IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HON'BLE THE CHIEF JUSTICE MR.H.L.DATTU & THE HONOURABLE MR. JUSTICE K.M.JOSEPH THURSDAY, THE 11TH DECEMBER 2008 / 20TH AGRAHAYANA 1930 WA.No. 2922 of 2007 --------------------- AGAINST THE JUDGEMENT IN WPC.3115/2007 Dated 30/11/2007 .................... APPELLANT/PETITIONER: ------------------------------------- PEPSICO INDIA HOLDINGS PVT. LTD., WISE PARK INDUSTRIAL DEVELOPMENT AREA, KANJIKODE POST, PALAKKAD-678 621, REPRESENTED BY ITS MANAGER (PLANT ACCOUNTING), MR. NEERAJ KHETAN. BY SR. ADV. SRI.C.S. LODHA ADV. SRI.A.K.JAYASANKAR NAMBIAR ADV. SRI.ANIL D. NAIR RESPONDENT/RESPONDENT: ------------------------------------------ 1. STATE OF KERALA, REPRESENTED BY THE CHIEF SECRETARY TO THE GOVERNMENT OF KERALA, SECRETARIAT, THIRUVANANTHAPURAM. 2. THE COMMISSIONER OF COMMERCIAL TAXES, THIRUVANANTHAPURAM. 3. THE DEPUTY COMMISSIONER (GENERAL), DEPARTMENT OF COMMERCIAL TAXES, THIRUVANANTHAPURAM. 4. THE DIRECTOR OF INDUSTRIES & COMMERCE, THIRUVANANTHAPURAM. 5. THE ADDITIONAL SALES TAX OFFICER, SECOND CIRCLE, PALAKKAD DISTRICT. 6. THE DEPUTY TAHSILDAR (R.R.), PALAKKAD. BY SPL. GOVT. PLEADER FOR TAXES SRI. VINOD CHANDRAN. THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 01/07/2008, THE COURT ON 11/12/2008 DELIVERED THE FOLLOWING: H.L. DATTU, C.J. & K.M. JOSEPH, J. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - WRIT APPEAL No.2922 of 2007 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 11th day of December, 2008. JUDGMENT K.M. JOSEPH, J. Section 10 of the Kerala General Sales Tax Act (hereinafter referred to as ' the KGST Act') confers power on the Government to grant exemption from payment of tax. In exercise of the said power, SRO.1729/1993 was issued. It inter alia provided that there will be an exemption in the case of new industrial units under Small Scale Industries, and Medium and Large Scale Industries for a period of seven years from the date of commencement of commercial production in respect of tax payable under the KGST Act on the turnover of sale of goods manufactured and sold within the State and on the turnover of goods taxable at the point of last purchase in the State, which are used for manufacturing other goods for sale within the State or inter state. Exemption is also provided from payment of surcharge payable under Section 3 of the Kerala Surcharge on Taxes Act,1957 in relation to the goods mentioned in sub-clause (a). The aggregate exemption in respect of sales tax and Central Sales Act together is not to exceed 100% of the fixed capital investment of the WA.2922/2007. 2 unit. Later it came to be modified by Notification, SRO.1092/1999 and still later there was substitution also effected by SRO.295/2000 dated 31st March, 2000 and after the substitution it reads as follows: “S.R.O. No.1092/99.- In exercise of the powers conferred by Section 10 of the Kerala General Sales Tax Act, 1963 (Act 15 of 1963), the Government of Kerala, having considered it necessary in the public interest so to do, hereby make the following modification to the exemptions granted in clauses 1 to 7 of the notification issued in G.O.(P) No.155/93/TD dated 3rd November, 1993 and published as S.R.O. No.1729/93 in Kerala Gazette Extraordinary No.1122 dated 4th November, 1993, namely:- The said notification shall apply only to the following categories of industries: (i) new industrial units other than public sector undertakings which have been set up or have commenced commercial production before 1st January, 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) owned or acquired or has been allotted land for establishing the industrial units and applied for financial support from any regular financial institution/government before 1.1.2000 or (c) in the case of WA.2922/2007. 3 self-financed units acquired or placed firm orders for the purchase of the necessary plant and machinery, before 1.1.2000 provided that the unit commences commercial production on or before the 31st day of December, 2001. (iii) and existing unit other than public sector undertaking which has taken effective steps for diversification, expansion or modernisation prior to the 1st day of January, 2000. An existing industrial unit shall be considered to have taken effective steps for diversification, expansion or modernisation, if such industrial unit has (a) or acquired necessary plant and machinery and /or equipments or (b) has owned or acquired or has been allotted land and has applied for loan from any regular financial institution and/or (c) has placed firm orders for the purchase of such plant and machinery and equipments before the 1st day of January, 2000 provided that such unit commences commercial production of such diversification, expansion or modernisation on or before the 31st day of December, 2001. A unit shall be deemed to have placed firm orders, for the purchase of plant, machinery and equipments if such unit had made any advance payments therefor by means of demand draft or cheque which has been credited to the account of the seller prior to 1st January, 2000. The onus of proving that an industrial unit had placed orders for purchase of such plant, machinery and equipments prior to 1st January, 2000 shall be on such industrial unit. WA.2922/2007. 4 (iv) a sick small scale industrial unit which has been registered as a sick unit before the Director of Industries and Commerce prior to the 1st day of January, 2000. (v) where on enquiry it is found that any industrial unit had secured exemption by furnishing false information or forged documents, the authority which issued the exemption order, shall, after affording such industrial unit a reasonable opportunity of being heard cancel the exemption. 2. Industrial units which had been sanctioned exemption/deferment as per notification SRO. No.1729/93 before 1st day of January, 2000 shall continue to enjoy the concession for the full period covered by the order of exemption/deferment. This notification shall come into force on the 1st day of January, 2000.” 2. The essential question which needs to be answered revolves around the interpretation of the words 'necessary plant and machinery'. 3. Appellant is the writ petitioner. It challenged Ext.P24 order passed by the Deputy Commissioner (General), Department of Commercial Taxes, Thiruvananthapuram, hereinafter referred to as the third respondent, rejecting its application for exemption from payment of sales tax in terms of SRO. 1729/1993 as amended by SRO.1092/1999 and aggrieved by SRO. 295/2000. The appellant further sought a writ of WA.2922/2007. 5 mandamus directing the third respondent to grant necessary sales tax exemption certificate to the petitioner after taking into account the effect of Exts.P2, P3 and P5 judgments and eligibility certificate issued by the Director of Industries and Commerce. 4. By Ext.P24, the third respondent took the view that the petitioner has not fulfilled the conditions mentioned in the notifications referred to for the purpose of sales tax exemption. He also found that the activities of the unit would not amount to a manufacturing process as laid down in SRO.1729/1993. The learned Single Judge found that the view of the third respondent in Ext.P24 to the effect that the activity carried on by the appellant in its unit would not amount to manufacture as laid down in SRO. 1729/1993 is unsustainable. However, the learned Single Judge upheld Ext.P24 on the reasoning that the certificate of eligibility issued by the Director of Industries is intended only to certify the actual commencement of commercial production of the unit before the cut off date and the monetary limit of tax exemption that the unit would be eligible for and that at the same time the Director of Industries was not required to certify the entitlement of the unit for tax exemption. He also found that the entitlement of the unit for exemption from payment of tax is to be certified by the Deputy Commissioner of Sales Tax in SRO. 1729/1993 and that such certification is to be contained in the exemption certificate issued by WA.2922/2007. 6 the Deputy Commissioner. He found that the appellant had not placed firm orders for the necessary plant and machinery as it had established only firm orders for plant and machinery for an amount of Rs.1,05,00,000/-. He also found that Ext.P24 was within jurisdiction and that the appellant had not satisfied the conditions mentioned in the notifications and consequently dismissed the writ petition. It is feeling aggrieved by the same that the appeal is filed. 5. Briefly put the case of the appellant is as follows: The appellant is a Private Limited Company. The Company, in 1999, decided to set up a medium scale unit in Kanjikode in the State of Kerala for manufacturing soft drinks under the brand name 'Pepsi'. The decision was largely influenced by the fact that the State Government had, with a view to attracting investment into the State, announced certain tax exemption schemes for new industrial units. It was also assured that the petitioner would be entitled to the benefit of these schemes. The Schemes found expression through various notifications. (As already mentioned) Ext.P1 is the notification SRO.1729/1993 as amended by SRO. 1092/1999 and SRO 295/2000. According to the petitioner, it had complied with the requirements of the notification and it applied for exemption. According to the appellant, in particular, it has taken the following steps for fulfillment of the conditions: WA.2922/2007. 7 “(i) Filed IEM with SIA vide SIA ACK/2655/SIA/IMO/1999 dated 28.12.1999. (ii) Acquired 50 Acres of land in Kanjikode, Palakkad District from Western India KINFRA on 28.12.1999, by executing a lease agreement dated 28.12.1999 and paying the entire consideration amount of Rs.2,77,64,000/- to Western India KINFRA vide DD dated 24.12.1999. (iii) Obtained the necessary consent from the Kerala State Pollution Control Board on 20.12.1999. (iv) Placed orders on suppliers of plant and machinery prior to 31 December 1999. (v) Commenced commercial production by March, 2001.” The State Level Committee took the stand that in so far as the appellant had not placed any firm orders for the entire plant and machinery required for the unit and had made advance payments only in respect of a portion of the entire plant and machinery before the stipulated date, the unit could not be said to have complied with the conditions. By order dated 8.6.2003 the Director of Industries and Commerce adopted the aforesaid view of the State Level Committee and rejected the application. The appellant had filed O.P. 8563 of 2000 challenging the recovery steps taken by the sales tax authorities. It amended the writ petition and challenged the order dated 8.6.2003. The writ petition was heard by a learned Single Judge, who WA.2922/2007. 8 passed a detailed judgment holding that the intention of the Government was to ensure that the unit must take serious steps and there is bonafide effort on the part of the unit to set up the unit and the matter was remanded to the Director of Industries and Commerce to take a decision in the light of the observations made in the judgment after considering the documents with regard to the placing of firm orders in respect of plant and machinery and equipments furnished by the appellant untrammeled by the view of the State Level Committee (Ext.P2). The State Government preferred an appeal and the Division Bench dismissed the appeal. Against the same, the State Government preferred a Special Leave Petition, which is produced as Ext.P4. By Ext.P5 order the Special Leave Petition came to be dismissed. The Director of Industries has thereafter issued eligibility certificate, it is stated. But it was not produced originally along with the writ petition as it was not served on the appellant. According to the appellant, it must have been issued considering the factual aspects and communications. The appellant had written a letter dated 11.5.1999 to the Government of its proposal to set up a plant vide Ext.P7. Vide Ext.P8 dated 13.5.1999 the KSIDC confirmed that the proposed manufacturing activity is not included under the negative list of units which are not eligible for incentives offered by the State Government. The appellant, by Ext.P9 dated 20.6.2001 make an application for tax exemption. By Ext.P10 dated WA.2922/2007. 9 8.6.2003 the application came to be rejected. The third respondent however, it is stated, with the intention to thwart the legal claims of the appellant resorted to new proceedings. Ext.P13 dated 20.6.2005 is issued by him calling upon the Company to adduce evidence in support of its claim to have placed firm orders for all necessary plant and machinery before the cut off date as required in the notification. Appellant caused Ext.P14 lawyers notice to be sent in reply. By Ext.P15 the appellant requested the fourth respondent, namely the Director of Industries and Commerce to issue the copy of the eligibility certificate. The fourth respondent vide Ext.P16 letter advised the appellant to contact the third respondent for a copy. The appellant approached the third respondent vide Ext.P17 letter. Faced with no response from the third respondent, the appellant approached the second respondent for copy of the eligibility certificate (Ext.P18). The second respondent, by Ext.P19 asked the appellant to approach the fourth respondent. The appellant again approached the fourth respondent vide Ext.P20. Vide Ext.P21, the appellant was issued with another notice dated 20.9.2006. The appellant was informed by the third respondent therein that he proposed to reject the claim for exemption on the ground that the processes carried out by the appellant's unit did not amount to manufacturing. Appellant thereupon preferred Ext. P22 reply enclosing therewith a short write up on the WA.2922/2007. 10 manufacturing activities carried out in the factory. Ext.P23 is the detailed written submission said to have been given before the third respondent. However, by Ext.P24, as already stated, the appellant's application came to be rejected by the third respondent. 6. The case of the respondents essentially is as follows: By SRO.1092/1999 the operation of SRO.1729/1993 was restricted to certain categories of industries only from 1.1.2000. Accordingly, a new industrial unit, which had taken effective steps for setting up a new industrial unit prior to 1.1.2000 is eligible for exemption provided the unit commenced commercial production before 31.12.2001. The appellant, being a self financing unit, should have taken effective steps, that is acquired or placed firm orders for purchase of necessary plant and machinery prior to 1.1.2000. Necessary plant and machinery shall mean all machinery and equipments required for running the unit. As per the flow chart of the unit, it contains the functional requirements. The activities of the unit start with the shipping in of bottles, its purification, inspection at various stage on one side, and the making of the product which starts from drawing water, its treatment at various levels in the water treatment plant, storage of syrup, mixing processes at various levels, bottling, labeling, inspection etc., on the other side which are carried out simultaneously and which are all done with the aid of machinery. WA.2922/2007. 11 Therefore necessary plant and machinery required for each and every stage of its activities are the machineries for the various processes at various levels for making the ultimate product and machineries for bottling, labeling and inspection. It is stated that the only question before the court in O.P. 8563 of 2003 was with regard to the rejection of the application for eligibility certificate on the ground that the appellant had not complied with the requirement to take effective steps before the cut off date. Ext.R1(a) is produced as the certificate issued by the Director of Industries and Commerce. There are no conclusive findings by this court or the Supreme Court that the appellant had satisfied the requirement as specified in the notification. The appellant had not furnished details to prove that they have taken effective steps for acquiring the necessary plant and machinery for the operation of the unit. Third respondent is the authority to pass exemption order. It is also the case of the respondents that an exemption notification must be given strict interpretation. 7. A reply affidavit is filed by the appellant essentially reiterating the contentions raised in the writ petition. 8. Heard learned counsel appearing on behalf of the appellant and the learned Special Government Pleader for Taxes Sri. Vinod Chandran. WA.2922/2007. 12 9. Learned counsel for the appellant would contend that the third respondent has acted illegally in passing Ext.P24. He contended that the learned Single Judge, after having correctly found that there was indeed manufacturing activity, has erred in taking the view that the appellant has not fulfilled the conditions stipulated in the notifications for the reason that the appellant has not produced material to show that it had acquired or placed firm orders for the necessary plant and machinery. It is contended that the aim of the notifications is to promote industrial development of the State of Kerala and to provide incentives to those industries. The notifications in question must accordingly be construed liberally. It is further contended that the main thrust was on setting up of the new unit by 31.12.2001 and the notification provides commencement of commercial production before the said date as a condition. Principles of purposive interpretation are pressed into service. It is contended that the units which can show that they fall under clauses (a), (b) or (c) are deemed to have taken effective steps as the second part of the notification is a deeming provision. It is contended that the appellant company qualifies for exemption under both parts of the notification. The notification does not require placing orders for all the necessary plant and machinery. Such an interpretation would involve reading the word “all” prior to “necessary plant and machinery” which is impermissible. It is also contended that the WA.2922/2007. 13 appellant satisfies the first part having taken various other steps such as acquiring and paying for land, obtaining other clearances and placing orders and paying advances for the construction of factory building, in addition to placing firm orders for necessary plant and machinery. The doctrine of contemporanea expositio is pressed into service in the light of the interpretation given to the notifications by the authorities in the State, who are responsible for framing and implementing the industrial policy of the State. It is pointed out that no tax was collected from the customers. Relying on the views of the Principal Secretary (Tax) and the Principal Secretary (Industries), no tax has been collected from customers and the benefit is passed on by the appellant to the customers, it is contended. It is then contended that under the 1993 notification as amended it is for the Director of Industries and Commerce to examine and issue the certificate of eligibility. The Deputy Commissioner (Taxes) is only to issue the order of exemption and cannot sit in judgment over the orders of the Director. It is also pointed out that having regard to the judgments of this court, it is not open to the parties to take a contrary view. 10. It is contended that the first part is independent of the second part. Examples are given. Appellant is also qualified under Clause (c). Appellant had placed orders for supply of paramix plant comprising of Deaeration plant, Mixing plant, Beverage Chilling plant, Carbonation plant, WA.2922/2007. 14 switch and control unit and frame, Blow moulder, Pet Conveyor system, Unscrambler and Air conveyor, gripper, rinser, warmer, case packer, filler and capper. It is stated that all these orders for Rs.7 Crores are necessary plant and machinery. It is further contended that even construing the matter in a very narrow manner and considering only two orders as firm orders, the requirement of Clause (c) is fulfilled, because all that the clause requires was the demonstration of having taken bonafide steps. Reliance is placed on the decision in Deepak Fertilisers Case (2007(SC2 GJX 709) to contend that it could not have been contemplated to fix different level of rigour for cases coming under clause (b) and clause (c), as under clause (b) if the appellant had simply applied for loan, it would have qualified without doing anything more. Reliance is placed on the decision of the Apex Court reported in Vadilal Chemicals v. State of A.P. (2005(6) SCC 292 to contend that once an eligibility certificate is granted after detailed deliberations, the Deputy Commissioner cannot go behind it. There is no discretion with the Deputy Commissioner, it is contended. 11. Per contra, learned Special Government Pleader for Taxes, Sri. Vinod Chandran, would submit as follows: SRO 1729/1993 is a notification by which notification granting exemption came to be withdrawn. The Committee of Chief Ministers of all the States noting the anomalies in the administration of sales tax appointed WA.2922/2007. 15 the Dr.Raja Chellaiah Commission. The Commission recommended introduction of Value Added Tax. It also recommended the phasing out of the exemptions and other concessions being given to industrial undertakings under the various General Sales Tax Acts, as it created unhealthy competition and also increased the possibility of evasion of sales tax. It is in this back drop Government of Kerala decided on the basis of the decisions of the Committee of Chief Ministers to withdraw the exemption granted by SRO. 1729/1993. However, it is contended that to avoid litigations on the basis of promissory estoppel and to protect the interests of those who had substantially acted on the basis of the exemption notification it decided to give exemption to those who had taken steps. It is contended that as per SRO 1092/1999 as amended by SRO 295/2000, exemption available under SRO 1729/1993 was confined to those industrial units inter alia which took effective steps for setting up such units before 1.1.2000 as also an existing unit which had taken effective steps for diversification of the unit, expansion or modernisation prior to 1.1.2000.. In regard to new industrial undertakings, which had taken effective steps for setting up such units before 1.1.2000 the notification itself provided what was to be considered as having taken effective steps and they are contained in clauses (a) to (c). The commencement of commercial production before 31.12.2001 was a further WA.2922/2007. 16 condition for the grant of exemption. It is contended that a small entrepreneur desiring to start a small unit and an entrepreneur who invested money to purchase land for setting up a unit, but does have the resources to set up the industry without availing finance and a self financing unit, which has substantial resources have been categorized on a rational basis. In O.P. 8563 of 2003, it is contended the appellant had approached this court and contended that they had paid advance for four major items of machinery and placed firm orders with respect to the other plant and machineries and also contended that as per the deeming provision with respect to the items for which advance has been paid, it should be deemed to be placing of firm orders with respect to the said machineries and the quantum of advance paid is irrelevant. It is also contended that in the earlier round of litigation in respect of items for which advance had not been paid, the appellant had contended that they are ready to adduce evidence for the placing of orders. This court had taken the view that the quantum of advance is not relevant and however negligible, the fact of payment of advance would result in finding of placing of firm orders in respect of those items, for which advance has been paid. The court also took the view that the deeming provision with regard to advance payment only dispenses with the requirement of establishing that firm orders have been placed and it is open to the unit to establish by WA.2922/2007. 17 producing other materials that firm orders are placed before 1.1.2000 with regard to the other plant and machinery. Thus it is essentially contended that what was decided in