2023 (1) TMI 385 - SC - VAT and Sales Tax

Seeking exemption under Section 4-A (5) of the U.P. Trade Tax Act - manufacture of Spun Line Crown Cork in the year 1986 used as one of the packing materials of the glass bottles - manufacture of double Lip Dry Blend Crown under the program of diversification - 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. 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? HELD THAT - It is clear that in case of diversification the goods manufactured by diversification shall be different from the goods manufactured before such diversification Section 4-A(2)(c) - In the case of expansion or modernization the exemption shall be available if there is an additional production as a result of such modernization or expansion. In the present case we are concerned with the case of diversification . Therefore the goods manufactured after diversification must be different goods from the goods manufactured before such diversification. 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. In the present case the appellant was manufacturing / producing Spun Line Crown Cork used for sealing the glass bottles. With the use of modern technologies now the appellant is manufacturing Double Lip Dry Blend Crowns which is also used for sealing the glass bottles. The earlier product being manufactured by the appellant was used for sealing glass bottles and subsequently the additional product produced with the use of modern technology is also being used for the same purpose namely sealing glass bottles . Therefore the same cannot be said to be manufacturing of goods different from being 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 which is manufacturing of goods different from the goods manufactured before such diversification - 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. Giving the literal meaning to the exemption provision namely Section 4-A it cannot be said that the appellant is entitled to the exemption as claimed. When the provisions of the Act unequivocally provides that the diversification can be considered only in a case where goods of different nature are produced and only then the exemption shall be available. The goods manufactured on diversification must be a different distinct and a separate good in nature. In the present case the goods manufactured on use of advance and/or modern technology cannot be said to be a different commercial activity at all. The High Court has not committed any error in refusing to grant exemption to the appellant. We are in complete agreement with the view taken by the High Court. Appeal dismissed.

Issues Involved:
1. Interpretation of Explanation 5 to Section 4-A(5) of the U.P. Trade Tax Act.
2. Entitlement to exemption under Section 4-A(5) of the Act for goods manufactured after diversification.
3. Distinction between "modernization" and "diversification" under the Act.
4. Criteria for determining if goods are "different" for exemption purposes.

Detailed Analysis:

1. Interpretation of Explanation 5 to Section 4-A(5) of the U.P. Trade Tax Act:
The core issue revolves around the interpretation of Explanation 5 to Section 4-A(5) of the Act, which grants exemption from payment of trade tax to units that have undertaken "diversification" on or after 31.03.1995. The appellant contended that their new product, "Double Lip Dry Blend Crowns," was different from the previously manufactured "Spun Line Crown Corks," thus qualifying for the exemption. They argued that the new product was eco-friendly, used different raw materials, and had a different manufacturing process.

2. Entitlement to Exemption under Section 4-A(5) of the Act for Goods Manufactured after Diversification:
The appellant argued that the new product was entirely different from the earlier product in commercial parlance. They emphasized that both products being commonly known as "Corks" or used for sealing glass bottles should not affect the exemption eligibility. The appellant claimed that the goods' ultimate use was irrelevant for determining the nature of the goods for exemption purposes.

3. Distinction between "Modernization" and "Diversification" under the Act:
The appellant was initially granted an eligibility certificate under "modernization" instead of "diversification." They argued that modernization applies to units producing the same goods using modern technology, whereas diversification involves producing different goods. The appellant contended that their new product was distinct and not merely a result of modernization.

4. Criteria for Determining if Goods are "Different" for Exemption Purposes:
The respondents argued that the appellant's new product was merely an enhanced quality and quantity of the previously manufactured goods, thus falling under modernization rather than diversification. They emphasized that the exemption under Section 4-A(5) requires the goods to be of a different nature than those manufactured earlier. The respondents cited the case of Commissioner of Sales Tax, Orissa vs. Jagannath Cotton Company to support their argument that the goods manufactured after modernization were not different in nature.

Judgment Analysis:
The court examined the relevant provisions of Section 4-A, particularly Section 4-A(2)(c), Section 4-A(5)(b)(i) & (ii), and Section 4-A(5)(c). It concluded that for diversification, the goods manufactured must be different from those produced before diversification. The court emphasized that exemption provisions must be construed literally, and the appellant must satisfy all conditions for claiming exemption.

The court found that the appellant's new product, "Double Lip Dry Blend Crowns," used for sealing glass bottles, was not different from the earlier product, "Spun Line Crown Corks," as both served the same purpose. The court ruled that the use of modern technology to improve quality and quantity did not constitute diversification but rather modernization or expansion.

The court held that the goods manufactured after diversification must be distinct, different, and separate in nature. Since the appellant's new product did not meet this criterion, they were not entitled to the exemption under Section 4-A(5) of the Act. The court agreed with the High Court's decision and dismissed the appeal, stating that the appellant's goods manufactured after using advanced technology were not different in nature from the goods produced earlier.

Conclusion:
The appeal was dismissed, and the court upheld the High Court's decision, concluding that the appellant was not entitled to the exemption under Section 4-A(5) of the U.P. Trade Tax Act as the goods manufactured after diversification were not different in nature from those produced earlier. The court emphasized the importance of literal interpretation of exemption provisions and the necessity for the goods to be distinct and different for claiming exemption.

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