Supreme Court Upholds Denial of Trade Tax Exemption in Modernization Case: AMD Industries Limited vs. Commissioner of Trade Tax (2023) INSC 14

Date of the Judgment: January 9, 2023
Citation: (2023) INSC 14
Judges: M.R. Shah, J., Krishna Murari, J.
Can a company that upgrades its manufacturing process with new technology claim tax exemptions meant for companies that diversify their product line? The Supreme Court of India recently addressed this question, clarifying the distinction between modernization and diversification under the U.P. Trade Tax Act. The court ruled that simply using new technology to produce a similar product does not qualify for tax exemptions intended for companies that manufacture entirely different goods. This judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice Krishna Murari, with Justice M.R. Shah authoring the opinion.

Case Background

AMD Industries Limited, previously known as M/s. Ashoka Metal Décor Pvt. Ltd., established a unit in 1986 to manufacture “Spun Line Crown Corks,” which are used to seal glass bottles. On May 24, 2000, the company applied for an eligibility certificate under Section 4-A of the U.P. Trade Tax Act, seeking tax exemptions for manufacturing “Double Lip Dry Blend Crowns” under a diversification program.

The Divisional Level Committee granted the eligibility certificate, but under the ‘modernization’ scheme instead of ‘diversification’. This distinction was crucial because, under the Act, companies that diversify their product line are entitled to tax exemptions, whereas those that modernize their production process are not. The company was denied the exemption under Section 4-A(5) of the Act.

AMD Industries argued that the manufacturing process and machinery for the new product were different from the old ones, and that the raw materials and ultimate use of both products were also different. They contended that the new product was an eco-friendly product using PVC granules, unlike the old product. The company also argued that modernization applies only to units producing the same goods with modern technology, not to units producing different goods.

The Trade Tax Tribunal and the High Court of Judicature at Allahabad dismissed the company’s appeals, holding that the nature of the goods produced under the new technology was not different, as both products were used for sealing bottles. The High Court upheld the Tribunal’s decision, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The appellant, feeling aggrieved by the order dated 10.12.2003 passed under Section 4-A of the U.P. Trade Tax Act, filed an appeal under Section 10 of the Act before the Trade Tax Tribunal. The Tribunal dismissed the appeal. A second appeal before the Tribunal was also dismissed. The appellant then filed a revision application before the High Court of Judicature at Allahabad, which was also dismissed. The High Court upheld the Tribunal’s decision, stating that the goods produced were not different, as both were used for sealing bottles. This led to the appeal before the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of Section 4-A(5) of the U.P. Trade Tax Act, which provides exemptions from trade tax for units that have undertaken expansion, diversification, or modernization. The relevant sections are:

• Section 4-A(2)(c) of the U.P. Trade Tax Act:

  
  “in respect of those goods only which are manufactured in a unit which has undertaken expansion, diversification or modernisation 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 modernisation are additional production as a result of such expansion or modernisation”
  

• Section 4-A(5)(b)(i) and (ii) of the U.P. Trade Tax Act:

  
  “(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 modernisation, falls at any time after March 31, 1990;”
  

• Section 4-A(5)(c) of the U.P. Trade Tax Act:

  
  “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 modernisation, or wherein goods of a nature different from those manufactured earlier are manufactured after diversification;”
  

These provisions stipulate that for a unit to qualify for tax exemptions under diversification, the goods manufactured after diversification must be different from those manufactured before. The Act differentiates between diversification, which involves producing different goods, and modernization or expansion, which involves increasing the production of the same goods.

Arguments

The appellant, AMD Industries, argued that they had undertaken diversification by manufacturing “Double Lip Dry Blend Crowns,” which are different from their earlier product, “Spun Line Crown Corks.” They emphasized the following points:

• The new product is an eco-friendly product using PVC granules as raw material, unlike the old product.
• The manufacturing process and machinery for the new product are different from the old ones. The old product cannot be manufactured on the new machines and vice versa.
• The ultimate use of both the products are different.
• The new product is a different commercial commodity and should be treated as a different product in commercial parlance.
• The test for diversification should be whether the goods are different from those manufactured earlier, not their ultimate use.
• Exemption notifications should be interpreted literally.

The respondents argued that the appellant’s investment was an exercise of modernization and expansion, not diversification. They contended that:

• Both products are used for sealing glass bottles and are commonly known as “corks.”
• The new product is merely an enhanced version of the old product.
• The test for diversification is the production of goods that are different in nature, distinct, and a new article in commercial circles.
• Exemption notifications should be strictly construed.

The respondents relied on the case of Commissioner of Sales Tax, Orissa and Anr. Vs. Jagannath Cotton Company and Anr., (1995) 5 SCC 527, to argue that the goods manufactured by the appellant before and after the investment exercise were subject to levy under the class of goods namely “Corks”.

The innovativeness of the argument by the appellant lies in emphasizing the difference in raw materials, manufacturing process, and commercial identity of the new product, arguing that these factors should outweigh the common use of both products.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. 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 4-A (5) of the U.P. Trade Tax Act?

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

• Hansraj Gordhandas Vs. H.H. Dave, Assistant Collector of Central Excise Customs, Surat and Ors., AIR 1970 SC 755: This case was cited by the appellant to support the argument that exemption notifications should be interpreted literally.
• Parle Biscuits (P) Ltd. Vs. State of Bihar and Ors., (2005) 9 SCC 669: This case was also cited by the appellant to support the argument that exemption notifications should be interpreted literally.
• Assistant Commissioner (CT) LTU and Anr. Vs. Amara Raja Batteries Limited, (2009) 8 SCC 209: This case was cited by the appellant to support the argument that exemption notifications should be interpreted literally.
• Commissioner of Sales Tax, Orissa and Anr. Vs. Jagannath Cotton Company and Anr., (1995) 5 SCC 527: This case was cited by the respondent to argue that the goods manufactured by the appellant before and after the investment exercise were subject to levy under the class of goods namely “Corks”.

The Court also considered the following legal provisions:

• Section 4-A(2)(c) of the U.P. Trade Tax Act: This section defines the conditions under which tax exemptions are granted for units undertaking expansion, diversification, or modernization.
• Section 4-A(5)(b)(i) and (ii) of the U.P. Trade Tax Act: This section defines “unit which has undertaken expansion, diversification or modernisation.”
• Section 4-A(5)(c) of the U.P. Trade Tax Act: This section further clarifies the conditions for diversification, expansion, and modernization.

Judgment

The Court viewed the authorities as follows:

• The Court noted that the cases cited by the appellant regarding literal interpretation of exemption notifications were correct, but that the literal interpretation of the provision itself did not support the appellant’s case.
• The court relied on the case of Commissioner of Sales Tax, Orissa and Anr. Vs. Jagannath Cotton Company and Anr., (1995) 5 SCC 527 to state that the goods manufactured by the appellant before and after the investment exercise were subject to levy under the class of goods namely “Corks”.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the literal interpretation of Section 4-A of the U.P. Trade Tax Act. The court emphasized that for a unit to qualify for tax exemptions under diversification, the goods manufactured after diversification must be of a different nature than those manufactured before. The court found that despite the use of modern technology and different raw materials, the ultimate use of the product remained the same – sealing glass bottles. This led the court to conclude that the appellant’s activity was modernization, not diversification. The court also emphasized that exemption provisions should be construed strictly and literally.

The court’s reasoning can be summarized as follows:

The Court considered the argument that the new product was an eco-friendly product using PVC granules as raw material, unlike the old product. However, this was not considered to be a relevant factor. The court emphasized that the ultimate use of the product remained the same.

The court rejected the argument that the new product was a different commercial commodity. The court emphasized that both products were “corks” in commercial parlance.

The Supreme Court, giving a literal meaning to the exemption provision namely, Section 4-A, stated that it cannot be said that the appellant is entitled to the exemption as claimed.

The court quoted the following from the judgment:

• “Therefore, the goods manufactured after diversification must be different goods from the goods manufactured before such diversification.”
• “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 cannot be said to be “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.”

There were no dissenting opinions in this case.

Key Takeaways

• Tax exemptions for diversification require the manufacture of goods that are different in nature, not just improved versions of the same product.
• Modernization, which involves improving production processes with new technology, does not qualify for diversification exemptions.
• The ultimate use of a product is a key factor in determining whether it qualifies as a different good for tax exemption purposes.
• Exemption provisions in tax laws must be interpreted literally and strictly.
• Companies must clearly demonstrate a shift to a different product line to claim diversification-based tax benefits.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that for a unit to qualify for tax exemptions under diversification, the goods manufactured after diversification must be of a different nature from those manufactured before. This case clarifies the distinction between diversification and modernization under the U.P. Trade Tax Act, emphasizing that merely improving the production process with new technology does not qualify for diversification benefits. This case reinforces the principle that exemption provisions should be construed strictly and literally.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision that AMD Industries was not entitled to tax exemptions under the diversification scheme. The court clarified that using modern technology to produce a similar product does not qualify for tax exemptions intended for companies that manufacture entirely different goods. This judgment reinforces the importance of literal interpretation of tax laws and the need for companies to demonstrate a clear shift to a different product line to claim diversification-based tax benefits.