The dichotomy between manufacture and processing has long engaged the Indian judiciary, particularly in taxation and trade matters. The differentia gains importance as the two terms are used distinctly in various enactments ie. Income Tax Act, GST Act, under Exim Policy etc.

The recent decision of the Supreme Court in Noble Resources and Trading India Pvt. Ltd. v. Union of India & Ors., 2025 LiveLaw (SC) 570, adds a nuanced layer to this jurisprudence. The Court reaffirmed settled tests while ruling that crude degummed soybean oil, though derived from soybeans (an agricultural product), is not itself an agricultural product but a manufactured commodity.

This article analyses the decision and explores the evolving legal standards distinguishing manufacture from mere processing.

Tests to Determine 'Manufacture'

Drawing from a long line of precedents, the Apex Court reiterated five essential features to constitute a manufacturing process:

1. Presence of a process or series of processes
2. Transformation of the original commodity
3. Emergence of a new commodity at the end of the process
4. The new commodity must have a distinct name, character, or use
5. Recognition in trade as distinct from the original commodity

The Court noted that crude degummed soybean oil undergoes a series of processes that convert soybeans into a product that no longer retains the essential characteristics of the original raw material. Thus, the transformation qualifies as manufacture and not mere processing.

The Court elaborately dealt with the legal terminology of processing & manufacturing and taking clue from the binding precedents of the Apex Court summed up thus:

43. Having examined the process undertaken by the appellant and even though the High Court acknowledges such process to be a process of manufacture, it will be useful to make a reference to the judicial precedents qua manufacture or manufacturing process.

44. In Union of India Vs. Delhi Cloth and General Mills Co. Ltd. AIR 1963 SC 791 44, a Constitution Bench of this Court held that the verb 'manufacture' used as a word is generally understood to mean as 'bringing into existence a new substance', howsoever minor in consequence the change may be. 'Manufacture' implies a change but every change is not manufacture. Every change of an article is the result of treatment, labour and manipulation. But something more is necessary to make it 'manufacture'. There must be transformation; a new and different article must emerge having a distinctive name, character or use.

45. The meaning of the expression 'manufacture' was considered by this Court in Deputy CST Vs. Pio Food Packers 1980 Supp. SCC 174. In the said decision, a three-Judge Bench held that the test evolved for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity. This Court laid down the following test to determine as to whether manufacture has taken place:
5. xxx xxx xxx xxx Commonly manufacture is 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. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.

46. This view was endorsed by this Court in Commissioner of Income Tax, Orissa Vs. M/s N.C. Budharaja And Company 1994 Supp (1) SCC 280 46. In that case this Court was considering the limited question as to whether the construction of a dam to store water (reservoir) can be characterized as amounting to manufacturing or producing an article or articles, as the case may be.

The aforesaid question arose in the context of the claim of the assessee to deduction under Section 80-HH of the Income Tax Act, 1961. This Court explained that the word 'production' has a wider connotation than the word 'manufacture'; while every manufacture can be characterized as production, every production need not amount to manufacture and thereafter endorsed the meaning ascribed by this Court to the expression 'manufacture' in Pio Food Packers (supra).

47. In Commissioner of Income Tax Vs. Stanes Amalgamated Estates Ltd. (1998) 232 ITR 443, Madras High Court was examining the question on a reference made to it under Section 256(2) of the Income Tax Act, 1961: whether the Income Tax Appellate Tribunal was right in holding that the sale proceeds of eucalyptus oil extracted by the assessee from the leaves of eucalyptus trees grown by it was in the nature of agricultural income and hence not assessable to income tax?

The reference was at the instance of the revenue. Finding of the Income Tax Appellate Tribunal (for short 'the Tribunal') was that eucalyptus oil was agricultural produce. It was in that backdrop the High Court considered the question as to whether eucalyptus oil extracted from eucalyptus leaves could be considered as an agricultural produce. Division Bench of the High Court held that the oil extracted from the eucalyptus leaves is a distinct product.

In the process undertaken, eucalyptus leaves loses their original identity. Therefore, the High Court held that view taken by the Tribunal that eucalyptus oil extracted from eucalyptus leaves is also an agricultural produce is not correct.

48. This Court in Commissioner of Income Tax Vs. Cynamid India Limited (1999) 3 SCC 727 considered an interesting question as to whether rice husk was a product of agriculture or not. Assessee claimed deduction under Section 35-C of the Income Tax Act, 1961 contending that it manufactures an animal feed wherein rice husk was mainly used as raw material. Tribunal disallowed the deduction on the ground that rice husk was not a product of agriculture because it was not a direct outcome of agricultural endeavor.

What was produced by the cultivator was paddy which alone could be considered as an agricultural product. The husk was the result of a process of dehusking which was not agriculture. High Court answered the question in favour of the assessee holding that operation of dehusking paddy is not an industrial or manufacturing operation as commonly understood. It is essentially an agricultural operation. Both rice and husk remain in their natural form as a result of dehusking and are covered by the term 'agricultural product'.

It was in that context this Court observed that the term 'agricultural product' or 'product of agriculture' is required to be construed liberally so as to include not merely the primary product as it actually grows but also a product which undergoes a simple operation so as to make it more saleable or more usable. The rice and the husk though separated remain as they were produced and hence continue to be 'agricultural product' or 'product of agriculture'.

49. In Jai Bhagwan Oil and Flour Mills Vs. Union of India (2009) 14 SCC 63, this Court held that the true test to ascertain whether a process is a manufacturing process producing a new and distinct article is, whether the article produced is regarded in the trade, by those who deal in it, as a marketable product distinct in identity from the commodity/raw material involved in the manufacture.

50. Again, in the case of Collector of Central Excise, Kanpur Vs. Mineral Oil Corporation (2015) 14 SCC 64, a three-Judge Bench of this Court endorsed the view taken in Delhi Cloth and General Mills Co. Ltd. (supra) and held that to amount to manufacture, a new commodity having distinct name, character or use should emerge as a result of the process of manufacture. The true test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in trade as a new and distinct commodity.

50.1. In the facts of that case, this Court observed that appellants used to bring transformer oil and by removing impurities, it was again made useable as transformer oil. Before and after the process, the product was only transformer oil. That being so, this Court held that it could not be said that a new and distinct commodity had come into  existence consequent to the process undertaken by the appellant.

51. Thus, to constitute manufacture, the following are the essential features:

1. There must be a process or series of processes.
2. The original commodity or raw material undergoes a transformation through the process or series of processes.
3. At the end of the process or series of processes, a new commodity emerges.
4. The new commodity should have a distinct name, character, or use and can no longer be regarded as the original commodity.
5. It should be regarded as distinct from the original commodity and recognized as so in the trade.

52. The test is not whether the end product is a consumable product or not. Therefore, the High Court clearly missed the point by holding that because crude degummed soybean oil was not further refined and therefore was not a consumable item; it did not have a distinct identity. This is not the test of manufacture. While there is no dispute that soybean is an agricultural product, the High Court while endorsing the view of the Assistant Commissioner held that crude degummed soybean oil is also an agricultural product. Certainly, crude degummed soybean oil is distinct from soybean; it is not the same thing as soybean.

Earlier Supreme Court Precedents

The Court's reasoning aligns with and builds upon earlier landmark judgments:

• Union of India v. Delhi Cloth and General Mills, AIR 1963 SC 79
  The Apex Court held that manufacture is a transformation of an article which is commercially different from the one which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable.
  "The word 'manufacture' used as a verb is generally understood to mean as bringing into existence a new substance and does not mean 'merely' to produce some change in a substance, however minor in consequence, the change may be."
• Union of India v. J.G. Glass Industries Ltd., 1998 (97) ELT 5
  The Court drew a distinction between manufacture and process:
  "On an analysis of the aforesaid rulings, a two-fold test emerges for deciding whether the process is that of 'manufacture'. First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist; secondly, whether the commodity which was already in existence will serve no purpose but for the said process."
• Ujagar Prints v. Union of India, (1989) 3 SCC 488
  Bleaching, dyeing, and printing grey cloth transformed it into a marketable commodity with a new identity.
• Delhi Cloth & General Mills Co. Ltd. v. State of Rajasthan, (1980) 4 SCC 71
  Manufacture involves bringing into existence a new substance with a distinct name, character, or use.
• Commissioner of Central Excise v. S.R. Tissues Pvt. Ltd., (2005) 6 SCC 310
  Conversion of jumbo rolls into toilet rolls, facial tissues, etc., constituted manufacture due to distinct commercial identity.
• Tata Consultancy Services v. State of Andhra Pradesh, (2004) 1 SCC 308
  Software was held to be 'goods' once it acquired tangible form—emphasizing identity in trade and use.

The common thread in these cases is transformation plus distinct identity.
 

Manufacture vs. Processing: The Fine Line

The distinction lies in the end result. Processing may involve treatment or preparation that changes form, but manufacture results in a new product with its own identity.

• Cutting timber into logs is processing.
• Converting timber into furniture is manufacture.

In Noble Resources, the High Court erred by focusing on the fact that crude degummed soybean oil was not consumable and hence lacked distinct identity. The Supreme Court clarified that consumability is not the test—distinct name, character, or use is.

Implications of the Judgment

• Trade and Import Benefits: Classification of products for customs/tariff purposes must adhere to the 'distinct identity' test. Products that undergo substantial transformation may be denied agricultural concessions.
• Taxation Clarity: This judgment will guide assessments under GST, Excise, and Customs laws, especially where goods are intermediates or semi-finished products.
• Legal Certainty: By restating and applying settled doctrine, the Court ensures predictability in administrative and judicial decision-making.

Conclusion
The Supreme Court's judgment in Noble Resources is not just a reiteration but a clarification of the legal test for manufacture. It draws a clear line of demarcation between mere processing and manufacturing, emphasizing market identity and functional transformation. As industries evolve and intermediate products gain prominence in trade, this doctrine will serve as a crucial compass for regulatory classification and policy implementation.

Written By: Inder Chand Jain
Ph: 8279945021, Email: [email protected]