Holding

The sales‑tax exemptions under the Industrial Policy Resolutions are limited to units engaged in the manufacture or production of goods, and the High Court's judgment granting exemption to the respondent is set aside.

Summary

The Commissioner of Sales Tax, Orissa appealed against the Orissa High Court's order granting Jagannath Cotton Company exemption from sales tax under the State's Industrial Policy Resolutions of 1986 and 1989. The company argued that its process of extracting cotton from waste cotton constituted manufacturing, thereby qualifying for the concession. The High Court held that manufacturing was not a prerequisite for the exemption and that the company's process amounted to manufacture. The Supreme Court examined the language of the Industrial Policy Resolutions and the amended provisions of the Orissa Sales Tax Act, concluding that the concessions were intended only for units engaged in the manufacture or production of new goods. It further noted a lack of material on the exact process employed by the respondent, rendering a determination on manufacture impossible. Consequently, the Court set aside the High Court judgment, allowed the appeals, and remitted the matter to the High Court for a fresh decision. No costs were awarded.

Issues considered

Whether the sales‑tax concessions under the Industrial Policy Resolution apply to units not engaged in manufacturing.
Whether the process of obtaining cotton from waste cotton qualifies as "manufacture" within the meaning of the policy and the Sales Tax Act.
Whether the provisions of the Orissa Sales Tax Act are consistent with the Industrial Policy Resolution and what effect any difference has.
Whether the court can decide the issue in the absence of material describing the respondent's process.

Legislation cited

Orissa Sales Tax Act, 1947s. Entry 30(ft), s. Entry 39(ff)

Subjects

sales tax exemptionindustrial policy resolutionmanufacture definitionsmall scale industryOrissatax concessionremand

Judgment

A COMMISSIONER OF SALES TAX, ORISSA AND ANR.
v.
JAGANNATH COTTON COMPANY AND ANR.

JULY 28, 1995

B (B.P. JEEVAN REDDY AND S.C. SEN, JJ.)

State of Orissa-Industrial Policy Resolution of 1986 and 1989-Con-
cession to Industries-Exemption from Sales Tax-Co"esponding amend-
ment in Sales Tax Act-Claim for concessions-Held concessions were meant
C only for units which were engaged in manufactur~Woeful lack of material
as to whether process employed by claimant was manufactured-Matter
remitted to High Cowt. ·

Orissa Sales Tax Act, 1947: Entry 39(ff).

D Sales Tw:-Exemption to new industries-Exemption in tune with In-
dustrial Policy Resolution-Applicability of exemptio~ifference in
provisions of-Act and Industrial Policy Resolution and effect of difference
should be examined.

E Words and Phrases: 'Manufacture'-Meaning of

In its Industrial .Policy Resolution 1986, the State of Orissa an-
nounced certain sales tax concession to those establishing new industries
in the State and also to those who expanded their existing capacities.
Further in case of village, cottage and small scale industries, exemption
F from tax was provided on the purchase of raw material as well as the sale
of finished product. Besides the provisions of Orissa Sales Tax Act were
also amended in tune with the said policy resolution.

The respondent-company filed writ petitions in the High Court
claiming benefit of exemption from the sales tax asserting that the process
G undertaken by it in obtaining cotton waste from cotton was manufacturing
activity. The High Court allowed the writ petitions holding that (i) for
obtaining benefits of sales tax exemption it was not necessary that the
industry should be engaged in the manufacture or production of goods;
(ii) the process adopted by the respondent-company amounted to
H manufacture. Revenue preferred appeals before this Court.
390
COMMR. OF SALES TAX v. JAGANNATH COTTON CO. 391

Allowing the appeals and setting aside the judgment of the High A
Court, this Court

HELD : 1. A reading of the provisions of the Industrial Policy Resolu-
tion relating to sales tax concessions shows that the incentives are meant
only for those units which are engaged in the manufacture or production of B
goods. Indeed clause (2) (a) speaks of "concerned manufacturing units".
Furthermore, the use of the expression "purchase of raw material" itself
shows that what is ultimately produced is different goods than the raw
material used. Similarly the repeated use of the expression "finished
products" and the grant of exemption in case of small scale industries both
in respect of raw materials as well as finished products indicates that these c
concessions at substantial cost to public exchequer were ~eing provided
with a view to encourage units engaged in the manufacture or production of
goods and not to help those units which merely engaged themselves in some
sort of processing whereunder the goods remain essentially the same goods
even after the said process. (394-C-F]
D
2. The High Court seems to have proceeded on the assumption that

-- the Industrial Policy Resolution by itself is enough to provide the exemp-
tion from the sales tax. But where the provisions of the Sales Tax Act are
also amended providing for exemption, then the court has to see whether
they are the same as the Industrial Policy Resolution or are they different E
- and if different, what is the effect of such difference. (394-G]

3. Before the Court can express itself on the question whether a
particular process amounts to manufacture or not, it must know what is
the precise process that is gone through. In this case there is a woeful lack
of material on record. Accordingly the matters are remitted to the High F
Court for a fresh decision. (395-C; B; El

CIVIL APPELLATE JURISDICTION Civil Appeal Nos. 6627-
6631 of 1995.
G
From the Judgment and Order dated 29.7.94 of the Orissa High
Court in O.J.C. No. 1166/92 & 6, 162, 181, 1982 of 1993.

B.A. Mohanty and Ms. Kirti Mishra for the Appellants.

Badar Durrez Ahmad and Parijat Singh for the Respondents. H
392 SUPREME COURT REPORTS [1995] SUPP. 2 S.C.R.

A The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. Leave granted.

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
B 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 Resolution 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
C 'manufacturing' activity.

With a view to encourage the industrialisation of the State, the
Government of Orissa published the Industrial Policy Resolution (dated
May 13, 1986) in the Gazette of June 11, 1986. It provided several incen-
tives to those establishing new industries in the Sate and also those who
D expanded their existing capacities. Inter alia, it provided for certain con-
cessions 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 pay-
ment of sales tax for a particular period was provided. The State was
-
E 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 ad 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 true with the said
F policy resolution as would be evident from Entry 30(ft) referred to in the
counter filed by the respondent in this Court - but this is one of the aspects
requiring clarification. Entry 30(ft) seems to provide exemption from sales
tax of the products of a small scale industry set up on or after 1st April,
1986 and starting commercial production thereafter inside the State subject
G to certain further conditions.
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 neces-
sarily be engaged in the manufacture or production of goods and (2) that
H the process adopted by the respondent by which he obtains cotton from
COMMR. OF SALES TAX v. JAGANNATII COTTON CO. [B.P. JEEVAN REDDY, J.] 393

waste cotton does amount to manufacture. So far as the first ground given A
by the High Court is concerned, we find it difficult to accept. A reading of
the Industrial Policy Resolution (I.P.R.) 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 l.P.R. states, "(T)herefore, the major thrust should be
B
on development of sophisticated industries including electronics, upgrada-
tion 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 polymers, leather, textiles,
ceramics, chemicals, drugs and pharmaceutical industries." Even the
provisions of the l.P.R. relating to sales tax concessions bear out the said c
object. The relevant provisions read thus:

"(d) 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 D
purchase of spare parts of Machinery, raw materials and packing
materials of 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 Zone B and C and for 5 years in
Zone A E
(ii) Exemption of Sales Tax on finished products -

(a) Products of all existing and new Khadi, village cottage in-
dustries and Handicrafts will be exempted from sales tax when sold
by the concerned manufacturing units or sales outlets of authorised F
co-operative/Govt. agencies. Finished products of all existing and
new electronics industries so declared by the State Electronics
Development Corporation will also be exempted from Sales tax.

(b) Products of new small scale industries will be exempted from G
Sales Tax for a period of 5 years from the date of their commercial
production.

(iii) Sales Tax Deferment Scheme - New medium and large in-
dustrial units will be eligible to defer payment of Sales Tax col-
lected on their finished products for a period of 5 years in Zone-'B' H
394 SUPREME COURT REPORTS (1995) SUPP. 2S.C.R.

A and 'C and 7 years in Zone-'A' from the date of their commercial
production. Deferred amount in respect of each year would be
paid in full after the expiry of the period of deferment annually.

(iv) Exemption of Sales Tax on finished products in lieu of defer-
ment :- In lieu of the Sales Tax Deferment Scheme, new medium
B and large industrial units can opt for exemption of Sales Tax on
their finished products for a period of 5 years if located in Zone-A
from the date of their commercial production."

(emphasis supplied)
c A reading of the above provisions in the context of the I.P .R. shows
that the incentives are meant only for those units which are engaged in the
manufacture or production of goods. Indeed, clause (2) (a) in the above
extract speaks of "concerned manufacturing units". Manufacture, in its
ordinary connotation, signifies emergence of new and different goods as
D understood in relevant commercial circles. Furthermore, the use of the
expression purchase of· raw material" itself shows that what is ultimately
produced is different goods than the raw material used. Similarly, the
repeated use of the expression "finished products" and the grant of exemp-
tion in the case of small scale industries both in respect of raw material as
well as finished products indicates that these concessions at substantial cost
E to public exchequer were being provided with a view to encourage units
engaged in the manufacture or production of goods and not to help those
units which merely engaged themselves in some sort of processing
whereunder the goods remain essentially the same goods even after the
said process. Even if a process is adopted, the test is the same, viz., whether
F different goods emerge as a result of application of such process.

Apart from the 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
the provisions of I.P .R. or are they different. The High Court seems to have
G proceeded on the assumption that the I.P.R. by itself is enough to provide
the exemption from the sales tax. But where the provisions of the Sales Tax
Act are also amended providing for exemption, then the court has to see ...
whether they are the same as the l.P.R. or are they different - and if
different, what is the effect of such difference. It is, therefore, necessary to
H ascertain the relevant provisions in the Sales Tax Act, rules and notifica-
COMMR OF SALFS TAX v. JAGANNATH COTTON CO. [B.P. JEEVAN REDDY, J.) 395

tions, if any, issued thereunder before expressing a final opinion in the A
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. B
The process adopted by the respondent has also not been noted in the
judgment. We 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 C
the precise process that is gone through. It is necessary to have this
material. As a matter of fact, there are a number of decisions both under
the Central Excise Act as well as under the several State Sales Tax
enactments where similar questions have arisen. The principles emerging
therefrom may have to be kept in mind. The dealers and assessees normally
contend that the process undertaken by them does not involve manufac- D
ture, that no new goods have come into existence and that, therefore, no
tax or duty is leviable. But here the respondent is adopting a converse
position because it is beneficial to him under the I.P.R.

We are of the opinion that in the above state of affairs, the proper E
course would be to remit the matter to the High Court for a decision afresh
in the light of the observations made herein.

Accordingly, the appeals are allowed, the judgment of the High
Court is set aside and the matters remitted to the High Court for a fresh
decision in the light of this judgment. No costs. F
T.N.A. Appeals allowed.

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