News18| Improvement in quality of product cannot mean diversification, says SC while denying tax exemption to UP based manufacturer

Holding that with the passage of time, due to advancement in technology, if there is a replacement of old machinery with new machinery for improvement in quality and quantity of a product, that can only be said to be expansion and/or modernization, but not “diversification', the Supreme Court on Monday refused to provide exemption under Section 4-A (5) of the U.P. Trade Tax Act to a manufacturer.

A division bench further opined that when the Act unequivocally provided 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.

Court further noted that 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.

In the present case, the manufacturer before Court was producing “Spun Line Crown Cork” used for sealing glass bottles. With the use of modern technologies, the manufacturer started making “Double Lip Dry Blend Crowns”, which is also used for sealing glass bottles.

The bench comprising of Justices MR Shah and Krishna Murari thus noted,

"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."

Top Court further noted that the words used in Section 4-A of the Act were 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.

Thus, while dismissing the manufacturer's appeal, the bench opined,

"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."

Case Title: AMD Industries Limited (Earlier known as M/s. Ashoka Metal Décor Pvt. Ltd.) vs. Commissioner of Trade Tax, Lucknow and Anr.