The Supreme Court today held that the process of bottling of LPG cylinders meant for domestic use is an activity which amounts to ‘production’ and ‘manufacturing’ and is liable for income tax deductions. The apex court also accepted the views expressed by various high courts from time to time that bottling of gas into cylinder amounts to production and liable for claim of deduction under Sections 80HH, 80-I and 80-IA of Income Tax Act. A bench of justices A K Sikri and Ashok Bhushan dismissed a batch of appeals filed by Commissioner of Income Tax against the order of high court and the Income Tax Appellate Tribunal (ITAT), which has allowed the tax benefit to parties engaged in bottling of Liquefied Petroleum Gas (LPG) for domestic use. The ITAT order, which was also affirmed by the high courts, has held 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.
The tribunal noted that the entire process involved LPG suction, vapour distribution, de-classification, compression of LPG vapour, external and internal cleaning, hydropressure testing refilling, sealing, quality control and hence the activity will be considered as a ‘manufacturing activity’. Section 80-I of Income Tax Act provides for certain amount of deductions in respect of profits and gains derived from an industrial undertaking and section 80-IA also gives similar benefits to such enterprises engaged in infrastructure development. Section 80HH of the IT Act on the other hand, entitles deduction in respect of profits and gains from a newly established undertaking or a hotel business in backward areas. The assessing officers had disallowed the deduction claimed of bottling units 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 there was no change in the chemical composition or other properties of the gas in the activity of filling the cylinder.
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“In the considered opinion of this Court, the activity would definitely fall within the expression ‘production’. We agree with the submission of the counsels for the assessees that the definition of ‘manufacture of gas’ in 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,” the apex court said. It said, “We are also inclined to accept the submission of the 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, 80-I and 80-IA would be admissible”.
The apex court noted that after the bottling activities at the plants, LPG is stored in cylinders in liquefied form under pressure and 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 said. The court said that it is apparent that the LPG obtained from the refinery undergoes a “complex technical process” in the assessees’ plants and is clearly distinguishable from the LPG bottled in cylinders and cleared from these plants for domestic use by customers.