BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI ==========

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1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI ========== 28 th Day of October, 2009 P R E S E N T Mr. Justice P.V. Reddi (Chairman) A.A.R. NO. 824 OF 2009 Name & address of : Mrs. Delna Rustum Boyce, the applicant (through Mr.Areez P. Khambatta, her father and General Power of Attorney holder) Behind Ellisbride, Ahmedabad Concerned : Director of Income-tax Commissioner (International Taxation) Ahmedabad Present for the : Mr. S.N.L. Agarwala, Advocate Applicant Mr. Jayesh Shah, C.A Present for the : None Department R U L I N G (By Hon ble Chairman) 1. The applicant is a non-resident Indian, generally residing in USA. This application has been filed by her father and General Power of Attorney holder residing in Ahmedabad. The applicant is being assessed to income tax in India as NRI by the Income-tax authorities in Ahmedabad. The applicant proposes to set up and promote a unit near Ahmedabad in the name of Pioneer Fruit International to produce fruit based drink mixes/concentrates derived from fruit juice through the various processes which are given in the Flow Chart appended to the application. The process involves various steps such as peeling, extraction of fruit oil, fruit pulping,

2 screening, emulsifying, homogenizing, spray drying, addition of preservatives, colour and sweetness and packaging. The learned authorized representative of the applicant stated at the time of hearing that three products will be produced in the proposed plant : (1) fruit juice either obtained from one or more than variety of fruits (normally packed in pouches for ready consumption) (2) Concentrates of juice which in the ordinary parlance are known as fruit syrups consumed by mixing water, and (3) fruit powder obtained by spray-drying of homogenized juice. It is stated that the final product will be placed in packages compatible with the preservation and marketability of the products. The applicant has furnished a copy of the project report in respect of the proposed unit. 2. The applicant has furnished a note giving the details of production with reference to the Flow Chart. The same is extracted hereunder : 1. Fruit Juice: After receiving fresh fruits, they are sorted and washed in hot water. Then they go through the process of peeling/dicing, which segregates the peel and the pulp of the fruit. The peel of the fruit goes through the process of extraction of oil from it and the pulp of the fruit goes through the fine screening mesh to extract juice from it. At this stage preservatives and dissolved vegetable gum are added to it. 2. Mixed Fruit Juice: More than one fruit is simultaneously processed in the above manner. 3. Fruit Juice Concentrate: The fruit juice or the mixed fruit juice obtained as above is subjected to the process of centrifugation which reduces its water content. Fruit oil obtained from fruit peel and vegetable oil purchased from market and preservatives are mixed to this concentrate. This mix is passed through Homogenizer which emulsifies and 2

3 stabilizes the fruit concentrate with fruit oil, vegetable oil, flavour, food acid, vitamins and preservatives. 4. Fruit Powder: The fruit concentrate obtained as above is subjected to the process of spray drying which converts it to fruit powder, which is blended with food acid, food colour, flavour, stabilizer, sweeteners and vitamins. 3. The applicant seeks advance ruling under Section 245Q of the Income Tax Act, 1961 on the following question : 1. Whether the profit of the proposed undertaking of the assessee derived from its business of squeezing of juice from fruits and vegetables; extracting oil, emulsifying, homogenizing and / or spray drying it; adding preservatives and other additives to it and packaging it in compatible packs, is profit from the business of processing, preservation and packing of fruits or vegetables eligible for deduction under sub-section (11A) of section 80IB of the Income Tax Act, Section 80IB of the Income Tax Act, 1961 hereafter referred to as Act, in so far as it is relevant, reads thus: 80-IB. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections [(3) to [(11), (11A) and (11B)]] (such business being hereinafter referred to as the eligible business, there shall, in accordance with and subject to the provisions of this section be allowed, in computing the total income of the 3

4 assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely : (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India : 4

5 Provided that the condition in this clause shall, in relation to a small-scale industrial undertaking or an industrial undertaking referred to in subsection (4) shall apply as if the words not being any article or thing specified in the list in the Eleventh Schedule had been omitted. Explanation 1 : xx xx xx xx Explanation 2: xx xx xx xx [(11A) The amount of deduction in a case of an undertaking deriving profit from the business of processing, preservation and packaging of fruits or vegetables or from the integrated business of handling, storage and transportation of foodgrains, shall be hundred per cent of the profits and gains derived from such undertaking for five assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from the operation of such business in a manner that the total period of deduction does not exceed ten consecutive assessment years and subject to fulfillment of the condition that it begins to operate such business on or after the 1 st day of April, 2001.] 5. Sub-section (11A) was amended by the Finance Act of The Finance Minister while introducing the Bill in the Parliament 5

6 stated that the object of the provision was to promote agroprocessing industries. The Memorandum explaining the provisions in the Finance Bill, 2004 states that the agro-based industry in the country is an important source of employment and therefore the benefit of deduction as specified in the provision (sub-section 11A) has been granted to the undertakings engaged in the business of processing, preservation and packaging of fruits and vegetables. The conditions subject to which the deduction can be claimed are specified in sub-section (2) of Section 80IB. 6. The question is whether the business of the proposed undertaking is one of processing, preservation and packaging of fruits. In my view, the answer should be plainly in the affirmative. The integrated activities of processing, preservation and packaging of fruits or vegetables are embraced within the scope of sub-section (11A) of Section 80IB. The only aspect which needs some elaboration is whether the ingredient of processing is satisfied. Is it a business of processing (including preservation) of fruits? Whether the series of steps taken to produce fruit based drink mixes or concentrates or fruit powder amount to processing of fruits or do they cross the boundaries of processing as commonly understood? In other words, whether the finished / packaged product is the result of something that cannot be appropriately characterized as processing? Or, is it something more than processing? 6

7 7. The import of the expression processing can be better understood by referring to the decisions of the Supreme Court interpreting the said expression occurring in the taxing enactments. In the case of Delhi Cold Storage P.Ltd. vs. CIT *, the Supreme Court was concerned with the question whether the assessee company running a cold storage could be held to be an industrial company for the purposes of Section 2(7)(c) of the Finance Act, An industrial company has been defined to mean a company which is mainly engaged in the manufacture or processing of goods and other activities specified therein. The question was whether the cold storage of the appellant can be said to be engaged in the processing of goods? The Supreme Court answered the question in the negative for the reason that the stored articles cannot be said to have undergone a process mainly because there was reduction of moisture content as a result of long storage. At the same time, the Supreme Court observed that processing is a term of wide amplitude and has various aspects and meanings. It was pointed out that in common parlance processing is understood as an action which brings forth some change or alteration of the goods or material which is subjected to the act of processing. Another case which deserve reference is the case of Chowgule & Co P..Ltd. vs. Union of India **. The three-judge Bench of Supreme Court held that the blending of iron-ore in the * 1991, 191 ITR p.656 ** 1981, 47 STC pg.124 7

8 course of loading through the mechanical ore handling plant amounted to processing of ore within the meaning of Section 8(3)(b) of the Central Sales Tax Act and the mechanical ore handling plant fell within the description of machinery, plant, equipment used in the processing of ore for sale. The following pertinent observations were made while explaining the connotation of the word processing : The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Sri Om Prakas Gupta v. Commissioner of Commercial Taxes. What is necessary in order to characterize an operation as processing is that the commodity must, as a result of the operation, experience some change. Here, in the present case, diverse quantities of ore possessing different chemical and physical compositions are blended together to produce ore of the requisite chemical and physical compositions demanded by the foreign purchaser and obviously as a result of this blending, the quantities of ore mixed together in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical compositions, because what is produced by such blending is ore of a different chemical and physical composition. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to processing of ore within the meaning of Section 8(3)(b) and Rule 13. 8

9 Earlier, it was observed that the blending of different qualities of ore did not amount to manufacture. 8. In the case of Commissioner of Wealth Tax vs. Mohini Rai #, the Gujarat High Court observed that in order to characterize an operation as processing, it is necessary that the commodity must, as a result of the operation, experience some change. 9. The principle that runs through the above decisions is that notwithstanding the extent of processing and the changes that occur to the original commodity by reason of series of operations, it could still amount to processing of that original commodity. 10. Processing and preservation are two distinct expressions used side by side. Processing may be for the limited purpose of preservation of fruits without bringing about much change in the form of the fruit. But, processing in the context in which it occurs ought not to be confined only to the operations that would ensure the preservation of fruits as they are or in the form of slices. In other words, the expression should not be confined to minimal processing that would not change the identity of the fruit. If processing and preservation is to be confined only to fruits as such and not to the derivatives from the fruits, the benefit intended to be given to agroprocessing industries will operate in a very limited sphere, thereby defeating the very object of the provision. The extraction of juice and # 1999, 240 ITR pg.636 9

10 oil from the fruits or further converting the homogenized juice into fruit powder and adding the substances meant for preservation would legitimately fall within the sweep of the expression processing. The fact that the fruit assumes a different form or that a series of operations are involved in preparing the mixed juices and concentrates which could be preserved for long does not take it out of bounds of processing. Processing in its wider sense would still be aptly applicable. 11. I am therefore of the view that the applicant is entitled to the benefit of deduction contemplated in sub-section (11A) of Section 80- IB and the question has to be answered in the affirmative subject however to the clarification that the conditions laid down in subsection (2) of Section 80-IB should be satisfied. I may add that the Commissioner in his comments has very rightly taken the stand that the profit of the proposed business seems to be eligible for deduction provided the assessee satisfies the other conditions Accordingly, the ruling is given on this the 28 th day of October, 10

11 Sd/- (P.V. Reddi) Chairman F.No. AAR/824/2009 dated /10/2009 This copy is certified to be a true copy of the Ruling and is sent to: 1. The applicant 2. The Director of Income-tax (International Taxation), Ahmedabad. (Batsala Jha Yadav) Addl. Commissioner of Income-tax, AAR 11