Case: Commissioner Of Income Tax 1 Vs. M/S. Hindustan Petroleum Corporation Ltd

question of law that arises of consideration in all these appeals, which are filed by the Commissioner of Income Tax, Mumbai, is identical. Thein these appeals are engaged in the process of bottling Liquefied Petroleum Gas (LPG) Cylinders meant for domestic use. They are claiming benefit of Sections 80HH,IA of the Income Tax Act, 1961 (hereinafter referred to as theAdmissibility of benefit under the aforesaid provision depends upon the question as to whether bottling of LPG is an activity which amounts tofor the purposes of the aforesaid provisions of the Act.2) 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,compression of LPG vapour, external and internal cleaning, hydro pressure testing refilling, sealing, quality control etc. and hence the activity would be a ‘manufacturingIn this hue, the Tribunal also referred to the Gas Cylinders Rules, 2004 and in particular Rule 2(xxxii) thereof which defines ‘manufacture ofto 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 tofor the purposes of Sections 80HH,IA of the Act as well. The High Court has concurred with the view of the ITAT. This is how the Department is before this Court and insists that the process of bottling LPG cylinder in domestic use does not amount to manufacture.3) Before discussing the aforesaid central issue which has arisen for consideration, it may be noted that Sectionof the Act provides for certain amount of deductions in respect of profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs tovessels or other powered craft to which the said section applies. Sectiongives similar benefits to those industrial undertakings or enterprises which are engaged in infrastructure development. Section 80HH, on the other hand, entitles deduction in respect of profits and gains from a newly established undertaking or a hotel business in backward areas.4) As mentioned above, all the assessees are in the business of bottling LPG cylinder and according to them they are industrial undertakings and the aforesaid process amounts to production or manufacture. Since, manufacture or production of articles is sine qua non for treating these assessees as industrial undertakings and for the applicability of the aforesaid provisions, it is essential to establish that the assessees are industrial undertakings. It is in this context the question mooted above has arisen for consideration.

Court's reasoning:
16) Keeping the aforesaid distinction in mind, let us take note of the process of LPG bottling that is undertaken by the assessees herein and about which there is no dispute. It has come on record that specific activities atplant 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. The stages of these activities are as under:(a) Bulk LPG is received in the bottling plant through road tankers/rail wagons;(b) The LPG is unloaded into spheres/bullets through LPG compressors which use variable levels of pressure for suction, unloading and vapour recovery;(c) Refilling/bottling of LPG in cylinders by compressing the same into liquid form; and(d) Capping, fixing of seals and safety valves prior to storage and loading of filled cylinders.17) Thus, after the bottling activities at theplants, LPG is stored in cylinders in liquefied form under pressure. When the cylinder valve is opened and the gas is withdrawn from the cylinder, the pressure falls and the liquid boils to return to gaseous state. This is how 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. It, therefore, becomes apparent that the LPG obtained from the refinery undergoes a complex technical process in theplants and is clearly distinguishable from the LPG bottled in cylinders and cleared from these plants for domestic use by customers. It may be relevant to point out that keeping in view the aforesaid process, the ITAT arrived at the specific findings in support of its decision, which are asThere 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 wordhas a wider connotation in comparison toand 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 commercialIn the considered opinion of this Court, the aforesaid activity would definitely fall within the expressionWe agree with the submission of the learned counsels for the assessees that the definition of ‘manufacture ofin Rule 2 (xxxii) of the Gas Cylinders Rules, 2004 also supports the case of the assessees inasmuch as gas distribution and bottling is treated as manufacturing or producing gas. We are also inclined to accept the submission of the learned counsel for the assesses that various High Courts have, from time to time, decided that bottling of gas into cylinder amounts to production and, therefore, claim of deduction under Sections 80HH,IA would be admissible. Another important aspect which was highlighted by learned counsels for the assessees was that identical issue whether bottling of gas into cylinder amounts to production for claim of deduction under the Act has been considered by various High Courts and decided in the affirmative but those decisions were not challenged by the Department. The cases specifically referred were M/s. Puttur Petro Products Pvt. Ltd. v. The Assistant Commissioner of Income Tax, Mangalore (2014) 361 ITR 290 )and Central U.P. Gas Ltd. v. Deputy Commissioner of Income Tax, Kanpur (Income Tax Appeal No. 224 of 2014 decided by High Court of Allahabad9) From the submissions made by learned counsel for the Revenue, who banked on the reasoning given by the AO, it can be gathered that the entire thrust of the AO was that the process involved in filling up the gas into cylinders does not amount toinasmuch as the said process does not bring into existence a new identifiable and distinctive goods. 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. Other reason which prevailed with the AO and which was also the argument of the learned counsel for the Revenue was that, on identical facts, the Gujarat High Court had held that refilling the LPG after purchasing from M/s. HPCL into small cylinders would not amount to manufacture. That was a case which was decided in the context of the Gujarat Sales Tax Act, 1969. The Court held that transfer of LPG from bulk containers into cylinders did not amount to process of manufacture. It is pertinent to point out that Section 2(16) of the Gujarat Sales Tax Act, 1969 definesand, therefore, the entire case was examined keeping in view the said definition ofand the issue was as to whether the process amounted to manufacture or not. As pointed out above, the question as to whether it amounts toas well did not arise for consideration. The AO committed manifest error in relying upon the said decision inasmuch as the provisions with which we are concerned in the instant case use the words ‘manufacture orand are not limited toalone.20) Judgment in the cases ofIndustries Private Limited and Tara Agencies, which were cited by the learned counsel for the Revenue, may not apply to the present case. They dealt with the provision of the Central Excise Act and, therefore, test ofpropounded on that case would not be applicable when dealing with the cases under the provisions of Sections 80HH,IA of the Act which use both the expressionsIt has already been clarified in Vadilal Chemicals Ltd. judgment. Insofar as judgment in Tara Agencies is concerned, the factual scenario therein was totally different where three different stages in relation to tea were examined by this Court. The Court held that the procedure of blending of different qualities of tea would amount to ‘processing ofand it did not amount to ‘manufacture or production ofHere, the case set up by the assessees is not that bottling of LPG isas distinguished fromWe may, at this juncture, refer to the judgment of this Court in Commissioner of Income Tax, Madras v. Vinbros and Company (2015) 14 SCC 483 )where bottling and blending of alcohol is held to be ‘manufacture orfor the purpose of Sectionof the Act.