Meaning of “Constructional or manufacturing operations”

The meaning of constructional or manufacturing operations under section 10(5B) of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble Authority tried to explain the meaning of constructional or manufacturing operations.

Meaning of constructional or manufacturing operations defined by court

The phrase ‘constructional or manufacturing operations‘ used in section 10(5B) of the Income Tax Act came up before hon’ble AAR- New Delhi in Arthur E. Newell v. CIT [1997] 90 taxman 26/223 ITR 776 (AAR – New Delhi) and it explained.

Meaning : Section 10(5b) does not extend its exemption to all kinds of technicians or persons having specialised knowledge and experience. It further requires that such experience and knowledge must be ‘in constructional or manufacturing operations’.

Whether an article is converted into a different article depends on several criteria and one of the essential tests is whether in a commercial sense, the original article has ceased to exist and a new article has taken its place.

It is, however, not necessary that the original article or material should have lost its identity completely; all that is important is whether, what has emerged as a result of the operations is a different commercial commodity, having its own name, identity, character or end use.

This determination is essentially one of fact and has to be arrived at on a consideration of all relevant factors such as the quality and nature of the original article, the extent and magnitude of the operations carried out on, or in relation, to it, and the commercial identity, character and use of the article produced.

It will not be correct to infer that manufacturing process is restricted only to cases where the identity of the original article gets completely lost or destroyed by the processes employed. There can be a manufacturing process, so long as the resultant article has a different and separate commercial identity, notwithstanding that the original article is still identifiable and existent.

Indeed, the concept of total change and loss of identity of original material cannot be helpful in the context of all types of process.

Section 10(5B) of the Income Tax Act

10(5B). [Omitted by the Finance Act, 2002, w.e.f. 1-4-2003;]

In this article, you can get guidance from high courts on the meaning of constructional or manufacturing operations under section 10(5B) of the Income Tax Act.

Updated up to Finance Act 2021