Advancement of technology not “diversification”; Trade tax exemption can be claimed only if goods of different nature are manufactured: Supreme Court

Supreme Court: Explaining the scope of “diversification” of goods for the purpose of claiming exemption from trade tax, the bench of MR Shah* and Krishna Murari, JJ has held that as per Section 4-A (5) of the U.P. Trade Tax Act, 1948, 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 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 rules of interpretation, 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 and as per Section 4-A (5) of the U.P. Trade Tax Act, 1948 in case of “diversification” the goods manufactured by diversification shall be different from the goods 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”. 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 case at hand, 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. In such case, the goods manufactured on use of advance and/or modern technology, cannot be said to be a different commercial activity at all.

[AMD Industries Limited v. Commissioner of Trade Tax, 2023 SCC OnLine SC 18, decided on 09.01.2023]

*Judgment authored by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

Advocates who appeared in this case :

For respondent: Advocate Bhakti Vardhan Singh

Focus Keyphrase: Trade tax

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