LPG Bottling activity amounts to production under Income Tax sections 80HH, 80-I and 80-IA-SC

LPG Bottling activity amounts to production under sections 80HH, 80-I and 80-IA-Supreme Court. The word production is wider than the word manufacture.

LPG Bottling activity amounts to production

ABCAUS Case Law Citation:
ABCAUS 2014 (2017) (08) SC

The Substantial Question of Law framed for determination:
Whether bottling of LPG is an activity which amounts to ‘production’ or ‘manufacturing’ for the purposes of Sections 80HH, 80-I and 80-IA of the Income Tax Act, 1961 (‘Act’).

Important Case Laws Cited/relied upon by the parties:
State of Gujarat v. Kosan Gas Company (1992) 87 STC 236
Income Tax Officer v. Arihant Tiles and Marbles P. Ltd (2010) 320 ITR 79 (SC)
Vadilal Chemicals Ltd. v. State of A.P. & Ors (2005) 6 SCC 292

Brief Facts of the Case:
The respondents-assessees was a Navratan PSU namely HPCL. It was engaged in the process of bottling Liquefied Petroleum Gas (LPG) Cylinders meant for domestic use. They are claiming benefit of Sections 80HH, 80-I and 80-IA of the Act.

In all the  fourteen appeals filed by the Commissioner of Income Tax, the Assessing Officers (AOs) had disallowed the deduction claimed by the assessees holding that they did not engage in the production or manufacture activity because of the reason that LPG was produced and manufactured in refineries and thereafter there was no change in the chemical composition or other properties of the Gas in the activity of filling the cylinder. This view was affirmed by Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal (ITAT), however, upset the aforesaid view of the AOs after finding that LPG produced in the refineries cannot be directly supplied to households without bottling of the LPG into the Cylinders and insofar as LPG bottling is concerned, it is a complex activity which can only be carried out by experts. In this light, it was noted that the process involved LPG suction, vapour distribution, de-classification, compression of LPG vapour, external and internal cleaning, hydro pressure testing refilling, sealing, quality control etc. and hence the activity would be a ‘manufacturing activity’.

The Tribunal also referred to the Gas Cylinders Rules, 2004 and in particular Rule 2(xxxii) thereof which defines ‘manufacture of gas’ to mean filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder. On that basis, it was concluded by the Tribunal that the activity of filling of cylinder with compressed gas amounts to ‘production’ or ‘manufacture’ for the purposes of Sections 80HH, 80-I and 80-IA of the Act as well. The High Court too concurred with the view of the ITAT.

Still not satisfied, the Revenue was in appeal before Supreme Court insisting that the process of bottling LPG cylinder in domestic use does not amount to manufacture.

Observations made by the Supreme Court:
The Hon’bleSupreme Court observed that that Sections 80HH, 80-I and 80-IA of the Act use both the expressions, namely, ‘manufacture’ as well as ‘production’ and an assessee whose process amounts to either ‘manufacture’ or ‘production’ (i.e. one of these two and not both) would become entitled to the benefits enshrined therein. It was further observed that as held by the Court in the case of Arihant Tiles and Marbles P. Ltd, the word ‘production’ is wider than the word ‘manufacture’.

In the said case, the Hon’bleSupreme Court had held that though cutting of marble blocks into marble slabs did not amount to ‘manufacture’, if there are various stages through which marble blocks are subjected to before they become polished slabs and tiles, such activity would certainly be treated as ‘production’ for the purpose of Section 80-IA of the Act.

The Hon’bleSupreme Court noted that the specific activities at assessees’ plant involve several processes which include receiving bulk LPG vapour from the oil refinery, unloading the LPG vapour, compression of the LPG vapour, loading of the LPG in liquefied form into bullets, followed by cylinder filling operations. Etc. Thus LPG is made suitable for domestic use by customers who will not be able to use LPG in its vapour form as produced in the oil refinery.

The Hon’bleSupreme Court noted that ITAT had arrived at the following specific findings in support of its decision:

(a) There is no dispute that the LPG produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety.

(b) LPG bottling is a highly technical and complex activity which requires precise functions of machines operated by technically expert personnel

(c)Bottling of LPG is an essential process for rendering the product marketable and usable for the end customer.

(d) The word ‘production’ has a wider connotation in comparison to ‘manufacture’, and any activity which brings a commercially new product into existence constitutes production. The process of bottling of LPG renders it capable of being marketed as a domestic kitchen fuel and, thereby, makes it a viable commercial product.

The Hon’bleSupreme Court opined that the aforesaid activity would definitely fall within the expression ‘production’.

The Hon’bleSupreme Court observed that the entire thrust of the AO was that the process involved in filling up the gas into cylinders does not amount to ‘manufacture’ inasmuch as the said process does not bring into existence a new identifiable and distinctive goods. The Hon’bleSupreme Court clarified that in the first instance, no distinction was drawn between manufacture and production and the matter was not looked into from the angle as to whether the aforesaid process would amount to production or not.

The Hon’bleSupreme Court also clarified that the decision of the Gujarat High Court which had held that refilling the LPG after purchasing from M/s. HPCL into small cylinders would not amount to manufacture was a case which was decided in the context of the Gujarat Sales Tax Act, 1969. The Section 2(16) of the Gujarat Sales Tax Act, 1969 defines ‘manufacture’ and, therefore, the entire case was examined keeping in view the said definition of ‘manufacture’ and the issue was as to whether the process amounted to manufacture or not? The question as to whether it amounts to ‘production’ as well did not arise for consideration.

It was held that the view of the ITAT as affirmed by the High Court was and the appeal was dismissed.

LPG Bottling activity amounts to production

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