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TMI Blog2007 (11) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Industries. A conditional certificate of eligibility was issued by the Director. The Deputy Commissioner (General) declined to issue a certificate of exemption in favour of the petitioner and hence this writ petition challenging the order passed by the third respondent, the Deputy Commissioner. The petitioner, in 1999, decided to set up a medium scale unit for the manufacture of soft drinks under the brand name of "Pepsi". The petitioner contends that it's decision to set up the unit in Kerala was largely influenced by the fact that the Government of Kerala had, with a view to attracting investment into the State, announced certain tax exemption schemes for the benefit of new industrial units established in the State. The notification referred to in this regard is S.R.O. No. 1729 of 1993. Apparently a major portion of the controversy which is currently involved in so far as the petitioner is concerned, would not have arisen but for the amendment of S.R.O. No. 1729 of 1993 by S.R.O. No. 1092 of 1999 which was later modified by S.R.O. No. 295 of 2000. Three notifications have been produced as exhibit P1. For the sake of convenience, I will refer to S.R.O. No. 1729 of 1993 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chemicals or gas, fumigation or any other process applied for preserving the goods in good condition or for easy transportation. The process of producing desiccated coconut out of coconut shall be deemed to be 'manufacture' for the purpose of this notification." By S.R.O. No. 1092 of 1999 [exhibit P1(a)], the Government effected modification to the exemption granted under clauses 1 to 7 of exhibit P1 notification. By the said notification it was declared that S.R.O. No. 1729 of 1993 shall apply only to the following categories of industries. Subclauses (i) and (ii) as inserted by the Notification S.R.O. No. 1092 of 1999 alone are extracted hereunder, the other clauses are not relevant. "(i) New industrial units other than public sector undertakings which have been set up or have commenced commercial production before January 1, 2000. (ii) New industrial units other than public sector undertakings which have taken effective steps for setting up new industrial unit prior to the 1st day of January, 2000. An industrial unit shall be considered to have taken such effective steps if it has (a) obtained provisional registration (applicable only in the case of SSI units), (b) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, expansion or modernisation prior to the 1st day of January, 2000. (iv) A sick small-scale industrial unit which has been registered as a sick unit before the Director prior to the 1st day of January, 2000. The assessee in the present case claims that it falls under category (ii). The other categories are not relevant for the purpose of the present case. In the explanatory note to the amendment notification it is stated that the Government have decided to withdraw the exemption/deferment granted to industrial units as per notification S.R.O. No. 1729 of 1993 which are set up on or after January 1, 2000. The benefit of exemption/ deferment, as the case may be, will be granted in the case of units which have already commenced commercial production or have set up or which have taken effective steps to set up industrial units prior to January 1, 2000. In other words, the amendment notification was intended to abridge the benefit of exemption granted under S.R.O. No. 1729 of 1993. The benefit of S.R.O. No. 1729 of 1993 will continue to be available to units which have commenced commercial production prior to January 1, 2000, to units which have been set up prior to January 1, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es tax exemption. By an order dated June 8, 2003 the Director rejected the petitioner's application for eligibility holding that the petitioner had not acquired the necessary plant and machinery prior to January 1, 2000. The said order was challenged in O.P. No. 8563 of 2003. The order of the Director was set aside by this court and the matter was remitted back to the Director to pass fresh orders in the light of the observations made in the judgment and in accordance with law. Exhibit P2 judgment Reportedo as Pepsico India Holdings Pvt. Ltd. v. State of Kerala [2006] 144 STC 409 (Ker).was confirmed by the Division Bench of this court in W.A. No. 543 of 2004 Reported as State of Kerala v. Pepsico India Holdings Pvt. Ltd. [2006] 144 STC 442 (Ker). (exhibit P3). A special leave petition preferred against the same as SLP (Civil) No. 17308 of 2004 was dismissed as per exhibit P5. Subsequently, the issue was reconsidered by the Director, who passed fresh order [produced as exhibit R1(a) along with the counter-affidavit filed on behalf of respondents 1 to 3 and 5] inter alia certifying that the petitioner had started commercial production for soft drinks and syrup on March 7, 2001 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f production right from the stage of drawing of water to the stages of manufacturing, bottling, sealing and labelling. After having said so, the notice further alleged that the unit had paid an advance payment only for the following four items prior to January 1, 2000: 4. Skyline Engineering contracts Ltd. Basis civil infrastructure works It is alleged that items 3 and 4 are not items of necessary plant and machinery, that therefore items 1 and 2 alone could be treated as components of necessary plant and machinery. What is contemplated by the notification is therefore "necessary plant and machinery" which would mean such plant and machinery as are required at all stages of production. 80,00,000 4,00,000 24.12.1999 Total. . . 2,00,00,000 21,75,000 It was alleged that the company had not taken effective steps for the purchase of necessary plant and machinery before January 1, 2000 and consequently it would not be entitled to sales tax exemption. The assessee was given time to file objections to this notice. In exhibit P14 objections sent through the Advocate the assessee mainly asserted that the issue of eligibility having been considered by the Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said premise also. Exhibit P22 is the objection filed by the petitioner to exhibit P21. In exhibit P22 the petitioner reiterated the earlier contentions as contained in exhibits P14 and P18. It contended that what is involved is manufacture and the activity is not one of the excluded categories enumerated in the Explanation to S.R.O. No. 1729 of 1993. The product which is manufactured is commercially different from the raw materials. What is involved is not merely packing of goods, polishing, cleaning, grading, etc., and consequently the petitioner's application for exemption cannot be rejected. It seems that there was a personal hearing on November 23, 2006. Written submissions were also submitted by the assessee and by exhibit P24 order dated January 5, 2007 the Deputy Commissioner had rejected the petitioner's application for sales tax exemption. Exhibit P24 has been challenged in this writ petition. In the counter-affidavit filed by the respondents it is contended that the benefit of exemption granted under S.R.O. No. 1729 of 1993 was sought to be withdrawn with effect from January 1, 2000. Subsequent notifications were brought in for the said purpose. Nevertheles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacture, then obviously the petitioner would not be entitled to sales tax exemption in terms of S.R.O. No. 1729 of 1993. I will therefore deal with the said contention in the first instance. Exhibit P25 is a rough flow chart indicating the manufacturing process undertaken by the petitioner. The process starts with sugar purification where sugar is dissolved and subjected to carbon purification, filtration and finally to thermal treatment. Parallely CO2 is also purified. Apparently it is first vaporised and subjected to multi media filtration, by successively subjecting it to filtration with silica, alumina, carbon and micron. Treated liquid sugar is then blended with the syrup concentrate and then pumped into the filling plant where there is a mixture of treated water and treated liquid sugar. The flow chart also indicates the process of water purification. The veracity of exhibit P25 is not disputed. If this be the position then it is obvious that the manufacturing process which is undertaken by the petitioner cannot be taken as a mere adding of sugar to water and bottling the same. The final product is different from raw materials. What is excluded from the purview of "manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the observations made therein with regard to the scope and ambit of S.R.O. No. 1092 of 1999 have become final and binding on the parties. It is further contended that the rider incorporated in exhibit R 1(a) certificate issued by the Director of Industries to the effect that "this eligibility certificate is issued on the condition that the Deputy Commissioner (General), Commercial Taxes who is the sanctioning authority shall decide on the eligibility of the unit for sales tax exemption under the relevant notification, vide general procedure in this regard clarified by the State Level Committee, in its meeting held on March 15, 2003" will have to be treated as ultra vires the powers of the second respondent in terms of S.R.O. No. 1729 of 1993 and therefore liable to be eschewed from consideration. Sri. Vinod Chandran, learned Special Government Pleader for Taxes contended that the authority exercised by the Director of Industries on the one hand and the Deputy Commissioner of Taxes, the third respondent on the other hand in terms of the notification do not overlap each other. What is contemplated by the statutory notification S.R.O. No. 1729 of 1993 is a system by which the Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) makes it clear that even if the authority who is to issue the eligibility certificate finds that a unit is eligible for exemption, if it is found by the authority who is to issue the exemption order that the said unit is not eligible for exemption claimed, it can refuse to grant exemption. What is the delineation of the power exercised by the Director of Industries on one hand and Deputy Commissioner of Commercial Taxes on the other under the statutory Notification S.R.O. No. 1729 of 1993? The notification like any other statutory instrument is to be considered reasonably. A construction of the notification should be in consonance with the purpose of the notification issued under section 10 of the Kerala General Sales Tax Act. It cannot be gainsaid that an assessee can be considered as having been exempted from payment of tax in terms of the statutory notification only when a tax exemption certificate is issued. The competent authority in terms of the statutory notification to issue exemption certificate is the third respondent-Deputy Commissioner. Clause 10 of S.R.O. No. 1729 of 1993 enumerates the conditions and restrictions applicable in the matter of exemption of sales tax p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question would be entitled to sales tax exemption? If these two factors are certified in the eligibility certificate issued by the Director, does it oblige the Deputy Commissioner of Commercial Taxes to necessarily consider the unit in question as entitled for tax exemption? Mr. Vellapally contends that once the unit is certified as eligible for tax exemption then the limited brief available to the Secretary, Board of Revenue or the Deputy Commissioner of Commercial Taxes (who is currently the competent authority) is only to quantify the monetary limits of the tax exemption that the unit is entitled to. I am unable to accept this submission. If the said argument is extended to its logical conclusion, it will lead to a situation where the certificates of eligibility issued by the Director will have to be treated as certificate of actual exemption itself. In my view this would be clearly inconsistent with not only the express terms of the notification but also the intended purpose of the notification as such. I also take note of the fact that the authority competent to issue an eligibility certificate for medium and large scale industries would include not only the Director but a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in question i.e., S.R.O. No. 1729 of 1993 is similar to the one considered by this court in Tamil Nadu Ammonia [1998] 6 KTR 644. I am therefore unable to accept the submission of Sri. Vellappally that the third respondent acted without jurisdiction in deciding the question of eligibility of the petitioner for tax exemption. In my view, the respondent not only had the jurisdiction but also the obligation to consider whether the petitioner is entitled for sales tax exemption. The third respondent was only obliged to take note of two things as certified in exhibit R1(a) certificate of eligibility. That the petitioner had commenced commercial production on the date mentioned in the certificate of eligibility which in the present case is March 6, 2001, and that the monetary limit of tax exemption the unit is eligible for Rs. 30,46,94,552. Subject to the aforementioned two factors the actual issuance of tax exemption certificate which obviously can only be in consequence of a finding that the unit is entitled to be exempted from payment of tax was within the domain of the third respondent. This he obviously proceeded to do when he passed exhibit P24 order. Exhibit P24 cannot be term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh within the time frame mentioned in the Act and to pass a reasoned order adverting to the documents produced or to be produced by the petitioner in support of the contention that the petitioner has taken effective steps for setting up the industrial unit prior to January 1, 2000. This was all what was directed by the learned judge in exhibit P2 judgment and it was so construed by the Division Bench as well. In my view exhibit P2(1) judgment obviously cannot be construed as conferring authority on the second respondent to decide the question of eligibility entitlement of the petitioner for sales tax exemption. If the direction issued in exhibit P2(1) judgment is construed in such a fashion, it will amount to altering the scheme for tax exemption as provided in the statutory application. A reading of exhibit P2(1) judgment in its entirety, clearly shows that this court also did not intend to issue any direction either expanding the authority of the fourth respondent-Director on the one hand or abridging the authority of the third respondent-Deputy Commissioner of Sales Tax on the other hand. This court in exhibit P2(1) judgment directed the statutory authority to do what it is ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of eligibility of a unit for sales tax exemption. A further process to be undertaken by any other authority was not part of the notification on the scheme which was considered by the Supreme Court in Vadilal [2005] 142 STC 76; [2005] 6 SCC 292. In other words, the Committee was conferred with the comprehensive powers of deciding all issues relating to the entitlement of a unit for sales tax exemption. On the other hand the notification in question provided for the issue of eligibility to be decided by the Director and this essentially relates to certifying the commencement of commercial production by the unit for the purpose of the notification and certifying the monetary limit of exemption that the unit is eligible for. The crucial issue as to whether the unit is entitled for exemption is a matter which has to be decided by the third respondent. As mentioned above the delineation of authority is clear and there is no overlapping of the powers and functions of the second respondent and the third respondent. Regarding contention No. (2) The next issue to be considered is whether the finding in exhibit P24 order that the petitioner had failed to satisfy the eligibility con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required for all the stages of production right from the stage of drawing of water to the stages of bottling, sealing and labeling. It is further noted in exhibit P13 that out of the necessary required machineries the unit is seen to have placed firm orders before the cut-off date only for a "conveyor system" and "mixing plant" costing about Rs. 105 lakhs, i.e., orders are seen placed in accordance with the notification only for two items of the several necessary items of plant and machinery. The total cost of plant and machinery as claimed by the petitioner, in the application for sales tax exemption is Rs. 32,10,13,534. As noted in para 13 above (which is extracted from exhibit P13) apparently firm orders had been placed by the petitioner only for three items which would come under the category of necessary plant and machinery. Though three replies were given by the petitioner to exhibit P13, viz., exhibit P14 on June 30, 2005, exhibit P22 dated September 29, 2006 and thereafter exhibit P23 written submissions was made on December 1, 2006 after the personal hearing, it was not the case of the petitioner at any point of time that firm orders had been placed by them for other pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary plant and machinery" deployed in the unit as such. The crucial factor in the case of self-financing units are "acquiring or placing firm orders for the purchase of necessary plant and machinery before January 1, 2000". The deeming provision in the notification, relating to placement of firm orders further states that for the purchase of plant and machinery and equipments if such unit had made any advance payments in the matter indicated therein prior to January 1, 2000 then it shall be deemed that the unit has placed firm orders in respect of such plant and machinery. Benefit of the deeming provision in the notification is available to the petitioner only in respect of the three items of plant and machinery indicated in exhibit P13 (according to the third respondent it is only items 1 and 2). The deeming provision is not even invoked in respect of other plant and machinery which are admittedly necessary for the manufacturing process undertaken by the petitioner. It is not the petitioner's case that any plant and machinery as such was acquired before the cut-off date, i.e., January 1, 2000. In the circumstances the finding in exhibit P24 that the petitioner had not acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ector further mentioned that the total cost of plant and machinery of the unit as claimed by the petitioner is for the necessary plant and machinery required for each and every stage of production. Thus when the petitioner makes a claim, for the purpose of exemption that it has made an investment to the tune of Rs. 32,10,13,534 towards plant and machinery deployed in the unit, it obviously is the case of the petitioner that the said investment relates to necessary plant and machinery in the unit. As noted by the Director necessary plant and machinery are all the components of machinery and equipment constituting a complete production plant and machinery necessary for all the stages of production right from the stage of drawing of water to the stages of manufacturing, bottling, sealing and labeling. The items of plant and machinery for which firm orders were placed prior to the cut-off date on January 1, 2000 even according to the petitioner are obviously only a small percentage of the plant and machinery. It is significant to note that the said aspects noted in exhibit R1(a) have not been challenged in the writ petition. No doubt the petitioner has a case that exhibit R1(a) certifi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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