Ungarbled and garbled pepper not two different commercial products for claiming deduction u/s 10B

Ungarbled and garbled pepper not two different commercial products. The process of garbling to make pepper edible does not give rise to a different distinct commodity so as to be entitled for deduction u/s 10B 

ABCAUS Case Law Citation:
ABCAUS 2190 (2018) (02) HC

The Issue:
The issue was as to the eligibility of the assessee to claim deduction under Section 10B of the Income Tax Act, 1961 (the Act).

Brief Facts of the Case:
The appellant assessee was engaged in the procurement and export of pepper. The assessee procured un-garbled pepper, which was garbled by a process making it fit for human consumption and was exported. The assessee had been claiming allowance under Section 80HHC for its export turnover as it also had sale in the domestic market.

In the relevant assessment year the assessee was a hundred per cent export-oriented unit, which is one of the conditions for claiming the benefit under Section 10B.

However, the assessee’s claim for allowance under Section 10B was rejected, on two counts. One that the process involving conversion into garbled pepper was not a “manufacture” or “production” and it was only a processing which did not qualify for allowance under Section 10B. The second ground on which the disallowance was made was the reconstitution of the partnership firm disentitling them from the benefit/s 10B.

On an appeal by the assessee, the first appellate authority, on both the grounds, found in favour of the assessee. However, the Tribunal found that processing of un-garbled pepper into garbled would not be a “manufacture” or “production”.

Observations made by the High Court:
The Hon’ble High Court observed that the issue whether un-garbled and garbled pepper are two different commercial commodities under the State Sales Tax Act was considered by the a Division Bench which categorically held that ungarbled pepper and garbled pepper cannot be two different commercial commodities.

The assessee contended that the decision of the Division Bench was in the context of the Sales Tax Act which may not have application under the Income Tax Act. We are unable to countenance such a contention, especially since the finding that un-garbled and garbled pepper are not two distinct commodities was not based on any specific provision in the statute.

It was noticed that under Section 80HHC the benefit is to any industrial undertaking carrying on ‘manufacture’ or ‘processing’. The benefit under Section 10B is to any undertaking carrying on ‘manufacture’ or ‘production’. Hence the statute itself recognizes the distinction between “manufacture”, “production” and “processing”. A manufacture or production necessarily has to lead to a different commodity while a processing may not result in a new commodity being brought out.

The Hon’ble High Court relied on the decision of the Hon’ble Supreme Court where the issue was whether when a pineapple is washed, inedible portion is removed and sliced and added with sugar as a preservative and canned under temperature and put in boiling water for sterilisation, gives rise to a different commodity. It was observed that the learned Judges held that the pineapple slices must be held to possess the same identity as the original pineapple fruit. Their Lordships clarified that at some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been ‘manufactured’.

Decision/ Conclusion/Held:
Following the precedent the Hon’ble High Court answered the questions of law framed against the assessee and in favour of the Revenue.