2005 (7) TMI 351 - SC - VAT and Sales Tax

Whether a unit undergoing expansion is entitled under the notification dated July 27, 1991 to the benefit of exemption on the additional fixed capital investment as a result of such expansion, or the total fixed capital investment (being the aggregate of the original as well as the additional fixed capital investment)? Whether the respondents claim of one integrated expansion from 12,000 TPA to 60,000 TPA during the period August 12, 1988 to March 28, 1994 is sustainable in fact or in law? Whether or not certain pre-operative expenses form part of fixed capital investment for the purpose of section 4-A of the U.P. Trade Tax Act and the notification dated July 27, 1991? Whether the respondents (allegedly) not having collected or realised any tax on the strength of the eligibility certificate, granted pursuant to the High Court s judgment, and which was not stayed by this honourable Court, are entitled to any relief? Held that - Appeal allowed. The High Court has found that the respondent had taken the benefit of the increased capacity of the unit which came about by reason of the first two expansions in the sense that the exemption on entire sales turnover relatable to such increased capacity had been enjoyed by the respondent under the 1985 notification. The DLC had also granted tax benefit to the respondent only in respect of the third expansion excluding the pre-operative expenses. Albeit for other reasons, in our opinion, having regard to our decision on the various issues against the respondent, this is the highest relief that the respondent could claim and which the appellants concede would be the most equitable.

Issues Involved:
1. Entitlement to exemption on additional fixed capital investment versus total fixed capital investment.
2. Determination of whether there was one integrated expansion or three separate expansions.
3. Inclusion of pre-operative expenses in the fixed capital investment.
4. Entitlement to relief based on non-collection of tax during the exemption period.

Issue-wise Detailed Analysis:

Issue 1: Entitlement to Exemption on Additional Fixed Capital Investment versus Total Fixed Capital Investment
The court examined whether the respondent's unit undergoing expansion is entitled to the benefit of exemption on the additional fixed capital investment or the total fixed capital investment. Section 4-A of the U.P. Trade Tax Act, 1948, and the 1991 notification were central to this issue. The notification provided tax relief based on the fixed capital investment, which the court interpreted as additional fixed capital investment for units undertaking expansion. The court held that the benefit under the 1991 notification is limited to a percentage of the additional fixed capital investment, not the total fixed capital investment. This interpretation aligns with the statutory scheme and avoids anomalous results, ensuring that older units do not receive disproportionate benefits compared to new units.

Issue 2: Determination of Whether There Was One Integrated Expansion or Three Separate Expansions
The court considered whether the respondent's claim of one integrated expansion from 12,000 TPA to 60,000 TPA, implemented in three phases, was sustainable. The Divisional Level Committee (DLC) had treated the expansions as separate, granting relief only for the third expansion. The Tribunal and High Court, however, found that there was one integrated expansion. The Supreme Court disagreed, noting the lack of evidence supporting a single scheme of expansion and emphasizing that separate industrial licenses, financial negotiations, and applications indicated three distinct expansions. The court concluded that the expansions were separate in fact and law.

Issue 3: Inclusion of Pre-operative Expenses in the Fixed Capital Investment
The respondent claimed that pre-operative expenses, including interest to financial institutions, rights shares issue expenses, foreign technician expenses, and foreign travel expenses, should be included in the fixed capital investment. The Tribunal allowed this claim, but the Supreme Court rejected it. The court emphasized the restrictive definition of "fixed capital investment" in Explanation (4) to Section 4-A, which includes only specific items like land, building, plant, machinery, etc. The court held that the claimed expenses do not reflect the value of these items and cannot be included in the fixed capital investment for the purposes of the Act or the 1991 notification.

Issue 4: Entitlement to Relief Based on Non-collection of Tax During the Exemption Period
The respondent argued against the recovery of tax, citing compliance with the High Court's judgment and the prohibition on collecting tax during the exemption period. The Supreme Court rejected this argument, referencing the State of Rajasthan v. J.K. Udaipur Udyog Ltd., which established that the primary liability to pay tax remains on the seller, irrespective of whether the tax was collected from customers. The court noted that under Section 4-A(4), if an eligibility certificate is canceled or amended, the dealer must pay the tax for the period during which the exemption was not admissible. The court concluded that the respondent must pay the tax, even if it had not collected it from customers.

Conclusion:
The Supreme Court allowed the appeals, setting aside the decisions of the High Court and Tribunal, and affirming the decision of the Divisional Level Committee. The court held that the benefit of the 1991 notification is limited to the additional fixed capital investment, recognized three separate expansions, excluded pre-operative expenses from the fixed capital investment, and upheld the state's right to recover tax despite non-collection during the exemption period.

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