GIRNAR INDUSTRIES Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) Assessee-appellant has an industrial unit located in the Special Economic Zone at Kakkanad, Kochi where it is engaged in blending and repacking of tea for export. For the assessment year 2004-05 the assessee claimed deduction of export profit in respect of the blended tea exported from the industrial unit under Section 10A of the Income Tax Act ('the Act'). However, the assessing authority held that "blending" does not answer the description of manufacture or processing and so much so, assessee is not entitled to deduction of export profits claimed under Section 10A of the Act. It is the specific case of the department that blending can be treated as a manufacturing activity only after the definition Clause of "manufacture" contained in Section 2(r) of the Special Economic Zones Act, 2005 is incorporated in the provisions of Section 10AA of the Income Tax Act with effect from 10-2-2006. Even though first appeal was allowed by the CIT (Appeals) holding that the subsequent amendment is clarificatory in nature, on further appeal filed by the department, the Tribunal reversed the order of the CIT (Appeals) and confirmed disallowance on the ground that blending and export of tea by the assessee qualifies for benefit only after incorporation of the definition Clause of "manufacture" from the Special Economic Zone Act in Section 10AA of the Income Tax Act. It is against this order of the Tribunal the assessee has filed the appeal. We have heard Senior Counsel Sri Firoze Bandhya Rujina appearing for the appellant-assessee and Senior Standing Counsel Sri P.K.R. Menon appearing for the respondents.

(2.) The short question that arises for consideration is whether blending and packing of tea for export in the industrial unit in the Special Economic Zone amount to manufacture or production of an article qualifying for exemption under Section 10A of the Act, that is, during the period prior to introduction of "blending" as "manufacture" with effect from 10-2-2006. There is no dispute on facts inasmuch as assessee is admittedly engaged in purchase of tea produced in various estates from various auction centres and in the industrial unit they blend the tea so procured into various grades of blended tea, repack in their name and export it to various countries. The Development Commissioner, Special Economic Zone has issued permanent registration certificate to the assessee declaring that the assessee is engaged in manufacture and export of blended tea (in bulk, in consumer packs and tea bags). The case of the department is that unless the item exported is treated as a product manufactured in the industrial unit of the assessee, the assessee is not entitled to exemption. On the other hand, the assessee's case is that every unit in the Special Economic Zone enjoys Income Tax exemption on the profit derived on the export of their products. Prior to the passing of the Special Economic Zone Act, 2005, the assessee's industry was located in the Zone previously known as the Cochin Export Processing Zone which is a Free Trade Zone covered by Section 10A of the Act. Since assessee's eligibility for exemption has to be considered under Section 10A, the relevant portion of the said Section is extracted hereunder for easy reference:

(3.) Even though there is no court decision directly on the question raised, Senior Counsel appearing for the appellant-assessee has relied on various decisions of the Supreme Court on the general principles of construction on exemption Clause and also on CBDT Circular No. 794, dated 9-8-2002 explaining the scope of Section 10A of the Income Tax Act. We do not think there is any need to refer to all the decisions cited before us because the position canvassed is one and the same i.e., adoption of a liberal construction pertaining to exemption clause. However, it is worthwhile to refer to at least one of the decisions of the Supreme Court in CIT v. Gwalior Rayon Silk Mfg. Co. Ltd., 1992 196 ITR 149 wherein the Supreme Court has stated the law as follows: