Court Upholds Marble Processing as Manufacturing for Tax Deduction

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Case Name

Grace Exports vs Income Tax Officer (High Court of Rajasthan)

D.B. Income Tax Appeal No. 16 of 2010

Date: 29th August 2012

Key Takeaways

1. Marble processing (cutting, polishing) is considered manufacturing for tax purposes.

2. The court's decision aligns with a Supreme Court ruling in a similar case.

3. This ruling impacts the interpretation of "manufacture" in Section 10B of the Income Tax Act.

4. Companies in similar industries may now be eligible for tax deductions previously denied.

Issue

Does the step-wise activity of cutting marble blocks and converting them into polished slabs and tiles constitute "manufacture" or "production" for the purpose of claiming a deduction under Section 10B of the Income Tax Act?

Facts

Let's break this down in a conversational way:

So, we've got this company, right? They're in the business of making and exporting fancy marble slabs and tiles. For the 2004-05 tax year, they filed a return claiming an exemption under Section 10B of the Income Tax Act. They said, "Hey, we're a 100% Export Oriented Unit, and we're manufacturing these marble products."

Now, here's where it gets interesting. The company argued that they were using their own plants and machinery to process these marble blocks into slabs and tiles. And get this - they were selling all of this stuff outside of India.

But the tax officer wasn't buying it. They said, "Nah, cutting and polishing marble isn't really manufacturing." They based this on some previous court decisions, including one from the Supreme Court in the Aman Marble case.

The company appealed, and the Commissioner of Income Tax Appeals actually sided with them. But then the Income Tax Appellate Tribunal (ITAT) came along and said, "Sorry, we're going with the tax officer on this one."

Arguments

Okay, so here's how the arguments went down:

The company's side:

They were like, "Look, we're not just cutting and polishing. We're transforming these rough marble blocks into something totally different - polished slabs and tiles. That's manufacturing!"

The tax department's side:

They argued, "Hold up. You're just cutting and polishing. That's not really changing the fundamental nature of the marble. It's not manufacturing in the true sense."

Key Legal Precedents

This is where it gets really interesting. The court looked at a few important cases:

1. Income Tax Officer Vs. Arihant Tiles and Marbles P. Ltd.: (2010) 320 ITR 79 (SC) 

  This was the big one. The Supreme Court had said that the step-by-step process of cutting marble blocks and turning them into polished slabs and tiles does count as manufacturing under Section 80-IA of the Income Tax Act.

2. Lucky Minmet's case: 226 ITR 245 

  This was an earlier case that the tax officer had relied on, which suggested that marble processing wasn't manufacturing.

3. Aman Marble's case: 257 ELT 393 

  Another case the tax officer had cited, but the Supreme Court in Arihant Tiles actually distinguished this one.

Judgement

So, drum roll please... The High Court sided with the company! Here's what they said:

1. The ITAT was wrong to deny the benefit under Section 10B of the Income Tax Act.

2. The ITAT's view doesn't match up with what the Supreme Court said in the Arihant Tiles case.

3. The court dismissed the tax department's appeal for the 2004-05 assessment year regarding the Section 10B claim.

The court basically said, "Hey, if the Supreme Court says this process is manufacturing for one section of the tax law, it should count for this section too."

FAQs

1. Q: What does this mean for other marble processing companies?

  A: They might now be able to claim tax benefits under Section 10B if they're exporting their products.

2. Q: Does this apply to all types of stone processing?

  A: The judgment specifically talks about marble, but it could potentially be applied to similar processes for other stones.

3. Q: What's the difference between "manufacture" and "production" in this context?

  A: In this case, the court treated them similarly, focusing on the transformation of the raw material into a new product.

4. Q: How far back can companies claim this benefit?

  A: The judgment doesn't specify, but it suggests that if a company was granted the benefit in a base year, it shouldn't be denied for the subsequent 9 years.

5. Q: What about the Section 80HHC benefit mentioned in the case?

  A: The court didn't rule on this as the amount involved was small (Rs. 33,426) and the company's lawyer didn't pursue it.

1. This appeal under Section 260-A of the Income Tax Act, 1961 ('the Act') is directed against the judgment and order dated 13.07.2009 as passed by the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur ('the ITAT') in ITA No.357/JU/2008 for the assessment year 2004-05. This appeal has been admitted on the following substantial questions of law:-

“(1) Whether the Tribunal was justified in disallowing the benefit available to assessee under Section 10B of the Income Tax Act and if so whether the view taken by the Tribunal is in conformity with the law laid down by their lordships of the Supreme Court in Income Tax Officer Vs. Arihant Tiles reported in (2010) 320 ITR – 79 (SC)?

(2) Having granted the benefit to the assessee under Section 10B in the base year, whether it could be denied to the assessee for the subsequent 9 years?

(3) Whether the Tribunal was justified on facts found by holding that the assessee is not entitled to claim the benefit under Section 80HHC on the goods in question?”

The factual aspects so far relevant for the purpose of determination of the questions aforesaid could be noticed in brief as follows: The appellant-assessee, said to be engaged in the business of manufacture and export of finished marble slabs and tiles, in its return for the assessment year 2004-05 claimed exemption under Section 10-B of the Act in respect of its Unit-2 as being 100% Export Oriented Undertaking with the essential submissions that it had been engaged in the activity of manufacturing, producing and processing of marble slabs and tiles from its own plants and machineries and whole of the manufactured material was sold outside the country. The claim of the assessee before the Assessing Officer was that the definition as given in EXIM Policy would be applicable in respect of 'manufacturing' for the purpose of Section 10-B of the Act but the same was not accepted by the Assessing Officer with the observations that the conversion of marble blocks by sawing into slabs, tiles and polishing did not amount to manufacture of article or things while relying, inter alia, on the decision of the Hon'ble Supreme Court in Aman Marble's case: 257 ELT 393 and that of this Court in Lucky Minmet's case: 226 ITR 245. The Assessing Officer also relied on a decision of ITAT in ITA No.86-87/JU/2004 in the case of Arihant Tiles and Marble. In appeal, the Commissioner of Income-Tax (Appeals), Udaipur ['the CIT(A)'] accepted the contention as urged on behalf of the assessee for allowing the claim under Section 10-B of the Act with reference to the fact that such claim had been allowed in respect of the assessee in the appellate orders passed for the assessment years 2001-02 and 2003-04. The ITAT, however, proceeded to accept the appeal filed by the revenue with the following observations and findings:-

“8. On careful analysis of the material made available before the Tribunal in the light of the submissions made by ld. D.R., it is found that undisputedly the assessee is carrying on the activity of processing of rough marble slabs by edge-cutting them and polishing them before exporting and it is an EOU not trading in domestic market. The assessee is contending that by activity of processing marble slabs by edge-cutting and polishing them amounts to manufacture in the light of the decision of the Hon'ble Apex Court rendered in the case of Sesa Goa Ltd [supra] wherein it was held that extraction and processing of mineral ore amounts to production within the meaning of the word in section 32A(20)(b) (iii) of the I.T. Act. It was further held that excavating and processing of ore amount to production within the meaning of sec. 80I of the Act and the ld. CIT(A) while agreeing to the contentions of the assessee, gained further support from the definition of 'produce' mentioned in sub-section (1) of section 10B which included from F.Y. 1.4.2000 to 31.3.2001, the word 'manufacture' includes any process from the F.Y. 1.4.2000 to 31.3.2001 onwards this term 'manufacture' has been replaced by the word 'produce'. The said word 'produce' is not defined anywhere in the section. Therefore, taking into consideration in the normal sense of the word produce which is derived from the word 'production' is taken by the ld. CIT(A) as normal meaning of production which is involvement of manpower, skill and some degree of complexity. However, the Hon'ble Apex Court in the case of Lucky Minmat P. ltd [supra] has unambiguously held that mining of lime stones, marble blocks and cutting and sizing the same do not involve any manufacturing process. In the present case on hand, undisputedly the assessee is carrying on the activity of processing of rough marble slabs by edge cutting and polishing them before their export. So, in view of similarity of the facts in the present case on hand with that of the facts in the case of Lucky Minmat P. Ltd [supra], it is to be held that the activity of the assessee will not amount to manufacture, which word is used in sec. 10B. Therefore, under these facts and circumstances of the case, we are of the considered view that the reasoning given by the ld. CIT (A) is going contra to the dictum laid by the Hon'ble Apex Court in the case of Lucky Minmat P. ltd [supra] and relied on by the Assessing Officer. Therefore, we are of the considered view that the ld. CIT(A)'s finding on this issue is not sustainable for legal scrutiny and hence the same is hereby set aside by restoring that of the Assessing Officer by allowing the ground raised by the department.”

Another issue involved in the matter had been in relation to the claim of benefit under Section 80-HHC of the Act that had also been decided by the CIT(A) in favour of the assessee but the ITAT proceeded to rule in favour of the revenue. The amount involved on this score had been Rs.33,426/- and the learned counsel for the appellant has frankly not pressed on this ground for meagre financial implication and further for the fact that on the other part of issue, the revenue has not filed any appeal. Thus, the claim for benefit under Section 80-HHC would not require adjudication in the present matter.

So far the question of benefit under Section 10-B of the Act is concerned, the learned counsel for the appellant-assessee has submitted that the view as taken by the ITAT cannot be sustained for the authoritative pronouncement of the Hon'ble Supreme Court in the case of Income-Tax Officer Vs. Arihant Tiles and Marbles P. Ltd.: (2010) 320 ITR 79 (SC) holding, inter alia, that step-wise activity of cutting marble blocks and converting into the polished slab and tiles constitute manufacture or production in terms of Section 80-IA of the Act while distinguishing the decision in Aman Marble's case, and while observing, inter alia, held as under:-

“......What we find from the process indicated hereinabove is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of “manufacture” or “production” under section 80-IA of the Income-tax Act....”

The learned counsel for the revenue is not in a position to controvert the submissions so made on behalf of the assessee- appellant.

Having gone through the decision of the Hon'ble Supreme Court in Arihant Tiles and Marbles (supra), we are clearly of the opinion that the view as taken by the ITAT cannot be sustained. Accordingly, the answer to Question No.1 is that the Tribunal was not justified in disallowing the benefit available to the assessee under Section 10-B of the Income Tax Act; and the view as taken by the Tribunal does not stand in conformity with the law declared by the Hon'ble Surpeme Court in the case of Income Tax Officer Vs. M/s Arihant Tiles & Marbles P. Ltd. (2010) 320 ITR 79. Accordingly, the appeal as filed by the revenue before ITAT (ITA No.357/JU/2008) for the assessment year 2004-05 shall stand dismissed as regards the claim under Section 10-B of the Act. In view of what has been found hereinabove in Question No.1, there appears no necessity of much dilatation on Question No.2. Suffice is to observe that if the benefits have been granted for the above year 2004-05 under Section 10-B of the Act; and the benefit is available for a block of 10 years, it cannot, ordinarily, be withdrawn when the nature of work and benefits remain the same. So far as the benefit under Section 80-HHC is concerned, the learned counsel for the appellant has rightly not pressed on the same for the meagre financial implications and further for the fact that the revenue has not filed any appeal in this particular matter on the other part of the issue. The order of the Tribunal in this regard is therefore, not disturbed.

Accordingly, and in view of the above, this appeal of the assessee is partly allowed to the extent and in the manner indicated above.

(NARENDRA KUMAR JAIN-II), J. (DINESH MAHESHWARI), J.