A judicial decision has to state the correct legal position. It is not supposed to waver because revenue would not accrue to the Government. This is one of the fundamental principles because if it is not so, then the decision would be necessarily in favour of Revenue. Why I am bringing up this obviously fundamental issue is because very recently a judgement has come in respect of manufacture and production where the decision of the Supreme Court in the case of Arihant Tiles1 has set us thinking about the whole issue once again.
In this Income Tax case the issue was whether the activity of the assessee engaged in the business of manufacture/production of polished tiles would get the deduction under Section 80IA of the Income Tax Act 1961. The Department held that it is not manufacture or production. The Supreme Court went into the definition of manufacture as given in the Section 2(29BA) of the Act and also took into consideration the expression in the Section 80IA(2)(iii) which is “manufactures or produces” and came to the conclusion that the activity undertaken by the assessee is manufacture or production. The Court observed that there are various stages through which the marble blocks have to go through before polishing. Ultimately all the processes including polishing converts them into polished slabs and tiles. The Court also made a further observation that not only there is manufacture but also an activity which is beyond manufacture and which brings the new products into existence. Thus, the Supreme Court in this case has made a fundamental point that "production is an activity which is something beyond manufacture and which brings a new product into existence".
I may point out here that regarding the distinction between these two expressions in the context of coal (was it manufacture or production), there has been an elaborate discussion in the Supreme Court judgement (para 41) in the
Empire Industries case2. The judgement says that both result in marketable goods.
But in the case of production, one begins with existing goods not quite marketable or reachable which with human labour, are brought into marketable state, fit for human consumption. However, in the case of manufacture, raw material is transformed into different product altogether, again a marketable one. Both these concepts together define the scope of Entry 84. So the present judgement in the Arihant Tiles case brings a new dimension from the above issue.
Having come to the conclusion that the activity of the assessee was one of manufacture and therefore was liable to tax deduction, the Supreme Court said that if the contention of the Department is to be accepted that the activity is not manufacture “then, it would have serious revenue consequences........ To say that the activity will not amount to manufacture or production will have disastrous consequences particularly in view of the fact that the assessees in all cases would plead that they were not liable to pay excise duty, sales tax, etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by the respondents constitutes manufacture or production and therefore would be entitled to the benefit of Section 80IA". Thus, the Supreme Court decision that the activity is manufacture is not only on the ground that (i) it is in fact manufacture on its own merits but (ii)also on the consideration that there would be disastrous consequences on revenue if it is otherwise.
It is this second portion of the argument of the Supreme Court for giving a decision which, in my respectful submission, is not quite in accordance with the concept that a decision of the highest court in the country can only be a decision on the fundamental merit of the case and not on the consideration whether the Revenue will be a loser. It will mean then that a decision on a central excise case on whether an activity is manufacture or not will depend on how much revenue will be lost on the income tax side.
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