Commissioner of Income Tax, Bombay City-II Vs Neo Pharma Private Ltd.

Kania, J.@mdashThis is a reference on a case stated under s. 256(1) of the I.T. Act, 1961 (refereed to hereinafter as "the said Act").

2. The facts found are to the effect that the assessee is a company in corporated under the Indian Companies Act, 1913. The assessee-company was incorporated on 9th March, 1950, mainly with the object of engaging itself in the business of manufacturing and processing pharmaceuticals. To achieve this object, the assessee entered into a loan-license agreement with another company called Pharmed Private Ltd. (referred to hereinafter as "Pharmed") to make available to the assessee their premises, plant, machinery and the services of the staff such as chemists and labourers to carry on manufacturing activities for and on behalf of the assessee. In respect of these services, the assessee agreed to pay to Pharmed a charge at a fixed rate, which was inclusive of Pharmed''s share of profits. It is recorded by the Income Tax Appellate Tribunal that the admitted position is that the assessee holds manufacturing licences in its own name to manufacture various drugs and medicines and that it got its products manufactured by Pharmed under the direct supervision of the assessee''s own technically qualified staff and under the assessee''s own quality control. All the raw materials were purchased by the assessee and supplied to Pharmed and so also all the packing materials were purchased by the assessee and supplied to Pharmed. The assessee paid service charges to Pharmed which, in turn, packed the goods on behalf of the assessee. Pharmed kept an account of all the raw materials supplied and the raw materials consumed in the manufacture of goods for and on behalf of the assessee. The assessee was recognized as a manufacturer by a number of governmental authorities such as Ministry of Petroleum and Chemicals, Central Excise Department and so on. In the relevant assessment years, namely, assessment years 1965-66, 1966-67, 1967-68 and 1968-69, corresponding to the respective previous years ending December 31, 1964, December 31, 1965, December 31, 1966, and December 31, 1967, the assessee claimed the benefit of a concessional rate of tax on the footing that it was an industrial company. In respect of the assessment year 1965-66, the ITO allowed to the assessee a rebate of income at 30 per cent. on a sum of Rs. 10 lakhs of its total income and at 20 per cent. on the balance under head II(b)(i) and cl (b) thereof in the second column of the Table forming part of the provision to Para. F. of Pt. I of the First Schedule to the Finance Act, 1965. Similarly, the ITO allowed a concessional rate of tax to the assessee in respect of the other assessment years under consideration and charged Income Tax at 55 per cent. and 60 per cent., respectively, under s. 1(A)(2)(i)(1) and (2) of Para. F of the later Finance Acts, which rates were applicable to what was known as an "industrial company". The Finance Act, 1966, defines an "industrial company" in s. 2(7)(d) as follows :

"''Industrial company'' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.

Explanation. - For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent. of such total income."

3. Definitions in the other relevant Finance Acts are in pari materia with this definition. The Additional Commissioner of Income Tax by his consolidated order dated December 11, 1970, in respect of the aforesaid assessment years set aside the assessments made on the assessee by the ITO as aforesaid on the ground that they were erroneous and prejudicial to the interest of the Revenue. The Addl. Commissioner took the view that a company could be said to be the manufacturer of goods or engaged in the manufacture or processing of goods only when it carried out all the operations involved in converting the raw materials into finished goods with the aid of machinery owned by itself and with labour under its direct supervision. He took the view that as the machinery and services required for the conversion of raw materials into finished products in the present case were provided by Pharmed, the assessee could not be said to be a manufacturer. The appeal filed by the assessee against the said order of the Addl. Commissioner was allowed by the Income Tax Appellate Tribunal. The Tribunal took into account the facts, which we have set out above, and which the Tribunal has again summarised in para. 10 of its statement of the case. The Tribunal further pointed out that the packing materials used for packing the goods and the labels and cartons applied to the drugs and products, which comprised the said goods, had the name of the assessee printed on them and the goods manufactured were the property of the assessee, the same having been manufactured at its cost and risk. The Tribunal further held that the business of the assessee consisted mainly in the manufacturer or processing of goods for the purposes of s. 104 of the said Act. From this decision of the Tribunal the following two questions have been referred to us for our determination :

"(1) Whether, on the facts and in the circumstances of the case, the assessee-company is a manufacturing company, entitled to rebate at higher rates under the relevant Finance Acts ?

(2) Whether, on the facts and in the circumstances of the case, the business of the assessee consisted mainly in the manufacture or processing of goods for the purpose of section 104 of the Income Tax Act, 1961 ?"

4. At the outset, we may point out that Mr. Butani, the learned counsel for the Commissioner, did not dispute that the conversion of raw materials into drugs and pharmaceuticals did amount to manufacture. It was, however, contended by him that this manufacturing activity was conducted not by the assessee but by Pharmed as the machinery and plant used in the process of manufacture belonged not to the assessee but to Pharmed. It was submitted by him that the idea of giving a concessional rate of tax was to give relief only to such companies as had invested their own funds in the purchase of plant and machinery and hence, in the present case, the assessee was not entitled to that benefit. It was submitted by him that the assessee in fact was merely a trader, and not a manufacturer at all.

5. We find it difficult to accept the submission of Mr. Butani. In the first place, as the term "industrial company" has been defined, as we have set out earlier, what we have really to see is whether the assessee falls within that definition. It would not be proper for us to enter into an examination of the motives or objects which led the Legislature to grant a concession in the rates of tax to an "industrial company". We are concerned with the interpretation of a taxing statute and what we have primarily to see is whether the assessee''s case clearly falls within the plain words used in the definition of the term "industrial company". Secondly, it appears that, in the present case, although the plant and machinery employed for the purpose of manufacture belonged to Pharmed and the services of certain employees to Pharmed were also utilised in that process, the manufacturing activity was really that of the assessee. It was the assessee which paid the hire charges for the machinery and the plant. It was the assessee which purchased the raw materials and the packing materials. The employees of Pharmed carried out the manufacture of drugs and pharmaceuticals under the direct technical supervision of the expert staff employed by the assessee and the products manufactured were of the quality prescribed by the assessee. The risk for the entire operation was that of the assessee. In view of this, we fail to see how it can be said that it was not the assessee but Pharmed which manufactured the said drugs and pharmaceuticals, the goods in question. We find that the view which we have taken finds strong support from the decision of a Division Bench of the Calcutta High Court in Addl. Commissioner of Income Tax Vs. A. Mukherjee and Co. (P.) Ltd., . The question there was whether the assessee-company which carried on the business of publishing books, could be said to be a manufacturer. As aforesaid, it was a publisher of books. The assessee''s job was to get the manuscript for publication, hit upon a suitable format for the book, get it printed as per its requirements under its supervision, get the book bound after suitable changes and then put out the publication for sale. In all these activities the assessee had to play an active role by co-ordinating its activities in a business-like manner. All these activities dovetailed into one another and the stage from the acquisition of the manuscript right up to the publication was one integrated activity which tantamounted to a manufacturing or processing activity. It was held that the aforesaid findings of the Tribunal conclusively showed that the assessee was engaged in the activity of manufacturing and also of processing books which were goods. In that case, the facts found further showed that the assessee did not own a printing press. It was observed that in order that a publisher of books should be a manufacturer of books, it was wholly unnecessary for him to be a book binder himself. A publisher may get the books printed by any printer but the printer is not a manufacturer but a mere contractor. This decision had been followed by another Division Bench of the Calcutta High Court in Griffon Laboratories (P.) Ltd. Vs. Commissioner of Income Tax, , where it has been held that a manufacturer may hire a plant or machinery and employ hired labour and manufacture the goods. But to earn the benefit of the concessional rate of tax as an industrial company, the company must mainly engage itself in the manufacture or processing of goods as specified in s. 2(7) of the Finance Act, 1966, either by itself or by some one under its supervisory control or direction. The decision of the Calcutta High Court in Addl. Commissioner of Income Tax Vs. A. Mukherjee and Co. (P.) Ltd., , had been followed by the Delhi High Court in Orient Longman Ltd. Vs. Commissioner of Income Tax, Delhi-II, .

6. Mr. Butani the learned counsel for the Commissioner, however, places reliance on the decision of a Division Bench of the Gujarat High Court in Commissioner of Income Tax, Gujarat Vs. Ajay Printery Private Ltd., . We find that the reliance is somewhat misplaced. All that the observations at pp. 813 and 814 of the aforesaid report, on which he placed reliance, show, is that as the term "manufacture" or "processing of goods" has not been defined under the said Act, it has to be understood in its ordinary meaning or as understood in ardency parlance. There can be no doubt about this principle. This, however, is of no relevance in the present case because it is an admitted position, and it is indeed beyond dispute, that the conversion of raw materials into drugs and pharmaceuticals must be regards as "manufacture".

7. Mr. Butani next placed reliance on the decision of a Division Bench of the Madras High Court in Additional Commissioner of Income Tax, Madras-1 Vs. Chillies Export House Ltd., . In that case the assessee, an exporter of chillies, purchased the chillies, sorted them, graded them as per Agmark specifications, clipped and stemmed them, and subjected them to fumigation under expert technical hands in order to prevent deteriorations and with a view to give better polish and appearance, and, during that process, they were treated with methyl bromide. The assessee got the fumigation done by a third party. The assessee claimed that it was an "industrial company" within s. 2(6)(c) of the Finance (No. 2) Act, 1971, and hence was entitled to be taxed at the concessional rate of 55 per cent. That claim of the assessee was negative by the ITO and the AAC on the ground that the treatment given by the assessee to the chillies did not amount to processing and, even if it did, as the assessee did not do it itself but got it done by another company, it could not be considered as having been engaged in processing. This decision was reversed by the Tribune but restored by the said Division Bench of the Madras High Court. Mr. Butani relies on the observations in that decision to the effect that as the activities relating to fumigation treatment were done by a third party and not by the assessee, it could not be said that the assessee was engaged in the processing of goods or manufacture and the assessee could not be held to be an "industrial company". In our view, this decision turns on its own facts and has no application to the case before us. In the first place, in that case, unlike in the present case, the activities carried on by the assessee were mainly trading activities. It is not clear as to whether the view was taken that, after the fumigation, the chillies concerned could be regarded as a new commercial commodity. In view of this, the said decision is clearly distinguishable.

8. It is not disputed by Mr. Butani, that if we were of the view that the assessee must be regarded as the manufacturer of the said drugs and pharmaceutical products, as we are, it is clear that the income of the assessee attributable to the said manufacturing activity in respect of the respective previous years, which are relevant to the aforesaid assessment years, was not less than 51 per cent. of its total income.

9. In view of the aforesaid, question No. 1 must be answered in favour of the assessee and in the affirmative. As far as question No. 2 is concerned, it is common ground that the decision on the question, in this case, must follow the decision on question No. 1. The said question is also answered in the affirmative and in favour of the assessee.

10. The Commissioner to pay to the assessee the costs of the reference.