Meaning of Manufacture & Production for availing lowest tax rate u/s 115BAB
Section 2(29BA) of the Income Tax Act defines “Manufacture” as a change in a non-living physical object or article or thing,-
(a) Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;
The word “Production” is not defined in the Income Tax Act yet but judiciary have held that it has a wider connotation in comparison ‘Manufacture’. It includes any activity which brings a commercially new product into existence i.e., any product which is commercially a new product and marketable as such is production.
It has been provided that “Manufacture or Production” shall not include
(i) development of computer software in any form or in any media;
(ii) Mining;
(iii) Conversion of marble blocks or similar items into slabs;
(iv)Bottling of gas into cylinder;
(v) Printing of books or production of cinematograph film; or
(vi) Any other business as may be notified by the Central Government in this behalf; and
Outsourced activity of “Manufacturing or production”
Every provision needs to be read with the intention of the legislature behind its enactment. Press release issued 20-09-2019 clarifying the intent of section 115BAB reads as under:
“In order to attract fresh investment in manufacturing and thereby provide boost to Make In India initiative of the Government, another new provision has been inserted in the Income Tax Act with effect from Financial Year 2019-20 which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay Income tax at the rate of 15% This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March 2023. The effective tax rate for these companies shall be 17.01% inclusive of surcharge and cess. Also such companies shall not be required to pay minimum Alternate Tax”.
Judiciary in the past in few cases have held that if outside agency works directly under the supervision and control of the assessee, then it can be reckoned as “manufacturing or production” by the assessee.
Few important judicial pronouncements were there in the context of section 10AA or Chapter VIA (section 80IA, 80IB etc) provisions. Let me enumerate few such ruling.
- CIT v. Prabhudas Kishordas Tobacco Products P.Ltd (2006) 282 ITR 568 (Guj):
Gujarat High Court held that the tendu leaves and tobacco which are used as input do not retain their independent identity after the bidis are rolled after undergoing several process.
Commercially, the final product is known in the trade as a distinct commodity and has a separate market.
Furthermore, merely because an assessee gets the work done through contract workers, in other words, enters into a contract with the workers and pays them per piece the relief could not be denied. The real test is whether the outside agency works directly under the supervision and control of the assessee, it being immaterial whether the processing is done by the workers employed by the assessee at a place outside the premises of the assessee.
ITAT was justified in treating the activities carried on by the assessee as amounting to manufacture of bidies, entitling the assessee to relief under sections 80HH and 80I. - Penwalt India Ltd. 196 CTR (Bom) 813:
It was held by the Bombay high court that the assessee is getting machinery manufactured by some else under its direct supervision and control and all other activities are undertaken by the assessee, the assessee is said to be engaged manufactured of sugar and tea machinery. Therefore, assessee was held to be entitled to special deduction under section 80-I of the Act. - CIT v. Acrow India Ltd. (1991) 188 ITR 485(Bom):
Bombay HC observed that assessee was engaged the services of various company for fabrication of goods and things mentioned in the agreement under its supervision and control with the help of technical know-how supplied by it. Assessee had also supplied all the raw material to various company which acted only as labour contractors with the assessee,. It has held that the assessee was engaged in the business of manufacturing and processing of goods. - CIT, Bombay City-II v Neo Pharma Private Limited (1982) 137 ITR 879 (Bom):
Here the assessee company was incorporated mainly with the object of engaging itself in the business of manufacturing and processing pharmaceuticals, entered into an agreement with another company, “Pharmed”. Another company, Pharmed, was to make available to the assessee their premises, plant, machinery and the services of the staff such as chemist and laborer to carry on the manufacturing activities for and on behalf of the assessee.
Exercising the power under section 263 of the Act, CIT ordered that an assessee could be said to be the manufacture or processing of goods only when it carried out all the operations involved in converting the raw- material into finished goods with the aid of machinery owned by itself and with labour in its direct supervision; and that since the machinery and services rendered for the conversion of raw-material into finished goods in that case where provided by pharmed, the assessee could not to be manufacturer.
The assessee’s appeal was allowed by the ITAT. HC affirmed the decision of the Tribunal holding that plant and machinery employed for the purpose of manufacture belonged to pharmed and the services of certain employees of pharmed was also utilized in that process, the manufacturing activity was really that of the assessee and that therefore, it could not be said that it was not the assessee but pharmed which manufactured the drugs and pharmaceuticals. - Talwar Khuller (P.) Ltd. (1999) 235 ITR 70 (All)
It was held that the assessee company was manufacturing various articles of brassware from artisans under its supervision and control. It was also observed that the assessee gave the pattern and design of the articles to be manufactured by the artisans and advance money to them for purchasing the raw material. It was also noted that the artisans made articles in different models & articles in raw form were examined by the assessee. After their directions, artisans modify and polish the same. Under these facts, it was held that company was a new company manufacturing and processing of article.
In short, judiciary has held that the real test is whether the outside agency works directly under the supervision and control of the assessee company or not. If they work directly under the supervision and control of the assessee company then it can be treated as “manufacture or production”. However, my personal view different on this.
Every provision needs to be read with the intention of the legislature behind its enactment. Press release issued 20-09-2019 clarifying the intent of section 115BAB reads as under:
“In order to attract fresh investment in manufacturing and thereby provide boost to Make In India initiative of the Government, another new provision has been inserted in the Income Tax Act with effect from Financial Year 2019-20 which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay Income tax at the rate of 15% This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March 2023. The effective tax rate for these companies shall be 17.01% inclusive of surcharge and cess. Also such companies shall not be required to pay minimum Alternate Tax”.
Though judiciary in the past in few cases have held that if outside agency works directly under the supervision and control of the assessee, then it can be reckoned as “manufacturing or production” by the assessee, it need reconsideration for the purpose of section 115BAB. Going through the intent for which section 115BAB is introduced in the legislature, in my view, concessional tax rate would be available if the company set up its own manufacturing / production facilities.
