Goods manufactured using advance modern technology, not diversification – Supreme Court

Goods manufactured using advance modern/ technology not diversification i.e. different commercial activity – Supreme Court denies exemption u/s 4A of UP Trade Tax Act.

 ABCAUS Case Law Citation
ABCAUS 3632 (2023) (01) SC

Important Case Laws relied upon:
Commissioner of Sales Tax, Orissa and Anr. Vs. Jagannath Cotton Company and Anr., (1995) 5 SCC 527
Hansraj Gordhandas vs. H. H. Dave, Assistant Collector of Central Excise Customs, Surat and Ors. AIR 1970 SC 755
Parle Biscuits (P) Ltd. Vs. State of Biharand Ors. (2005) 9 SCC 669
Assistant Commissioner (CT) LTU and Anr. Vs. Amara Raja Batteries Limited, (2009) 8 SCC 209

In the instant case, the question of law formulated by the Hon’ble Supreme Court was whether for the goods, manufactured by use of modern technologies can be said to be “diversification”, and manufacturing of the goods of a nature different from the goods manufactured earlier entitle the appellant to claim the exemption from trade tax as provided under Section 4A(5) of the U.P. Trade Tax Act (the Act)?

Under section 4A exemption was provided from trade tax in respect of those goods which were manufactured in a unit which has undertaken expansion, diversification or modernisation on or after cut off date and which in the case of diversification, were different from the goods manufactured before such diversification, and in the case of expansion or modernisation are additional production as a result of such expansion or modernisation.

In the instant case, the Assessing Officer held that for the goods manufactured, the appellant was not entitled to the exemption u/s 4A(5). This view was confirmed by the Tribunal and High Court.

On appellants application, the Trade Tax Department had granted it the eligibility certificate under ‘modernisation’ instead of eligibility certificate under ‘diversification’ scheme.

The case of the assessee was that the process of manufacture and the machineries used for both the products (existing and the new) were different.  

It was also the case that the existing(old) product could not be manufactured on the new installed machine and vice-a-versa, the new product cannot be manufactured on the old machines. 

It was also the case that one of the major raw materials for both the products are not the same and that ultimate use of both the products were different.  

It was submitted that under the term “modernization” only those units fall, which by the modern technical produce the same goods and the scheme of “modernization” do not apply on the units which produce different goods.  

The Hon’ble Supreme Court observed that as per relevant provisions, in case of “diversification” the goods manufactured by diversification shall be different from the goods manufactured before such diversification.

The Hon’ble Supreme Court further observed that the goods manufactured after diversification must be different goods from the goods manufactured before such diversification. 

The Hon’ble Supreme Court also pointed out that as per the settled position of law, in case of an exemption  notification/ exemption provision, the same is required to be construed literally and the person claiming the exemption must satisfy all the conditions of exemption provision.

The Hon’ble Supreme Court observed that the earlier product being manufactured by the appellant and the new product produced with the use of modern technology was also being used for the same purpose. Therefore, the same could not be said to be manufacturing of goods different from being manufactured before such diversification.  

The Hon’ble Supreme Court said that with the passage of time, due to advancement in technology, if there is a replacement of the old machinery with the 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 can not be said to be “diversification”, which is “manufacturing of goods different from the goods manufactured before such diversification”.  

In a case of “diversification”, the effect has to be that the quality and quantity of the product should have been improved and/or increased but if the ultimate use is the   same, the product manufactured on use of modern   and/or advanced technology cannot be said to be manufacturing the different goods for claiming the exemption from payment of trade tax.

The Apex Court said that the words used in Section 4A are very clear and unambiguous and as per the settled proposition of law, the Statute and more particularly, the exemption provisions are to be read as they are and to be construed literally and should be given a literal meaning.

In view of the above, the Hon’ble Supreme Court held that following the literal meaning to the exemption provision namely, Section 4-A, it could not be said that the appellant was entitled to the exemption as claimed as the goods manufactured on “diversification” must be a “different”, “distinct” and a “separate” good in nature.

Accordingly, the substantial question of law was answered in favour of the Revenue and the appeal was dismissed.

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