. The Supreme Court after examining a number of

judgments including the judgments in the case of Delhi Cloth Mills (supra) and South

Bihar Sugar Mills (supra) came to the conclusion that what was necessary for imposition

of excise duty was for the emergence of marketable goods. It was argued on behalf of

the assessee that pre-stressed cement concrete poles manufactured by them were not

goods inasmuch as they were not marketable since they were manufactured for a captive

purchaser. The court after analyzing its own precedents opined that: whether or not the

goods were in fact marketed was of no relevance; what was essential was that goods were

marketable. Marketability being essentially a question of fact it would have to be

decided as an issue of fact in each case. Even if goods were available only from one

source or from a specified market it made no difference so long as they were available to

the purchaser. Marketability was not dependent upon whether or not a number of

purchasers available for the goods in issue; a single purchaser would suffice. Relevant

observations in this regard are contained in paragraph 10 of the judgment which are

extracted hereinbelow for the sake of convenience:

"10. It would be evident from the facts and ratio of the above decisions that the goods in each case were found to be not marketable. Whether it is refined oil (non-deodorised) concerned in Delhi Cloth and General Mills or kiln gas in South Bihar Sugar Mills or aluminium cans with rough uneven surface in Union Carbide or PVC films in Bhor Industries or hydrolysate in Ambalal Sarabhai the finding in each case on the basis of the material before the Court was that the articles in question were not marketable and were not known to the market as such. The 'marketability' is thus essentially a question of fact to be decided on the facts of each case. There can be no generalization. The fact that the goods are not in fact marketed is of no relevance. So long as the goods are marketable, they are goods for the purposes of Section 3. IT is also not necessary that the goods in question should be generally available in the market. Even if the goods are available from only one source or from a specified market, it makes no difference so long as they are available for purchasers. Now, in the appeals before us, the fact that in Kerala these poles are manufactured by independent contractors who sell them to Kerala State Electricity Board itself shows that such poles do have a market. Even if there is only one purchaser of these articles, it must still be said that there is a market for these articles. The marketability of articles does not depend upon the number of purchasers nor is the market confined to the territorial limits of this country. The appellant‟s own case before the excise authorities and the CEGAT was that these poles are manufactured by independent contractors from whom it purchased them. This plea itself - though not pressed before us - is adequate to demolish the case of the appellant." (emphasis is ours)

13. As in the Central Excise and Salt Act, 1944, in the I.T. Act there is no definition

of the word manufacture. The expression industrial undertaking, however, has been

defined inter alia in the explanation to Section 33B of the I.T. Act as any undertaking

which is mainly engaged in the manufacture or processing of goods. The Tribunal in this

case has, returned a finding to the effect that the assessee has been treated as an industrial

undertaking by the relevant authorities. However, after accepting that the assessee is an

industrial undertaking; (and there being no dispute that the only activity in which the

assessee is engaged in is: coating titanium substrates with noble metal oxides) - the

Tribunal, curiously, went on to say that what was produced was not a distinct article

ignoring the evidence on record.

13.1 This apart, the Tribunal while rejecting the contention of the assessee in

paragraph 26 of the impugned judgment observed that the assessee had not placed on

record material to show that after coating the article in issue it became a "saleable" article

and hence, a different commodity.

13.2 In our view the Tribunal lost sight of the fact that a distinct new product had come

into existence after it was processed by the assessee. The fact that it had a single

purchaser, (i.e., UHDE/IPCL) for its coated titanium substrates ought not to have come in

the way of Tribunal allowing the deduction to the assessee. As noticed above the test is

that the transformed article should be marketable. In this case there could not have been

a better evidence of marketability than the assessee‟s agreement with UHDE.

14. The Supreme Court, as a matter of fact has, in a recent judgment entitled CIT vs

Oracle Software India Limited (2010) 2 SCC 677 further refined the test as to what

constitute a manufacturing process. In this case the Court was called upon to decide as to

whether a process by which blank compact discs are transformed into loaded software

would constitute manufacture in context of Section 80I of the I.T. Act. The Court

employed the test of fitness. In other words, to come to the conclusion whether the

process employed constitutes manufacture one would have to ascertain the efficacy of the

process in rendering the commodity or an article fit for use. The relevant observations of

the court in this regard are given in paragraph 16 to 18 of the judgment. This judgment

of the Supreme Court was followed in CIT vs Emptee Poly-Yarn Private Limited (2010)

2 SCC 720.

14.1 In our view the Tribunal had to employ the test of fitness in ascertaining whether

the process employed by the assessee rendered the free issue material supplied to it

(whether referred to as titanium substrates or a titanium metal anode), fit for use in the

industry.

14.2 The Tribunal‟s conclusion; that the coated titanium substrates did not result in

production of a distinct new article, based on provisions of the agreement arrived at by

the assessee with the UHDE which, required it to dispatch the processed titanium

substrates to Alpha for further fabrication to manufacture membrane cell element is, in

our view, flawed. The reason for this is: the Tribunal had to address the issue as to

whether the process employed by the assessee resulted in manufacture of a distinct new

article. If it did, it mattered little that the said product could be further worked upon to

manufacture membrane cell element. This line of inquiry and the resultant conclusion,

without relevant material to support it: was, according to us, misdirected. In our opinion

the Tribunal employed the wrong test. Once the Tribunal found as a fact that the process

undertaken by the assessee resulted in production of a "useful commercial commodity"

the enquiry had to end there, and the assessee‟s claim allowed.

15. The judgment cited by Ms Bansal, i.e., Bhagat Construction (supra) has no

applicability. In the said case the assessee before the court impugned the order of the

Tribunal before it whereby, its claim of investment allowance in respect of equipment

used for quarrying and stabilizing electricity was denied. The court sustained the

contention of the department on the ground that the assessee was not an industrial

undertaking. The reason for coming to this conclusion was that it had been found as a

matter of fact that the assessee‟s main business was civil engineering works and not to

manufacture any intermediary products. In the course of carrying out civil engineering

works it had quarried certain material which were mainly stones and the said material had

been used for the said purpose. The court was of the view that, since in the course of its

main activity, which was, as indicated above, civil work certain by-product had been

produced, which was consumed, it would not enable the assessee to claim investment

allowance on the ground that it was engaged in carrying out an industrial activity. The

court held that the assessee was not a manufacturer of any article or thing but, as a matter

of fact was a consumer of by-product, produced, and therefore, the machinery in issue

was not amenable to investment allowance. In our view, the case is completely

distinguishable on facts and hence, not applicable.

16. For the reasons given above, both questions of law are answered in favour of the

assessee and against the department. Consequently, the impugned judgment is set aside.

However, in the circumstances parties shall bear their own cost.

RAJIV SHAKDHER, J

SANJAY KISHAN KAUL,J FEBRUARY 4, 2011 kk