1. Dispute over sales tax exemption under Industrial Policy Resolutions regarding whether extracting cotton from waste cotton constitutes manufacturing activity. (Para 2 )
Back
Next 
1995 Supreme(SC) 766
SUPREME COURT OF INDIA
B.P.Jeevan Reddy : S.C.Sen
Commissioner Of Sales Tax, Orissa
Versus
Jagannath Cotton Company
Case No. : .
Date of Decision : 7/28/95
Advocates Appeared: Ahmed Badar : Mishra Kirti : Mohanti B.A. : Sinha Parijat
Advocates:
B.A.MOHANTI, Badar Ahmed, KIRTI MISHRA, PARIJAT SINHA
B.A.MOHANTI, Badar Ahmed, KIRTI MISHRA, PARIJAT SINHA
To qualify for sales tax exemptions under the Industrial Policy Resolution, a unit must be engaged in 'manufacture or production,' which requires the process to result in the emergence of new and different goods from the raw materials used.
Headnote:
Sales Tax Act – Appeal Against conviction - Case of new medium and large- scale industrial units facility of deferment of payment of sales tax for a particular period was provided - State was divided into three zones having regard to their level of industrialization. Zone A which was supposed to be the least industrialised area provided more incentives than Zones B and C. District wherein respondent-industry is located, falls in Zone C - Provisions of Sales Tax Act also appear to have been amended in tune with said policy resolution as would be evident from Entry 30(ff) referred to in the counter filed by the respondent in this court - but this is one of aspects requiring clarification. Entry 30(ff) seems to provide exemption from sales tax of the products of a small-scale industry set up on or and starting commercial production thereafter inside the State subject to certain further conditions – Held, Apart from above consideration, we must also see what are the provisions, if any, in the Orissa Sales Tax Act providing exemption from sales tax in the case of new industries and whether they are consistent with provisions of IPR or are they different. The High Court seems to have proceeded on the assumption that the IPR by itself is enough to provide exemption from the sales tax. But where the provisions of the Sales Tax Act are also amended providing for exemption then court has to see whether they are the same as the IPR or are they different and if different, what is the effect of such difference - It is, therefore, necessary to ascertain the relevant provisions in the Sales Tax Act, rules and notifications if any, issued there under before expressing a final opinion in the matter - There is yet another important aspect upon which there is a woeful lack of material - While the respondent asserts that he obtains cotton from the waste cotton by employing machinery, the exact process employed by him is not set out or clarified in the counter-affidavit filed in these matters. The process adopted by the respondent has also not been noted in judgment – Court do not know whether this aspect was gone into at all. Even the order of the Sales Tax Officer does not clearly set out the process Before the court can express itself on the question whether a particular process amounts to manufacture/production or not, it must know what is precise process that gone through - It is necessary to have this material. As a matter of fact, there are a number of decisions both under central Excise Act as well as under the several State sales tax enactments where similar questions have arisen. The principles emerging there from may have to be kept in mind - Dealers and assesses normally contend that the process undertaken by them does not involve manufacture that no new goods have come into existence and that therefore, no tax or duty - But here the respondent is adopting a converse position because it is beneficial to him under the IPR – Appeal allowed
Act Referred
Legal Category Hierarchy
Table of Contents
2. Whether sales tax exemption requires engagement in manufacturing and whether the process of extracting cotton from waste cotton constitutes manufacture. (Para 2 , 4 )
3. Industrial incentives target manufacturing where new goods emerge; the specific process must be analyzed and the Sales Tax Act's consistency with policy resolutions verified. (Para 4 , 5 , 6 , 7 )
4. Manufacture requires the emergence of new and different goods from raw materials; industrial tax concessions are intended for manufacturing units, not mere processing. (Para 5 )
5. Appeals allowed, High Court judgment set aside, and matter remitted for fresh decision based on court observations. (Para 8 , 9 )
6. Does the Industrial Policy Resolution provide sales tax exemptions to any industry, or only those engaged in manufacturing?
The incentives are intended only for units engaged in the manufacture or production of goods, as evidenced by the use of terms such as manufacturing units, raw material, and finished products. (Para 4 , 5 )
7. What is the legal test to determine if a process constitutes manufacture?
The test is whether the application of a process results in the emergence of new and different goods as understood in relevant commercial circles. (Para 5 )
8. Can a court determine if a process is manufacturing without a detailed description of the process?
No, the court must know the precise process employed before it can express an opinion on whether that particular process amounts to manufacture or production. (Para 7 )
Judgment
B.P. JEEVAN REDDY, J.
(1) LEAVE granted.
(2) THE appeals are preferred against a common judgment of the orissa High court in five writ petitions. All the five writ petitions were filed by the respondent herein, Jagannath Cotton Company, wherein the question is whether the respondent is entitled to the benefit of exemption from sales tax under the Industrial Policy Resolutions of 1986 as well as of 1989. It also involves the question whether the process undertaken by the respondent, applying which he obtains cotton from waste cotton, can be called manufacturing activity.
(3) WITH a view to encourage the industrialisation of the State, the government of orissa published the Industrial Policy Resolution (dated 13/5/1986 in the Gazette of 11/6/1986. It provided several incentives to those establishing new industries in the State and also those who expanded their existing capacities. Inter alia, it provided for certain concessions in the matter of sales tax. In the case of village, cottage and small-scale industries, exemption from tax was provided on the purchase of raw material as well as the sale of finished product whereas in the case of new medium and large- scale industrial units, the facility of deferment of payment of sales tax for a a particular period was provided. The State was divided into three zones having regard to their level of industrialisation. Zone A which was supposed to be the least industrialised area provided more incentives than Zones B and C. District Sambhalpur, wherein the respondent-industry is located, falls in Zone C. The provisions of orissa Sales Tax Act also appear to have been amended in tune with the said policy resolution as would be evident from Entry 30(ff) referred to in the counter filed by the respondent in this court - but this is one of the aspects requiring clarification. Entry 30(ff) seems to provide exemption from sales tax of the products of a small-scale industry set up on or after 1/4/1986 and starting commercial production thereafter inside the State subject to certain further conditions.
(4) THE High court has allowed the writ petitions on two grounds, viz., (1 that the industrial policy resolution does not require that for obtaining the benefit of exemption of sales tax, a small-scale industry should necessarily be engaged in the manufacture or production of goods and (2) that the process adopted by the respondent by which he obtains cotton from waste cotton does amount to manufacture. So far as the first ground given by the High Court is concerned, we find it difficult to accept. A reading of the Industrial Policy Resolution (IPR) of 1986 as well as of 1989 clearly shows that several concessions at substantial cost to public exchequer were provided only with a view to accelerate the pace of industrialisation in the State. Para 3 of the IPR states,
"THEREFORE, the major thrust should be on development of sophisticated industries including electronics, upgradation of technology, modernisation of the existing units and development of functional (?) industrial areas in the fields of electronics and computers, electrical and domestic appliances, plastic and pomers, leather, textiles, ceramics, chemicals, drugs and pharmaceutical industries."
Even the provisions of the IPR relating to sales tax concessions bear out the said object. The relevant provisions read thus:
"(A) Concessions relating to sales tax.- (i) Exemption of sales tax on raw materials.- All new village, cottage and small industries will be exempted from sales tax on purchase of spare parts of machinery, raw materials and packing materials for a period of 5 years from the date of their commercial production. All new medium and large industries will be eligible for similar facility for 3 years in Zones B and C and for 5 years in Zone A. (ii) Exemption of sales tax on finished products.- (a) Products of all existing and new Khadi, village cottage industries and Handicra
