Application of the MAOCARO to a company

engaged in agricultural Operations

A company is engaged in the cultivation of sugarcane and paddy etc. and selling them. To get better yield it consumes fertilizers. We feel that statement on the Manufacturing and other Companies (Auditor’s Report) order, 1975, is not applicable to the company because:

(i) It is not engaged in any manufacturing activity to become a manufacturing company.

(ii) It cannot be said to be engaged in any processing activity.

(iii) It is not engaged in the business of buying the goods for sale to make profit and thus it is not a trading company.

(iv) It cannot be called a mining company, chit fund, nidhi or finance company.

So the audit report issued by us contained the following remark on the lines suggested in para 48 of the Institute’s Publication—Exposure Draft statement on the Manufacturing and other Companies (Auditor’s report) Order’ 1975: -

“This report does not include a statement on the matters specified in paragraph 4 of the Manufacturing and other Companies (Auditor’s Report) order, 1975, issued by the Company Law Board in terms of Section 227(4A) of the Companies Act, 1956, since in our opinion and according to the information and explanation given to us, the said order is not applicable to company.”

It is understood (not definite) that the Company Law Boad feels that the order is applicable to all companies without exception. We feel the order does not contemplate like that. The same view has been observed in the Institute’s said publication in Para 20.

In the circumstances, kindly clarify whether the said order is applicable to the said company. If so, kindly clarify how the company is to be the classified: -

Manufacturing, Mining, Processing or Trading company.

Opinion April 22,1977

On a scrutiny of the various types of companies referred to in paragraph 1(ii) of the order, it is obvious that the Company can, at best, come within the category of a company engaged in “processing” activity. There is no definition of the word “processing” in the order. Nor is there any definition of that word in the Companies Act. One will, therefore, have to proceed on the basis of general notions in deciding whether such a company would answer to the description of a “processing company.

If one were to look at the contemporary legislation, the word “processing” is found defined in Section 28(5) (c) of the Foreign Exchange Regulation Act, as under: -

(c) “Processing” means any art or process for producing, preparing or making an article by subjecting any material to a manual, mechanical, chemical, electrical or any other like operation but does not include any process incidental or ancillary to the completion of a manufactured product such as dividing, pressing, compressing, packing, repacking, labelling, relabelling, branding or the adoption of any such treatment as is necessary to render such product marketable to the consumer”.

There is thus an essential distinction between an activity which enables a product being marketable and one which involves “processing”. “Processing” would imply “doing something to the goods to change or alter their form”.

Attention in this connection may be drawn to the commentary appearing in Chaturvedi and Pithisaria’s Income-tax Laws, Second Edition, Volume I, page 479, as under:-

“Processing—Processing has in one sense wider meaning than the term manufacture. At some point processing and manufacturing will merge. But where the commodity retains a substantial identity through the processing stage, it will be said to have been “processed” and not “manufactured” (Raghbir Chand Som Chand vs. Excise and Taxation Officer, (1960) II S.T.C. 149, 166 (Punj). For instance ginning cotton is carrying on a “process”, not a manufacture (Patel Cotton Co. P. Ltd. Vs. State of Punjab, (1964) 15 S.T.C. 865 (Punj), but ornaments were “manufactured” out of the metal (Jammula Srirangam Bros. Vs. State of Orissa, (1966) 17 S.T.C. 69(Orissa). Purchasing pig bristles, boiling and washing them with soap and other chemicals, sorting them to their sizes and colours and then tying them into separate bundles according to their size does not amount to manufacture but may be a mere processing activity (C.S.T. Vs. Harbilas Rai & Sons, (1968 21 S.T.C. 17, 20 (S.C.). Activities of a nature in regard to goods which may not amount to manufacture but which would result in the doing of something to the goods to change or alter their form may be taken in by the term “processing” (C.I.T. V. Casino (Pvt.) Ltd., (1973 91 I.T.R. 289, 299(Ker). The transformation into powdered form of ‘whole’ black pepper and turmeric (Mahabir Prasad Birhiwala V. State of West Bengal, (1973) 31 S.T.C. 628 (Cal.) or converting camphor powder into camphor cubes (Sri Om Prakash Gupta v. Commr. C.T. (1965) 16 S.T.C. 935 (Cal) is an act of processing”.

Reference may also be made to the decision of the Kerala High Court, reported in the case of C.I.T.v. Casino (Pvt) Ltd., reported in (1973) 91 I.T.R. 289, wherein it has been observed that “processing” has in one sense a wider meaning than the term “manufacture”. However, the Court held that the activity of preparing articles of food from raw materials in a hotel would not constitute “manufacture or processing of goods” within the meaning of Sec. 2(6) (d) of the Finance Act, 1968. In the present case no activity of any sort so as to change or alter the form of the products is involved.

It would thus appear that the type of company referred to in the Query would not answer to the description of a company engaged in a “processing activity” within the meaning of the Manufacturing and Other Companies (Auditor’s Report) order, 1975.

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