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CASE NO.: Appeal (civil)  1905 of 2004

PETITIONER: M/s. Vadilal Chemicals Ltd.                      

RESPONDENT: The State of Andhra Pradesh & Ors.       

DATE OF JUDGMENT: 02/08/2005

BENCH: Ruma Pal & Tarun Chatterjee

JUDGMENT: J U D G M E N T

RUMA PAL, J.

       The issue in this appeal is whether the appellant is  entitled to exemption from payment of sales tax under the  Andhra Pradesh General Sales Tax Act 1957 as notified by  G.O.M.S. No.117 dated 17th March,1993 (referred to in brief as  the ’1993 G.O.’).         The 1993 G.O. was issued by the Government of Andhra  Pradesh, Industries and Commerce Department to effectuate  the liberalized State incentive scheme for setting up new  industries as introduced by the Government in 1989.  The  package of incentives already granted by the State Government  was reviewed whereafter the State Government decided to  introduce certain modifications in order to accelerate industrial  development in the State. The incentives were granted on the  basis of Districts according to their grouping under areas I, II  and III.  We are concerned with District Medak, falling within  area II.          Apart from an investment subsidy, rebate on electricity  charges and a deferment/tax holiday on sales tax for specified  periods on products manufactured in the new industrial units  were granted in Clauses 5(c) and 5(b) respectively of the 1993  G.O.  Medium and large scale industries were given sales tax  deferment, whereas tiny and small scale industries were given  a sales tax (holiday) exemption.  The appellant falls within the  latter category.  In terms of the 1993 G.O. units like the  appellant’s were given a 5 years sales tax holiday subject to a  ceiling of hundred percent of fixed capital costs or Rs. 35 lakhs  whichever was less during the entire holiday period.   The procedure prescribed for availing of the benefits of  1993 G.O. envisaged the setting up of State Level and District  Level Committees.  The District Level Committees included  within its members, the Deputy Commissioner of Commercial  Taxes.  Clauses 10 and 11 of the 1993 G.O. read as follows:- "10.    The above Committee shall  scrutinize and sanction the claims  of the units of the concerned  District involving eligible capital  investment of Rs. 7.5 lakhs and  below:

11.     The decisions of the State Level  Committee shall be final in  scrutinizing/ deciding the eligible  investment and sanctioning the  incentives condoning the delays   in filing of applications for

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registration and claims for eligible  industries."

       Clause 16 records that the 1993 G.O. which was issued  in the name of the Governor of the State was with the  concurrence of the Finance and Planning (Financial Wing)  Department.  Annexure-I to the 1993 G.O. provides for a list of  ineligible industries. We will have the occasion to refer to this in   greater detail at a subsequent stage.          In 1994 the appellant set up a small scale industrial unit in  Medak in the State of Andhra Pradesh and invested a sum of  Rs. 93.99 lakhs for production of Liquor Ammonia and for  refilling of Anhydrous Ammonia.  On 6th June, 1994 the  appellant commenced commercial production. Its application to  the Industries Department for an eligibility certificate mentioned  the nature of the activities carried on by the unit and also gave  details of the investments made. The application was returned  by the Industries Department on 18th May, 1995, because the  Commissioner (Industries) was of the  opinion that "refilling"  activities were not eligible for incentives under the scheme.  However, the matter was re-examined  at the instance of the  appellant. Since instructions had already been issued by the  Department to the effect that refilling of LPG Gas was  considered eligible for incentives, filling of anhydrous ammonia  into cylinders was also held to be entitled to the grant of the  same benefit.         Accordingly, on 7th of August, 1996 the appellant’s unit  was inspected by the Industries Department for verification of  the appellant’s application. A recommendation was made by  the Industries Department  for grant of the benefit, however  limited to 50% of 15% investment subsidy and sales tax  exemption of Rs.35 lakhs under the Scheme.  A temporary  eligibility certificate was then issued to the appellant on 22nd  August, 1995 by the District Industries  Centre. This was made  conditional on the SSI unit not collecting Sales Tax from its  consumers during the period of exemption. If it did, it would be  liable to remit the sales tax collected to Government.         Under cover of a letter from the  Commissioner of  Industries dated 10th August 1996, a final eligibility certificate  was granted to the appellant certifying the eligibility of the  appellant for sales tax exemption.  It may be mentioned here  that the final eligibility certificate was issued with the sanction  accorded by the State Level Committee/District Level  Committee.  A copy of the covering letter was forwarded to the  Commissioner of Commercial Taxes, the concerned  Commercial Tax Officer and  the Deputy Commissioner  Commercial Taxes, Hyderabad.         The Commissioner of Commercial Taxes in his turn wrote  to the Deputy Commissioner Commercial Taxes Hyderabad,  the respondent No.4 before us, (referred to in brief as DCCT)  requesting him to permit Sales Tax exemption by the appellant  in accordance with the 1993 G.O. saying that the eligibility  certificate would be operative from 6th June, 1994 for a period of  five years for an amount of Rs. 35 lakhs. The appellant was  thereafter granted exemption from payment of sales tax  on the  products sold from its unit upto a limit of Rs. 35 lakhs for five  years from 1994 to 1999.          Between the period from 30th  September, 2002 to  3rd   October, 2002 about four years after the period of exemption  expired, 9 pre-revision show cause notices under Section 9(2)  of the Central Sales Tax Act.1956 read with Section 20(2) of  the Andhra Pradesh General Sales Tax Act,1957 were issued  by the DCCT to the  appellant. It was said in the notices that  upon verification it was noticed that the Assessing Authority had  allowed irregular sales tax exemption on the first sales of

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anhydrous liquefied ammonia amounting to Rs. 33,98,287.00  and adjusted the tax against the tax exemption granted under  the Tax Holiday Incentive Scheme. The DCCT noticed that the  commodity that was purchased and sold were one and the  same and that there was no new commodity that had emerged  and that the activity of manufacture as it was understood in  common parlance had not taken place. According to the DCCT,  "manufacture" envisaged a commercially distinct and different  commodity or a finished product with a separate identity from its  raw material. It was said that:- "The activity of bottling/packing of cases  into a unit containers from bulk  quantities was not recognized as  manufacture even under Central Excise  Act.  It was also ascertained from the  concerned Central Excise Authorities  that the said units were not registered  under Central Excise Act and not paying  Central Excise Duty on the gases  cleared in cylinders to the consumers.         In view of the foregoing  conclusions, the granting of  deferment/exemption of sales tax to the  said units is incorrect and the same is to  be withdrawn."

The nine show cause notices are materially identical  except that each related to different assessment years during  the period of the sales tax holiday.  The appellant replied to the show cause notices in which  the jurisdiction of the DCCT to issue the notices was  questioned. It was clarified that  the appellant was liable to duty   under the Central Excise Tariff Act 1985 and that the appellant  had been paying 16% Excise Duty on both Anhydrous  Ammonia and Liquor Ammonia manufactured by it in  accordance with the procedure prescribed under that Act. The  details of the processes undertaken in producing the products   were also given.  It was also drawn to the attention of the DCCT  that the authority to determine the eligibility under the G.O. Ms.  was not the Commercial Taxes Department, but the  Department of Industries & Commerce.          Subsequently, the appellant filed a writ petition in the  Andhra Pradesh High Court for a declaration that the appellant  was entitled to the benefits notified by the 1993 G.O. and that  the pre-revision show cause notices issued by the DCCT for the  years 1995-1996 up to the 1999-2000, were illegal, void and  unenforceable.  During the pendency of the writ proceedings on 21st  January, 2003 the DCCT passed an order confirming the  demand proposed to be raised in the show cause notices. The  DCCT held that process of refilling anhydrous ammonia into  cylinders did not amount to a manufacturing activity.  He held  that the State Government had issued a Memo dated 8.2.2000  declaring that LPG bottling units were not eligible for any Sales  Tax incentive as no manufacturing activity was involved.   Accordingly the DCCT issued demand notices for recovery of  sales tax for the period between 1995-96 to 1999-2000.  The High Court dismissed the writ petition on the basis of  an earlier Division Bench pronouncement in SHV  Energy  South East Limited and Anr. Vs. State Investment  Promotion Board, Hyderabad and Anr.  Being aggrieved by  the dismissal of the writ petition the appellant filed a special  leave petition challenging the decision of the High Court before  this Court under Article 136.          Mr. Dushyant Dave, learned senior counsel appearing on

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behalf of the appellant    submitted  that the decision relied  upon by the High Court was distinguishable. Apart from  reiterating the appellant’s stand as taken in the reply to the  impugned show cause notices it was also submitted that in this  particular case the appellant had been granted the benefit  under the 1993 G.O. after an exhaustive consideration of the  appellants’ case. It was stated that the appellant had made a  full disclosure of the process of manufacture undertaken by the  appellant.  It was also submitted that the word "manufacture" as  used in the 1993 G.O. must be understood in the context of the  incentive scheme and the objects sought to be fulfilled thereby.  The emphasis was on Industrial development and not on the  manufacture.  It was submitted that the words used in the 1993  G.O. must be given a liberal construction since it is part of a  packet of incentives. As far as sales tax law was concerned, the  State Act neither defined manufacture nor was it concerned  with whether goods sold were manufactured or not.  According  to the learned counsel there was intrinsic evidence  in the 1993  G.O. to show that the word "manufacture" was used in a wide   sense and that this was apparent from Annexure I to the 1993  G.O. which contained a list of ineligible  industries.  These  included widely disparate industries such as powder of chilly,  turmeric, masala  spices, kari, sambhar etc.; manure mixing  industries and hotels except (a)  Motels (b) hotels set up in  State Government approved tourist centers of Districts. Finally  and in the  alternative it was contended that if the issue was  decided against the appellant, having regard to the  circumstances of the case, the respondent State should not be  permitted to recover the amount as the appellant had not  collected any sales tax from its consumers, not only because of  the prohibition under the  State Sales Tax Act, but also because  of the conditions under which the eligibility certificates both  temporary and final had been issued.         Mr. Rakesh Dwivedi, learned senior counsel appearing on  behalf of the respondents has said that manufacture for the  purpose of the sales tax does not include repackaging,  rebottling etc. This has been so held in Deputy Commissioner  of Sales Tax (Law) Board of Revenue (Taxes) vs. M/s. PIO  Food Packers (1980) Suppl. SCC 174. Therefore, it was  contended, if the commodity remains the same then  irrespective of the process, it would not amount to manufacture.   This was a patent error which was correctible under Section 20  of the State Sales Tax Act. Countering the appellants’  submission for a liberal construction, it is argued that since an  exemption was sought to be claimed, the language would have  to be strictly construed. The list of ineligible industries in  Annexure I to the 1993 G.O. did not, according to the  respondents, give rise to any presumption that the process  carried on by the industries excluded, indicated what was  manufacture for the purpose of the 1993 G.O. The list merely  excluded certain industries altogether to avoid controversy.   The learned counsel conceded that as far as the production of  liquor ammonia was concerned, it could reasonably be said that  it had undergone a process of manufacture but as far as the  bottling of the anhydrous ammonia was concerned, the   process could not amount to manufacture. In our opinion, the appeal must be allowed.  At the outset  we may note that the earlier  decision of the Division Bench  relied upon by the High Court is clearly distinguishable.  It dealt  with a different Government order and the Court based its  decision to a large extent on the fact that the eligibility  certificate which had been granted to the assessee unit in that  case was not only temporary but had also been cancelled.  In  the present case, the grant of the eligibility certificate was not  the outcome of an unconsidered  decision based on extraneous

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considerations.  The matter was considered in depth and  sanctioned by the District Level Committee  of which, as we  have already noted, the DCCT was a part.  The appellant had  made a full disclosure of the process undertaken in respect of  which sales tax exemption was granted.  No malafides has  been alleged against the appellant nor is it the case of the  respondents that the appellant had taken any unfair advantage  of the 1993 G.O.  Doubtless the 1993 G.O. which was issued by the  Industries & Commerce Department had granted the sales tax  holiday on products manufactured in industrial units set up by  the State Government. But the interpretation of the word  ’manufacture’ as used in the 1993 G.O. by the DCCT was  wholly incorrect.   For one, the DCCT appears to have imported  the definition of ’manufacture’ from the law relating to excise.   That was uncalled for having regard to the fact that the word  had been used in a different context altogether. (See Ashirwad  Ispat Udyog & Ors vs. State Level Committee & Ors.)  Reliance by the respondents on M/s.PIO Food Packers  (supra) is misplaced.  In that case, sales tax was sought to be  levied under the  Kerala General  Sales Tax Act, 1974 on the  ground that  the pineapples purchased by the assessee had  been consumed in the manufacture of canned pineapple,  pineapple jam and pineapple squash within the meaning of the  phrase ’consumes such goods in the manufacture of the goods’  used in Section 5A(1)(b) of the Act.  It was in the context of that  phrase that this Court said:-  "Commonly manufacture is the end  result of one more processes through  which the original commodity is made to  pass.  The nature and extent of  processing may vary from one case to  another, and indeed there may be  several stages of processing and  perhaps a different kind of processing at  each stage.  With each process  suffered, the original commodity  experiences a change.  But it is only  when the change, or a series of  changes, take the commodity to the  point where commercially it can no  longer be regarded as the original  commodity but instead is recognized as  a new and distinct article that a  manufacture can be said to take place.   Where there is no essential difference in  identity between the original commodity  and the processed article it is not  possible to say that one commodity has  been consumed in the manufacture of  another.  Although it has undergone a  degree of processing, it must be  regarded as still retaining its original  identity".

In the result it was held:

" that when pineapple fruit is processed  into pineapple slices for the purpose of  being sold in sealed cans there is no  consumption of the original pineapple  fruit for the purpose of manufacture.   The case does not fall within Section 5- A(1)(a) of the Kerala General Sales Tax  Act".

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In this case the  State Sales Tax Act contains no  provision relating to ’manufacture’.  The concept only finds  place in the 1993 G.O. issued by the Department of Commerce  and Industries. It appears from the context of the other  provisions of the 1993 G.O. that the word ’manufacture’ had  been used to exclude dealers who merely purchased the goods  and resold the same on retail price.  What the State  Government wanted was investment and industrial activity. It is  in this background that the 1993 G.O. must be interpreted.    [See: Commissioner of Sales Tax. Vs. Industrial Coal  Enterprises (1992) 2 SCC 607).  The Department of  Commerce and Industries had by its letters dated 3rd June 1995  and 20th August 1996 clarified the issue.  The exemption was  granted in terms of the 1993 G.O. the thrust of which was to  increase the industrial development in the State. The  Commissioner, Commercial Tax had also in no uncertain terms  accepted the interpretation put by the Industries Department on  the 1993 G.O. and written to the DCCT to permit sales tax  exemption to the appellant in accordance with the 1993 G.O.  for a period of five years upto a limit of Rs.35 lakhs.      Besides the conclusion of the DCCT was   based on  an incorrect factual premise that the appellant   had not paid  excise duty on the bottled ammonia.  The  DCCT  ignored  the  appellant’s clear statement in its  reply to the show cause  notices that the bottled ammonia had been subjected to excise  duty and that it had paid the levy as prescribed under the  Central Excise Tariff Act, 1985. Furthermore, under the incentive scheme in question,  there was only one method of verifying the eligibility for the  various incentives granted including sales tax exemption.  The  procedure was for the matter to be scrutinized and  recommended by the State Level Committee and District Level  Committee and the certification by the Department of Industries  & Commerce by  issuing an Eligibility Certificate.  There was no  other method prescribed under the scheme for determining an  industrial unit’s eligibility for the benefits granted. The  Department of Industries & Commerce having exercised its  mind, and having granted the final eligibility certificate (which  was valid at all material times), the Commercial Taxes  Department could not go beyond the same. More so when the  Commissioner, Sales Tax had accepted the Eligibility  Certificate issued to the appellant and had separately notified  the appellants eligibility for exemption under the 1993 G.O. In  these circumstances the DCCT certainly could not assume that  the exemption was wrongly granted nor did he have the  jurisdiction  under Section 20 of the State Act to go behind  the  eligibility certificate and embark upon a fresh enquiry with  regard to the appellant’s eligibility for the grant of the benefits.  The counter affidavit filed by the respondents-sales tax  authorities is telling.  It is said that the Sales Tax Department  had decided to cancel the eligibility certificates for sales tax  incentives.   As we have said the eligibility certificates were  issued by the Department of Industries and Commerce and  could not be cancelled by the Sales Tax Authorities. [See in this  connection: Apollo Tyres vs. CIT  Kochi, (2002) 9 SCC 1.) There is another reason why the action of the DCCT  cannot be upheld.  The primary facts relating to the processes  undertaken by the appellant at its unit were known to the  Department of Industries and Commerce and the DCCT.  The  only question was what was the proper conclusion to be drawn  from these.  The Department of Industries and Commerce  which was responsible for the issuance of the 1993 G.O.  accepted the appellant as an eligible industry for the benefits.   Apart from the fact that it can be assumed that the Department

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of Industries was in the best position to construe its own order,  we can also assume that in framing the scheme and granting  eligibility to the appellant all the departments of the State  Government involved in the process had been duly consulted.   The State, which is represented by the Departments, can only  speak with one voice.  Having regard to the language of the  1993 G.O. it was the view expressed by the Department of  Industries which must be taken to be that voice. It is true that on 17th March 2000, the Commissioner of  Industries issued a circular cancelling Eligibility Certificates  issued to Industrial Gases bottling units, Mineral Water and  Sand Benefication units.  But the Commissioner of Industries  had also directed the cancellation of the Temporary/Final  Eligibility Certificates issued to such industries with effect from  30th March 2000 and to inform the units to pay sales tax with  effect from 31st March 2000 to the Commercial Taxes  Department.  The cancellation was, therefore, given  prospective effect.  If the DCCT wanted to rely on the circular, it  had to give effect to it completely, and indisputably by            31st March, 2000 the period of sales tax exemption was over for  the appellant.  Since we are with the appellant on the merits, it is  unnecessary to consider the  alternative argument relating to  the recovery of the sales tax from the appellant.  The appeal is for the reasons stated allowed and the  decision of the High Court is set aside.  The show cause  notices and the impugned order of the DCCT is quashed.   There will  be no order as to costs.