The UP Trade Tax Act Requires That Goods Manufactured After Diversification Be Distinct In Order To Qualify For Exemption: SC

CAUSE TITLE:
AMD Industries Limited (Earlier known as M/s. Ashoka Metal Décor Pvt. Ltd.) Vs. Commissioner of Trade Tax, Lucknow and Anr.

DATE OF ORDER:
9 January 2023

JUDGE(S):
Hon’ble Mr. Justice M.R. SHAH, J.

PARTIES:
Appellant(s): AMD Industries Limited (Earlier known as M/s. Ashoka Metal Décor Pvt. Ltd.)

Respondent: Commissioner of Trade Tax, Lucknow and Anr.

SUBJECT

The I.A. is disposed of and the appellant is allowed to change the name in the cause title from M/s. Ashoka Metal Décor Pvt. Ltd. to AMD Industries Limited. Feeling retaliated against and dissatisfied with the impugned judgement and order rendered by the High Court of Judicature in Allahabad in Trade Tax Revision No. 275 of 2004 by which the High Court denied the revision application made by the appellant herein and upheld the decision made by the knowledgeable Trade Tax Tribunal, Lucknow Bench, Lucknow (hereinafter referred to as "Tribunal"), and The manufacturer-original revisionist has chosen to appeal the Assessing Officer's decision that the appellant is not entitled to the exemption under Section 4-A (5) of the U.P. Trade Tax Act (hereinafter referred to as "Act") for the items made.

IMPORTANT PROVISIONS

While considering the aforesaid issue, relevant provisions of Section 4-A of the U.P. Trade Tax Act are required to be referred to, more particularly,

• Section 4- A(2)C - Exemption from trade tax in certain cases - It shall be lawful for the State Government to specify in the notification under sub-section (1) that the exemption from, or reduction in the rate of tax, shall be admissible— in respect of those goods only which are manufactured in a unit which has undertaken expansion, diversification or modernization on or after April 1, 1990, and which in the case of diversification, are different from the goods manufactured before such diversification, and in the case of expansion or modernization are additional production as a result of such expansion or modernization;
• Section 4-A(5)(b) “Unit which has undertaken expansion, diversification or modernization" means an industrial undertaking— (b) whose first date of production of goods,--(i) of a nature different from those manufactured earlier by such undertaking, in case of units undertaking diversification, and (ii) manufactured in excess of base production in such undertaking, in case of units undertaking expansion or modernization, falls at any time after March 31, 1990;
• Section 4-A(5)(c) “Unit which has undertaken expansion, diversification or modernization" means an industrial undertaking— which reads as under:- the production capacity whereof except as provided in the proviso to sub-section (1) has increased by at least twenty-five percent as a result of expansion or modernization, or wherein goods of a nature different from those manufactured earlier are manufactured after diversification;”

BREIF FACTS

• In order to produce "Spun Line Crown Cork," one of the materials used to package "glass bottles," the appellant in this case created the unit in 1986.
• The appellant applied for an eligibility certificate under Section 4-A of the Act on May 24, 2000, before the Divisional Level Committee in order to produce "double Lip Dry Blend Crown" as part of the diversification programme.
• The appellant was given the eligibility certificate under the "modernization" scheme as opposed to the "diversification" plan on the basis of the joint spot investigation conducted by a two-member committee.
• The appellant was eligible for the exemption under Section 4-A(5) of the Act if the manufactured items had been deemed a new product under the diversification programme, it is necessary to remark at this point.
• Under the terms of Section 4-A(5) of the Act, the appellant was refused the exemption.
• The appellant filed an appeal with the Trade Tax Tribunal under Section 10 of the Act against the ruling issued under Section 4-A of the Act on December 10, 2003, arguing among other things that the manufacturing procedures and machinery utilized to create both the current and new items are distinct.
• The appellant was eligible for the exemption under Section 4-A(5) of the Act if the manufactured items had been deemed a new product under the diversification programme, it is necessary to remark at this point.
• Under the terms of Section 4-A(5) of the Act, the appellant was refused the exemption.
• The appellant filed an appeal with the Trade Tax Tribunal under Section 10 of the Act against the ruling issued under Section 4-A of the Act on December 10, 2003, arguing among other things that the manufacturing procedures and machinery utilized to create both the current and new items are distinct.

CAUSE OF ACTION

The appellant's requested appeal was ultimately denied. The Tribunal ultimately denied the second appeal as well. It was specifically stated that since both produced materials are used in the packaging of bottles of cold beverages, the nature of goods produced using modern technology is the same as that of goods produced by the unit earlier. As a result, the appeals were dismissed because the manufactured goods are not different but the same and used for the same purpose. The challenged decision and order, which dismisses the revision application before the High Court in violation of the Tribunal's ruling, is the reason for the current appeal.

ISSUES RAISED

"Whether making goods using contemporary technology can be considered "diversification," and whether creating goods of a different type from those created before entitles the appellant to claim the exemption from trade tax as stipulated by Section 4-A (5) of the U.P. Trade Tax Act?

ARGUMENTS ADVANCED BY THE APPEALLANT

• appellant produces crown corks used to close glass bottles. It was the first manufacturing "Spun Line Crown Corks." But afterwards, it expanded its manufacturing business to create "Double Lip Dry Blend Crowns," for which it imported new equipment and spent a fixed capital cost of Rs. 4.5 crores.
• It is argued that the new product being created by the appellant is one that uses PVC granules as its primary raw material. The new item differs from the earlier "Spun Line Crown Corks" that were produced that its intended use was also different.
• The criteria that was to be used was if the goods differed from those that were produced before. As a result of its diversification efforts and the fact that the "Double Lip Dry Blend Crowns" it is currently producing are a different commercial good from those it produced in the past, it is argued that the appellant was qualified to claim exemption from trade tax.
• The notification dated 31.03.1995 and Explanation 5 to Section 4-A(5) of the Act, both of which the appellant relied upon to request an eligibility certificate on the basis of diversification, were misinterpreted by the Trade Tax Tribunal and the High Court.
• The final purpose of the commodities is unimportant for determining whether to exclude them from trade taxes.
• The experienced senior counsel representing the appellant has called our attention to the distinction between the earlier product and the later product. He has also called our attention to the differences in the manufacturing processes of both the new product and the earlier product as evidence for his claim that they are completely distinct products.
• It is argued that a new standard stating that the use of both products is the same has been incorrectly adopted by the Trade Tax Tribunal and the High Court. It is asserted that neither the section nor the notification contain any information about the requirements for using the items. Only the nature of the items must be different in accordance with Section 4-A(5) and the notification. An exemption notification is said to need to be given a literal interpretation in accordance with the established legal situation.

ARGUMENTS ADVANCED BY THE RESPONDENT

• The appellant set up a facility in the current case to produce "Spun Line Crown Corks," which are utilised as one of the packaging materials for glass bottles and are sold to glass bottlers. According to the argument, the appellant produced "Corks" following "modernization" that were also employed as one of the materials used to package glass bottles.
• It is claimed that in accordance with Section 4-A(5) of the Act and the notification, a unit that has engaged in "growth, diversification, or modernization" and produces different items from those it previously produced may be free from trade tax.
• According to the argument, in order to receive the benefits listed under the heading of "diversification," "goods of varied kind is required to be produced," in accordance with Section 4-A(5) of the Act.
• It is argued that the terminology used in the exemption notification issued under Section 4-A is also accurate, and as a result, the production of items that are different from those produced previously meets the criteria for diversification.
• It is argued that Section 4-A's clause (5) clearly states "expansion, diversification, and modernization" and then clarifies in one separate sub-clause that the exercise of "expansion or modernization" means the "increase in production" and then clarifies "diversification" to mean the production of goods of a different kind, distinct and different in nature, a new article as understood in commercial circle.
• According to the argument, the products that the appellant produced before the investment exercise were liable for levy under the category of "Corks" items.
• The production of "Double Lip Dry Blend Crowns" following the investment exercise is just an improvement on the quality and output of the "Corks" that were previously created before to the investment activity.
• Since the various commodities were not manufactured, they were not eligible for the exemption under Section 4-A(5) of the Act or the notification given under Section 4-A, it is argued that the investment was just an exercise in "modernization and expansion."
• They relied on the court's ruling in the case of Commissioner of Sales Tax, Orissa and Anr. vs. Jagannath Cotton Company and Anr., (1995) 5 SCC 527 to buttress his arguments (para 5).
• The fact that the products are used for packaging bottles means they cannot be considered to be "different in nature".

ANALYSIS BY THE COURT

• The Court made the following observation when debating the aforementioned issue: With time, due to technological advancement, if there is a replacement of old machinery with new machinery for improvement in quality and quantity of a product, at the most, it can be said to be expansion and/or modernization, but it cannot be said to be "diversification," which is "manufacturing of goods different from the goods manufactured before such diversification."
• The Court further stated that the result of "diversification" must be that the product's quality and quantity should have improved or increased, but if the product's intended use remains the same, it cannot be asserted that it is manufacturing various commodities in order to qualify for a trade tax exemption.
• The Court further argued that the products produced by "diversification" have to be of a "different," "distinct," and "separate" kind. In this instance, it is impossible to say that the products produced using modern technology constitute any sort of distinct commercial activity. In refusing to grant the appellant an exception, the High Court did not err. We wholeheartedly concur with the High Court's position. The Court came to the conclusion that the appellant is not entitled to the exemption as stated while upholding the High Court's ruling. As a result, the Court rejected the appeal.

CONCLUSION

The Supreme Court of India was debating the definition of "diversification" when the appellant in this case installed machinery to produce "Double LIP DRY BLEND CROWN CORK" as opposed to "SPUN LINE CROWN CORK," which was being manufactured at the time, and argued that it was diversification to be eligible for exemption. The department argued that this was false and that it amounted to nothing more than modernization, hence the claim was rejected. Based on the idea that the appellant had to persuade the court that it qualified to be covered under the exemption notification, the Supreme Court applied the user test, finding that both products were being used to seal glass bottles and therefore could not be considered diversification within the meaning of the act.

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