Standardization & pasteurization of milk not entitled for 80-I/80HHA deduction

AIT News Network

PUNE. Special Bench of ITAT vide a significant ruling AIT-2008-312-ITAT has ruled that the process of standardization and pasteurization of milk amounts to processing but does not amount to manufacture/ production for the purpose of claiming deduction under sections 80-I and 80HHA of the Act.

The Special Bench was constituted by the Hon'ble President for disposal of the impugned appeals before us. The question referred to the Special Bench is as under: -

"Whether on the facts of the case and in law, the process of pasteurization of milk amounts to process of manufacture/production for the purpose of claiming deduction under sections 80-I and 80 HHA?"

Special Bench observed as under:

                In the case of CIT vs. Sesa Goa Ltd,the Hon'ble Supreme Court held that extraction and processing of iron ore amounts to manufacture or production of an article or thing. The Hon'ble Supreme Court held: "the word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods". Here the question is whether by this process a new goods has been come into existence. If this is the test laid down, then definitely the pasteurization of milk does not amounts to manufacture or production for the purpose of deduction under sections 80-I .and 80HHA of the Act. The stand of the revenue is that the goods, even after standardization and pasteurization, remain the same. To avail the benefit, the goods should be different from the raw material used by the assessee for making the marketable final product. In the market the raw milk and the pasteurized' milk are treated one and the same commodity, though pasteurized milk could be treated as something gone through "make up" to make it more presentable in the market. The process of cleaning, standardization and pasteurization makes the final product mere more acceptable in the market but not a different commodity.

                The term "process" is a much wider term. It means a course or method of operation in the production of something which process may be mechanical, manual or chemical. While coming to the above conclusion, the Tribunal further found that the product now marketed is entirely different from the raw material even though the name "milk" still retained. After the process undertaken by the assessee, the milk is fit for consumption. But the same was true even on the raw milk. All processing does not make the assessee eligible for claiming the benefit of sections 80-I and 80 HHA. The wording in both the sections are similar and the criteria laid down is "manufacture" or "production" of an article or thing. Even the assessee is not having a case that he is manufacturing an article or a thing. Assessee says he produces an article or a thing - or is doing "processing" that amounting to production of an article or thing.

                Sections 80-I and 80HHA uses the words "engaged in manufacture or produce....". The activity of pasteurization of milk involves a number of processing. Assessee pasteurizes and standardizes the milk. According to the assessee, the pasteurized milk has· an independent ISI code. It is a different product than the raw milk, which amounts to manufacture of new product. In the case of Adarsh Dugdhalaya Pvt. Ltd. (supra)" Tribunal held that the assessee produced a commercial commodity, Tribunal held that end product of the assessee is an article essentially different from the raw material used and the assessee is entitled to the benefit of 'investment allowance, The word "manufacture" has various shades of meaning and ordinarily involves application of some labour, resulting in a final product, which is commercially different from the article to which the labour was applied. An article is said to be commercially different if it has "distinct character, name and use after the process to which it is subjected". Not so in the case of milk. There is no commercially different use. Use is the same. Only quality improved or changed. All the process does not amount to manufacture / production. The Hon'ble Supreme Court in the case of Idandas vs, Anant Ramchandra Phadke, has laid down three tests as to what constitutes manufacture. 'They are - (i) a certain commodity should have been produced; (ii) the process of production must involve either labour or machinery; and (iii) the end 'product should have a distinct character, name and used. As per Black's Law Dictionary "manufacture" is as follows: -

''The process of operation or making goods or any material produced by hand, by machinery or by other agency......... The production of articles for use from'raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine".

                According to the Webster's Dictionary, "manufacture" means: " (a) to make or fashion by hand or machinery, (b) to work into useful form, (c) to produce In a mechanical way, (d) to produce goods by hand or by industrial art or processes, etc.". The Hon'ble Supreme Court held" approving the Dictionary meaning, "manufacture" means "work up materials into forms

                The question before us is the milk that assessee acquired from the market, which was usable even at that stage, after the process of pasteurization and standardization, does it becomes a different commodity, though the name remains the same "milk" and the use has been changed. Is impurities removed, bacteria free standardized milk, by adding / removing fat contents, now marketed by the assessee is it different from the raw milk, though the use is same? Assessee do processing of the milk. But all the processing does not amount to production.

                All the steps, in short, are purification, boiling and standardization. It does not go beyond the stages of "processing" and by this processing it has become little more "clean" and "more fit" for consumption. But the milk in its raw stage was also fit for consumption. Assessee do processing. But all processing does not amount to production of an article or thing. If the assessee markets curd, ghee or other products after processing, that amounts to "manufacture or production of an article or thing". Pasteurization and standardization does not amount to production.

(Click here for full text of Ruling AIT-2008-312-ITAT)

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