Supreme Court on the Meaning of "Diversification" for Claiming Tax Exemptions/Benefits

INTRODUCTION

 

In the recent case of AMD Industries Limited v. Commissioner of Trade Tax, Lucknow & Another, 2023 SCC OnLine SC 18, an interesting question arose before the Hon’ble Supreme Court relating to the eligibility of the Appellant (AMD Industries Limited) to claim certain exemptions under the U.P. Trade Tax Act.

 

According to the facts of the case, earlier the Appellant was engaged in the business of manufacturing “Spun Line Crown Cork” used for sealing the glass bottles. Later on, the Appellant upgraded his machinery and equipments, and started manufacturing “Double Lip Dry Blend Crowns”, which is also used for sealing the glass bottles.

 

As per the provisions of the U.P. Trade Tax Act, the exemptions could be claimed by only those Business Units which had undergone ‘Diversification’. However, the meaning of ‘Diversification’ was a source of debate between the contending parties, and it was unclear as to whether the goods that are manufactured by use of new/modern technologies could be termed as ‘Diversification’ entitling the Appellant (AMD Industries) to claim exemption from Trade Tax or not.

 

CONTENTIONS OF THE PARTIES

 

As per the Appellant, its new product consists of entirely different raw materials and is a distinct product in commercial parlance. Just because both the old product and the new product are used for sealing bottles, the same is not a relevant criterion to adjudge that the old product and the new product are not different.

 

On the other hand, the Department claimed that to avail the benefits under the head of “Diversification”, goods of entirely different nature are to be produced and at best, the case of the Appellant is one of “Modernization” wherein it has merely expanded and upgraded its capabilities, and not of “Diversification” that required production of goods “of a different kind, distinct and different in nature.” Thus, the new product of the Appellant is merely of enhanced quality and hence, mere change of technology cannot be considered to “Diversification” and production of goods of a different nature.

 

VIEW OF THE COURT

 

Unfortunately for the Appellant, to settle the instant conundrum, the Hon’ble Court opined that for “Diversification” to exist, the new goods manufactured must be different from the goods that were manufactured before such “Diversification.” And the meaning of “Diversification” to claim exemption under a Taxation Statute must be construed strictly and literally as such exemptions/concessions exist with a view to provide encouragement to Business to produce goods and not to help those Business Units which merely engage themselves in some of enhanced processing or upgradation.

 

Even when a new process is being adopted, the test is to see whether different goods emerge as a result of application of such process. Furthermore, the Court did not find any ambiguity in the words of the statute and went on to construe the meaning of “Diversification” in a literal manner.

 

In the words of the Court, “the goods manufactured on “diversification” must be a “different”, “distinct” and a “separate” good in nature. 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.”

 

Hence, the Appeal preferred by AMD Industries Limited was dismissed by the Hon’ble Supreme Court and it was held that no case has been made out for grant of exemption.

 

CONCLUDING OPINION AND REMARKS

 

Though I agree with the reasoning of the Hon’ble Court that any Exemption Provision in a Taxation Statue is to be construed strictly and literally, yet it seems that in the facts of the present case, the Court has failed to consider the following factors: -

 

a. Usage of entirely different raw materials.

b. Incurring of heavy costs to upgrade the quality of the product/goods.

c. Market/Consumer Perception.

 

In business parlance, it is seen that the quality of the product plays a crucial role in determining its market position and the kind of other products that it would compete with in the future.

 

For example, would it be prudent to compare a cheap cellphone with a costly, top of the line iPhone? if the Mobile/Cell Phone Manufacturing Industry is seen, the products/cellphones are available in the market ranging from the cost of Rs. 5,000 to Rs. 1,50,000. What is the usage of a cellphone? To communicate and to access internet. Both, a 5000 Rupees Phone and 150000 Rupees Phone are capable of performing those functions. The real difference lies in the quality of usage and the market/consumer perception. If the market perceives both the products to be different, then both the products would indeed be different since they would be catering to different sections/segments of the market. Merely because the usage is same, it does not mean that the product is same.

 

This argument was not dealt with properly by the Hon’ble Supreme Court. The Court did accept that advancement of technology leads to modernization of the product, but it failed to answer the circumstances in which such modernization of product would lead to a product of a different nature.

 

In my humble opinion, such questions have been left unanswered and at a later point of time, such questions may again be raised before the Hon’ble Supreme Court to be answered.