Supply chain management companies: Advance income tax at importation

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Some of the supply chain management company's claim that their business falls within the framework of 'Industrial Undertaking' and hence they are entitled for a lower rate of advance tax at the import stage.

The tax department has a divergent view, and they are of the opinion that supply chain management companies are not Industrial Undertaking.1 This decision of the Federal Board of Revenue has given rise to a question whether or not re-packaging as part of a supply chain management company would fall under the definition of 'industrial undertaking' as defined vide sub-section 29(c) of Section 2 of the Income Tax Ordinance, 2001.2 In the light of this controversy, this paper examines this legal issue of grant of tax incentives.In the first instance, let us examine the existing legal framework under Income Tax Law.3 The definition of industrial undertaking given in the tax law is quite a slippery one, in its clause (i) it refers to production unit operated by electrical or any other form of energy and having 10 or more persons engaged whereas clause (ii) refers to a unit mechanically operated employing ten or more person, but this clause has been linked with the processes of 'manufacture' ship-building, energy and power supply, oil drilling and extraction of minerals.In addition, the Federal Board of Revenue (hereinafter referred as FBR) has also been given powers to notify any business as an industrial undertaking.

4 Nevertheless, the confronting problem has given rise to emergence of following issues: i) What are the connotations of the word 'manufacture';ii) What is an industrial undertaking;iii) Whether or not supply chain of goods can be termed as an industrial taking; andiv) Remedies for the aggrieved person.As regards the first issues, the judicial pronouncements determining what constitutes the term manufacture depict divergent views and directions.

It is evident from the survey of the existing literature that the courts were confronted with the issue of charging of tax, and for the chargeability of tax courts had to determined the scope of the word 'manufacture'.

The taxability came under question in respect of different statutes.

These legal opinions portray a divergent scenario in respect of character of the word, 'manufacture' in order to charge tax or to extend tax incentives.

These competing views are different in nature, and are opposed to each other, because for charging a tax, each statute has defined the term, 'manufacture' in a peculiar manner.

It may also be kept in mind that the economic philosophy for charging tax is different than extending incentives and that is apparent from the legal provisions.

The existing literature reveals that the term under review has been used in laws relating to Federal Excises and Sales Tax.

Both excises and consumption taxes are Sales Taxes and in these types of taxes, it is the supply which becomes taxable, whereas grant of incentives is dependent on restrictive meanings of the term used for dispersal of said incentives.Let us now begin to define the anatomy of word, 'manufacture'.

The word "manufacture" is a compound word of Latin origin derived from "manu" by hand and "facere", to do, to make, form; but the natural plain meaning is not confined to that which is done by hand alone, but by machinery as well.5 The word has been termed as "the process of making a thing by art".

Whatever is made by human labour, whether directly or through the instrumentality of machinery, has also been termed as manufacture.6 Therefore the natural and plain meaning of "manufacture" is to make or fabricate or to bring into existence an article or a product either by physical labour or by power.7 And exactly, the definition of 'manufacture' given in sub-section 29(c) of Section 2 of Income Tax Ordinance, 2001 corresponds to the view explained above.According to judicial pronouncement the word "manufacture" is: (i) The processes, work and repair which may not generally be covered by the word 'manufacture' inertly.8(ii) The process, principal or ancillary which a finished product had to undergo before its completion.9(iii) "Bringing into existence of a new substance known to the market and does not mean merely to produce some change in a substance however minor in consequence, the change may be.10(iv) Bringing or recovering of iron plates after breaking ships does not amount to manufacture.11 This view has been set aside by the Supreme Court.12(v) A change, but every change in the raw material is not manufacture.

There must be such a transformation that a new and different article must emerge having a distinctive name, character or use.13(vi) Mixing, blending, coloring and flavouring of tea which amounts to "manufacture" because not only that required a sophisticated process but an art and skill which was not very common, as such tax payer is an industrial undertaking engaged in the manufacture of finished tea out of imported raw leaves and dust after subjecting same to a manufacturing process.14(vii) "...to engage in the production or manufacture of goods whether or not the raw material of which are produced or manufactured or owned by him and shall include a person who by any process or operation assembles, mixes, cuts, dilutes, bottles, packages, repackages or prepares goods by any other manner etc will be considered to have manufactured or produced identifiable goods which can either be consumed independently or can be incorporated in the finished product of any item..."15(viii) "...making of goods of almost every type, the only exception that is provided is an employee manufacturer.

For the application of the proviso to subsection (11) of section 2 of the Sales Tax Act 1951, two condition must co-exist: firstly, that the material should be supplied by another, and, secondly, that the manufactured goods are not for the use of but for the sale by, that other, ie, by the supplier of the materials..."16(ix) "...Cutting of forest trees into pieces of timber for sale is a process of manufacture..." 17(x) "...deemed to include a ginner of cotton to be a manufacturer or a producer and to have possessed that status in order to be liable for payment of sales tax..."18(xi) ".Cutting and drying of arecanuts and garbling of pepper, was a manufacturing process, under definition..."19(xii) "...Change, or a series of changes, which takes the commodity to a point where commercially it can no longer be regarded as the original commodity but instead be recognised as a new and distinct article that a manufacture can be said to take place..."20(xiii) "...Cutting and polishing of uncut raw diamonds does not amount to manufacture of article or thing and so deduction u/s.80I is not available..."21(xiv) "...Dyeing and printing of cloth is regarded as a textile processing house.

But these textile units are regarded as engaged in manufacturing the on basis of existing precedents..."22(xv) "...Blending of tea leaves amounts to manufacture and the petitioner was engaged in the production of an article which is a commercially new and distinct commodity after processing comes into existence..."23(xvi) "...Processing of seeds is a process of manufacture or production for the purpose of section 80-J of the Indian Income Tax Act, 1961..."24(xvii) "...Process by which tea is packed after manufacture and comes into the category of package, tea will be deemed to have been considered by the legislature, to a production or manufacture which makes the article excisable to duty..."25There are some other views on the subject, for example:A.

"...Bank is engaged in providing financial services and in our view, it would be too far fetched to accept that the bank is engaged in running or setting up an industrial undertaking..."26B.

"...There is no definition of the term 'industrial undertaking' in the Income Tax Act, 1961, but, it is defined under the Wealth Tax Act, 1957.

Explanation to section 5(1)(xxxi) of the Wealth Tax Act which defined the term as an undertaking engaged in the business of generation or distribution or electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.

There is nothing in the language of section 80HH or section 80J which would suggest that a different meaning is contemplated for the term 'industrial undertaking', when it relates to a unit engaged in manufacture or production.

On the other hand the conditions to be fulfilled by the industrial undertaking as provided under sub-section (2) would indicate that a unit which is manufacturing or producing articles can be treated as an industrial undertaking without any further qualification..."27C.

"...The basic question in issue is, whether the process of pasting and cutting of the paper board is carried out with the object to complete the produce or in other words whether the case of the above process results into a finished product marketable under a separate trade name.

If paper board remains paper board in spite of the fact that two thin paper boards are pasted with each other to make it thicker and it is cut to bring it to the required size, in our view, the same remains paper board and not a different item warranting the levy of excise duty a second time..."28D.

".The shrimps caught from the deep sea, were converted into frozen fish and fish product.

The operations consisted of cleaning, peeling, packing and freezing the shrimps without which the same were not marketable and as a result of such processing a new commercial product came into existence and, therefore, the processed fish and fish products were the result of production or manufacture and the taxpayer was an industrial undertaking..."29E.

"...The input and out-put in the case of mixing and blending of tea was same, therefore, it does not amount to manufacture or production of an article..."30F.

"...The gas cylinders were not sold as such but they were sold only after certain tests or processes as specified by the customers.

It is also clear that only after the analysis and tests; it could be ascertained as to whom the gas was to be supplied and at what rate.

The various tests resulted in the categorisation of the gas in to different grades namely, Helium label 4, high purity Helium and Helium of technical grade.

Helium label 4 was sold at higher rate as it matched superior standards.

In this case, Helium gas had different marketability, which it did not possess earlier and hence the gas sold by the appellant was a distinct commercial commodity in the trade, rendering it liable to duty under Chapter Note 10 of Chapter 28 of the Act.

If the product/commodity, after some process is undertaken or treatment is given, assumes a distinct marketability, different than its original marketability, then it can be said that such process undertaken or treatment given to confer such distinct marketability would amount to manufacture in terms of Chapter note 10 to Chapter 28 of the Act..."31G.

".It is also relevant to note that these four or three tablets were initially packed, after their manufacture into this combination packing.

It is not as if they were first packed into separate packing and thereafter drawn from this packing and put into the packing presently under consideration.

If the Commissioner (Appeals)'s logic is to be adopted, it would mean that every manufacturer of pharmaceutical products or cosmetic products has to pay duty twice on any product first when it comes off the production line, and the second when it is packed.

This, surely, is not the intention of the lawmakers.

The intention which appears to us is to ensure that the value addition, which is sometimes substantiated, which results as a consequence of packing the product into retail pack is levied to duty.

Each of the processes referred to in these notes, conversion of powder into tablets; labelling or relabeling of containers intended for a consumer; repacking from bulk pack to retail pack obviously results in or facilitates sale of the product to the retail consumer.

The adoption of any other treatment referred to in each of these notes would be such treatment that would render the product marketable to a consumer.

It is therefore not possible for us to uphold the finding of the Commissioner (Appeals) that a new product has emerged which was not entitled to benefit of either of the notification..."32H.

".Deduction u/s.80HH is not allowable in case of units engaged in construction of a dam, a bridge, a building, a road, a canal and so on.

It has been laid down in this decision that although the word 'production' has a wider connotation than the word manufacture as expression associated with articles which can be regarded as only movable.

The Supreme Court observed that it is equally difficult to say that the process of constructing a dam is a process of manufacture or process of production.

A dam is constructed: it is not manufactured or produced.

In this decision, the Supreme Court did not express its opinion whether the work of construction of a dam can be characterised as an industrial undertaking as no arguments had been addressed on this aspect.

So the court proceeded on the assumption that it does.

Although, the provision of S.

32A in regard to investment allowance was some-what different, the Supreme Court gave similar finding on this provision also in respect of units engaged in construction activity..."33I.

"...Preparation of food by hotel or flight kitchen cannot be called manufacturing activity.

In so holding, the Court observed that in absence of definition of term 'manufacture', it is to be interpreted in the context of the object and language used in our sections.

It further observed that the incentive provisions are not applicable where only processing activity is carried out.

Further, production activity must be by industrial undertaking and not by the taxpayer in a trading activity.

The Court also observed that foodstuff prepared by cooking or any process from raw materials cannot be regarded as a distinct commodity and it cannot be held that such foodstuff is manufactured or produced.

By comparing the provisions of S.

32A in respect of investment allowance and S.

33 in respect of development rebate, the Court further observed that the legislature has differentiated between an industrial under-taking and hotel activity..."34The word 'manufacture' has also been defined in various dictionaries in the following terms:a) "...it means the process of making products by hand, machinery or other automated means.

Meaning of word 'manufacture', which is defined as making of goods or wares by manual labour or by machinery, especially on a large-scale, has expanded as workmanship and art have advanced, so that now nearly all artificial products of human industry, nearly all such material as have acquired changed conditions or new and specific combination, whether from the direct action of the human hand, from chemical processes devised and directed by human skill, or by the employment of machinery, are commonly designated as 'manufactured'..."35b) "...The word 'manufacture' has been generally understood to denote, either a thing made which is useful for its own sake and vendible as such, as medicine, a stove, a telescope, and may others; or to mean an engine or instrument, or some part of an engine or instrument, to be employed either in the making of some previously known article, or in some other useful purpose, as a stocking frame or a steam engine for raising water from mines; or it may perhaps extend also to a new process to be carried on by known implements or elements, acting upon known substances, and ultimately producing some other known substance but producing it in a cheaper or more expeditious manner, or of a better or more useful kind.

No mere philosophical or abstract principle can answer to the word 'manufactures'.

Something of a corporeal and substantial nature, something that can be made by man from the matters subjected to his art and skill, or at the least some new mode of employing practically his art and skill, is required to satisfy the word..."36c) "...Manufacture, noun: assemblage, assembly, composition, construction, creation, development, execution, fabrica, fabrication, fashioning, forging, formation, forming, making, origination, preparation, production, synthesis..."37d) "...Refashioning, an article made by hand, a product of mere mechanical labour, an article produced merely to supply the demand of the market.

Production involving mere mechanical labour, as contrasted with 'hat requiring intellect or imagination.

Bring (material) into a form suitable for use.

Make or fabricate from material..."38The above definitions of the word, "Manufacture" and the court's interpretations provide quite exhaustive coverage of the term, but the problem is that each judicial pronouncement is based on a specific definition given by the statute under interpretation and generally the assumptions are that emergence of a new product distinct from its raw material gives rise to the process of manufacture.The question arises what is an 'Industrial Undertaking'.

The definition given in Section 2 (29(c) of the Income Tax Ordinance 2001, suggest that an Industrial undertaking is more than a manufacturing unit and it includes an undertaking which is so declared by the government.

It appears that a unit engaged in industrial production or a business house engaged to produce new and distinct product and which employees people may be considered an industrial taking, but in its scope, the modern business consisting of supply chain has not been included.The judicial pronouncements have not defined modern concept of business such as supply chain companies for inclusion into the ambit of manufacture, on the other hand, the issue here revolves around the concept of an industrial undertaking which generally refers to mines and queries, manufacturing industries, shipbuilding, electricity generation, building works, rail and canal transport etc, and the intention of law maker in this particular case is quite evident that it does not include in its scope the supply chain management companies as their business involves provision of product and service packaging as required by end customers.39As is evident from our survey of existing judicial literature, chain management companies have not been termed as industrial undertakings.

The court's interpretations are a mix of situations confronting the issues of taxability that is revenue generation, and incentive granting which is revenue expenditure.

Tax expenditures are those special provisions of the income tax system which are designed to encourage certain activities and which result in government foregoing tax revenues.

Incentives are part of revenue expenditure and they require equity and equality consideration because these steps affect the process of distributive justice.

It may be kept in mind that tax expenditures are also criticised for their inequitable distributive impact.

In addition, because different clientele groups benefit from the two types of expenditures, the recipients of direct outlays - usually lower income groups - bear the brunt of governmental fiscal restraint.

Hence, a general definition of manufacture will not extend any benefit to supply chain management companies, since these businesses do not fall in the ambit of an 'Industrial Undertaking'.As regards remedy to settle the issue, the aggrieved may approach the government, that is, the Ministry of Industries by making out a case for tax incentive and requesting the government to declare their business as an industrial undertaking.

Chain management companies, in my view, do have a good case for getting themselves declared as an Industrial Undertaking.1.

FBR's letter No 4(28) Rev Bud/2011 dated 15.8.2011.

It has been ruled by the FBR that an importer of tea in bulk and in its sales after minor process of blending without substantially changing the original condition of imported goods, does not qualify within the definition of industrial undertaking in terms of sub-section 29 (C) of Income Tax Ordinance 2001.2.

"29(C) -Industrial undertaking means - (a) an undertaking which is set up in Pakistan and which employs, (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or(ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy: and which is engaged in,(i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; or(ii) ship-building; or(iii) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or (iv) the working of any mine, oil-well or any other source of mineral deposits; and(b) any other industrial undertaking which the Board may by notification in the official gazette, specify."3.

Clause (9A) of the Para-II of the 2nd Schedule to the Income Tax Ordinance, 2001 provides:"(9A) Tax under section 148 shall be collected at the rate of 3% on the Import value of raw material imported by an industrial undertaking for its own use."4.

See n.2: One who seeks benefit will have to approach the government for getting an approval in this regard.5.

(110, I.C.

788).6.

See Abbot's Law Dictionary.7.

AIR 1965 Guj.

215.8.

Assistant Collector of Customs v Orient Straw Board PTCL 1992 CL.

38.9.

PLD 1969 Lah.

228.10.

AIR 1963 S.C.

791.11.

PTCL 1989 CL.

638.12.

Federation of Pakistan v Noorani Trading Corporation PTCL 1992 CL.

363.13.

AIR 1968 S.C.

922 + 1972 Tax L.R.

2309.14.

Assessee v.

I.A.C: 2000 PTD (Trib.) 874: This view was based on the decision of Calcutta High Court in the case of Brook Bond India: (1984) Tax LR 2595 (Cal.).

But Calcutta High Court has changed its view in the case of Appeejay ante n.

27.15.

Shiekhoo Sugar Mills Ltd Vs.

Government of Pakistan and others.

(PTCL 2001 CL.

331) (S.C.

Pak): 2001 SCMR 1376.16.

P L D I960 Dacca 292: This view now stands changed by the decision of the Supreme Court of Pakistan in the case of Shekhoo Sugar Mills Ltd supra.17.

PLD 1959 Lah.

955.18.

PLD 1959 Lah.

915.19.

PLD 1959 Lah 955: "Manufacturing process".

Meaning of Indian factories Act, 1948.

2-K(iii).

"Manufacturing process" means any process for -(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing, or otherwise treating or adapting any article or substance with a view to its use sale, transport, delivery or disposal ; or(ii) pumping oil, water or sewage ; or(iii) generating, transforming or transmitting power; or(iv) composing types for printing, printing by letter-press, lithography, photogravure or other similar process or book-binding;(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels.20.

Dy.

CST v.

Pio Food Packers, (1980) 46 STC 63: The end result of one or more processes through which the original commodity is made to pass.

The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage.

With each process suffered, the original commodity experiences a change.21.

Gem India Manufacturing Private Limited v.

CIT, (2001) 249 ITR 307(SC).22.

Empire Industries Ltd v.

Union of India, 162 ITR 846 and Ujagar Prints & others v.

Union of India, (179 ITR 317) (SC).23.

Badrinarayan v.

State of Madhya Pradesh (1988) 70 STC 12.24.

Tarai Development Corporation v.

CIT (1979) 120 ITR 342 (All).25.

Brooke Bond India Limited v.

Union of India (1984) Tax LR 2595 (Cal.): This view now stands changed in the case of Appeejay ante n.2726.

Bank of Baroda v.

Joint CIT (2005) 2 SOT 804 Mum.27.

CIT v.

Indian Resins & Polymers (1999) 235 ITR 5 (Ker): CIT v London Star Diamond Co (I) Ltd, (213 ITR 517) (124 CTR 109).31.

M/s Air Liquide North India Pvt v Commissioner: Delhi High Court: CA No: 43/2005: decided on 30.8.2011.32.

Lupin Laboratories Ltd v.

Commissioner of Customs: 2002 (139) ELT 366.33.

CIT v.

N.

C.

Budharaja & Co & others (114 CTR 420) (204 ITR 412).34.

Indian Hotels Co Ltd & other cases (245 ITR 538) (162 CTR 310).35.

Black's Law dictionary.36.

Stroud's Judicial Dictionary.37.

Legal Theasarus by William C.

Bertin.38.

New Shorter Oxford English Dictionary, 1993 Edition.39.

Harland, C.M.

(1996) Supply Chain Management, Purchasing and Supply Management, Logistics, Vertical Integration, Materials Management and Supply Chain Dynamics.

In: Slack, N (ed.) Blackwell Encyclopedic Dictionary of Operations Management.

UK: Blackwell.

According to the Council of Supply Chain Management Professionals (CSCMP), supply chain management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management.

It also includes the crucial components of co-ordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers.

In essence, supply chain management integrates supply and demand management within and across companies.

More recently, the loosely coupled, self-organising network of businesses that cooperate to provide product and service offerings has been called the Extended Enterprise.

Courtesy: Business Recorder

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