State of Haryana Vs Bharti Teletech Ltd.

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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6791 OF 2004

State of Haryana & Ors. … Appellant

Versus

Bharti Teletech Ltd. …Respondent

J U D G M E N T

Dipak Misra, J.

Calling in question the legal acceptability and

propriety of the judgment and order dated 08.05.2003

passed by the High Court of Punjab and Haryana at

Chandigarh in C.W.P. No. 16336 of 2002 whereby the

Division Bench has quashed the order dated 26.9.2002

passed by the Sales Tax Tribunal, Haryana which had

affirmed the orders passed by the appellate authority,

namely, Joint Excise and Taxation and that of the

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Deputy Excise and Taxation Commissioner (Gurgaon),

the original authority who had, upon initiation of a

proceeding under Rule 28 (11) (b) of the Haryana

General Sales Tax Rules, 1975 (for short “the Rules”),

come to hold that the respondent-assessee herein had

violated the provisions of Rule 28A (11) (a) (i) as it had

failed to maintain, without convincing reasons, the

requisite production and was, therefore, liable to make

full payment of tax exemption benefit availed by it

during the concessional period, i.e., 13.12.1991 to

12.12.1998 of sale of Electronic Push Button

Telephones (EPBT), the present appeal, by special

leave, has been preferred by the State of Haryana and

its functionaries.

2. The facts that are imperative to be stated are that

the respondent assessee, namely, M/s. Bharti

Teletech Limited, was allowed sales tax

exemption under Rule 28A of the Rules for the

period 13.12.1991 to 12.12.1998 for an amount of

Rs.498.80 lakhs. This benefit was granted subject

to the conditions laid down in the said sub-rule 11

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of Rule 28A of the Rules. The conditions

postulated in sub-rule 11 (a) are that the

industrial unit after availing of the benefit shall

continue its production at least for the next five

years not below the level of average production

for the preceding five years. There is also

stipulation in the sub-rule 11 that if the unit

violates any of the conditions laid down in clause

(a) of sub-rule 11, it shall be liable to make, in

addition to the full amount of tax benefit availed

of by it during the period of exemption, payment

of interest chargeable under the Act as if no tax

exemption was ever available to it. It is apt to

note that there is a proviso that provides that the

rigors of the said clause would not come into play

if the loss of production is explained to the

satisfaction of the Deputy Excise and Taxation

Commissioner concerned as being due to reasons

beyond the control of the unit.

3. As the facts would uncurtain, on 3.05.1997, the

assessee submitted an application seeking

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amendment in the eligibility certificate so as to

include certain other items but it was rejected

vide order dated 22.7.1997 by the High Level

Screening Committee. On an appeal being filed,

the Commissioner of Industries accepted the

same and remitted the matter to the High Level

Screening Committee to revise the eligibility

certificate allowing the benefit of sales tax

exemption by inclusion of additional items.

However, the period of exemption remained

unaltered. Be it noted, the assessee was granted

the full benefit of exemption for the entire period.

4. After the expiry of the period of exemption, the

Deputy Excise and Taxation Commissioner

(Gurgaon), the 2nd appellant herein, while

monitoring the production level of the respondent

unit, noticed that it was not maintaining the level

of production of the preceding five years and,

accordingly, initiated a proceeding against it on

the foundation that it had violated the conditions

enumerated under Rule 28A (11) (a) (i) and was

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thereby liable to make full payment of tax

exemption benefit already availed by it along with

interest. As required under the Rules, it issued a

notice to show cause to explain non-maintenance

of average production after the expiry of the

benefit period inasmuch as it had drastically come

down to Rs.9.06 crores from 17.52 crores. In the

course of adjudication, in reply to the show cause,

the assessee explained that it had established

another unit as an expansion unit which had

come into commercial production w.e.f. 27.3.1998

and for the purpose of determining the level of

production after 12.12.1998, the production

figures of the expansion unit were also required

to be taken into account. A contention was raised

before the 2nd appellant that the notice to show

cause was premature as it was given prior to the

expiry of twelve months from 12.12.1998, that is,

the date on which the period of benefit expired.

5. The adjudicating authority rejected the said

contention and proceeded to delve into the facts

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that had emerged before it. It came to hold that

the Gross Turn Over (GTO) during January 1999

and December 1999 was Rs.9.06 crores as

against the average GTO of Rs.17.52 crores

during the five years immediately preceding

12.12.1998. The said authority also considered

the GTO for the assessment year 1999-2000

(1.4.1999 to 31.3.2000) which reflected the

amount as Rs.4,48,05,695.00 for the year

immediately preceding, i.e., assessment year

1998-1999.

6. It may be noted that a contention was advanced

that the unit during the five years preceding

12.12.1998 had produced 40,83,246 pieces giving

yearly average of 8,16,649 pieces against which

the average production in the post benefit period

is 1898961 pieces which would show that the

production actually increased after the expiry of

the benefit period. The competent authority,

upon perusal of the production chart for the

period 13.12.1993 to 12.12.1998, analysed the

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same and arrived at the average production. The

tabular chart prepared by the adjudicating

authority is as follows:-

Average Production

Items Before on period Expiry benefit

After Expiry of benefit period

Increase (+)

Decrease (-)

ETBT 330431 163270 (-) 167161

Pagers 4405 Nil (-) 4405

Spare Parts 481813 1735691 (+) 1253878

7. The reasoning adopted by the 2nd appellant

basically was that the claim of the assessee that

production had not come down in the post benefit

period was wholly unacceptable because it could

not be given the same weightage as its individual

parts inasmuch as a complete telephone set could

not, for the exemption purpose, be equated with

its number of parts which constituted its

assembly. Being of this view, the 2nd appellant

came to hold that it was obligatory on the part of

the assessee industrial unit, having availed the

benefit of tax exemption for the specified period,

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to continue its business and to respect the

conditions enumerated in the prescription in the

rule. The said authority ruled that the assessee,

having failed to meet the production level, was

liable to be visited with the consequences and,

accordingly, directed for making full payment

along with interest.

8. Grieved by the aforesaid order, the assessee

preferred an appeal before the appellate authority

who came to hold that the explanation for loss in

production was due to outdated machinery and,

hence, the reasons for fall in production could not

be held to be beyond the control of the assessee,

for it was well within his control to replace the

outdated machinery of the old unit instead of

putting up a new unit. On the aforesaid bedrock,

the appellate authority declined to interfere in

appeal.

9. Failure in appeal led the assessee to file an

appeal before the Sales Tax Tribunal which, on

reappreciation of the factual matrix in entirety,

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came to hold that the average manufacturing of

EPBT in the subsequent three years was

approximately of 9.32 lacs as against an average

of 3.79 in the preceding five years. That apart,

the appellant had not taken the plea that the

lower production was because of factors beyond

their control. The tribunal further observed that it

was not a mere coincidence that the second unit

(expansion) became operational soon after the

expiry of benefit in the first unit from which it was

evident that the assessee had a well thought out

plan to deliberately reduce the manufacturing of

EPBT drastically in the first unit and increase the

production of the said item in the second unit.

The tribunal also took note of the fact from the

information provided by the assessee it was

obvious that the turnover in the expanded unit

had increased from Rs.65.49 lacs in 1998-1999 to

Rs.31.36 crores in 1999 but on the other hand,

the turnover in the first unit had gone down from

Rs.13.27 crore during 1998-99 to Rs.4.48 crore

during 1999-2000 and hence, it was clearly

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indicative that the expanded capacity had been

created to coincide with the expiry of the benefit

period in the first unit. Finally, the tribunal held:-

“Though increase or decrease in the turnover by itself may not be of much consequence in the scheme but the turnover does have direct relationship with the production and since the production of higher value item i.e. EPBT was reduced, the total gross turnover in terms of value was also bound to decline and the spare capacity in the first unit was utilized by increasing the production of spare parts i.e. low value items. It is, therefore, obvious from the facts of the case that the production of EPBT was deliberately reduced in the first unit and increased in the second unit as the appellant company was hoped of getting the benefit of exemption again on the expanded capacity.”

10. In view of the aforesaid analysis, the tribunal

affirmed the conclusion recorded by the forums

below. The aforesaid order of the tribunal came

to be assailed before the High Court in a writ

petition. The Division Bench of the High Court

referred to the rule position and quantity

manufactured in lacs and turnover of goods and

placed reliance on R.K. Mittal Woolen Mills v.

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State of Haryana and others1 and came to

hold that the tribunal ought to have set aside the

orders of the Deputy Excise and Taxation

Commissioner and Joint Excise and Taxation

Commissioner instead of upholding their action on

totally erroneous consideration. It opined that the

approach of the tribunal was erroneous inasmuch

as without pointing out to the violation of the

rules, it had passed the order solely on the basis

of conjecture. The High Court further observed

that even if the factum of reduction of production

as stated by the tribunal was accepted as correct,

still the exemption on tax could not have been

withdrawn as it was not a ground mentioned in

sub-rule II (a) (i) of Rule 28A for withdrawal of

exemption.

11. Questioning the defensibility of the order passed

by the High Court, Mr. Manjit Singh, learned

counsel appearing for the appellants, has

contended that the High Court in a laconic

manner has arrived at the conclusion that the 1 (2001) 123 STC 248

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authorities as well as the tribunal has fallen into

error by opining that there has been a violation of

the rule in question though on a bare reading of

the said orders there can be no shadow of doubt

that the increased production in respect of the

second unit could not have been taken into

account for the first unit since the second unit

was an individual unit having no concern with the

first unit. It is his further submission that the High

Court failed to appreciate that the respondent had

tried to take recourse to an innovative subterfuge

by establishing a new unit producing the same

items as the earlier ones and added the

production of the second unit to the first unit to

claim the benefit which is impermissible. Learned

counsel would further submit that when the

conditions enumerated under the rule had

factually been violated, there was no justification

on the part of the High Court to opine on the basis

of the decision rendered in the R.K. Mittal

Woolen Mills’ case that the exemption could not

have been withdrawn because there had been no

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violation of clauses (I) and (II) of sub-rule 11(a) of

Rule 28A of the Rules.

12. Mr. Gopal Jain, learned counsel appearing for the

respondent contended, in support of the

impugned order, that the appreciation of facts by

the High Court and the reasons ascribed by it for

annulling the orders of the forums below are

absolutely unimpeachable since the assessee was

under an obligation to apply for exemption even

in respect of expansion and in that background,

there was no justification for the forums below not

to take into consideration the production of the

expanded unit. It is also urged by him that even

assuming that there are two units, the same

would be covered under the definition of Rule 28A

(f) which defines “eligible industrial unit” and on a

proper construction of the provision, the

combined conclusion of the production of the

units cannot really be found fault with. It is also

put forth by him that the provisions relating to

exemption and the exemption notifications are

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required to be liberally construed for industrial

growth and the High Court, keeping in mind the

said principle, has dislodged the orders passed by

the forums below and, therefore, the order

impugned should not be taken exception to.

13. To appreciate the rivalised contention raised at

the bar, it is appropriate to refer to Rule 28A (11)

which reads as follows:-

“11(a) The benefit of tax- exemption/deferment under this rule shall be subject to the condition that the beneficiary/industrial unit after having availed of the benefit, -

(i) shall continue its production at least for the next five years not below the level of average production for the preceding five year; and

(ii) shall not make sales outside the State for next five years by way of transfer or consignment of goods manufactured by it.

(b) In case the unit violates any of the conditions laid down in clause (a), it shall be liable to make, in addition to the full amount of tax-benefit availed of by it during the period of exemption/deferment, payment of interest chargeable under the Act as if no tax exemption/ deferment was ever available to it;

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PROVIDED that the provisions of this clause shall not come into play if the loss in production is explained to the satisfaction of the Deputy Excise and Taxation Commissioner concerned as being due to the reasons beyond the control of the units:

PROVIDED FURTHER that a unit shall not be called upon to pay any sum under this clause without having been given reasonable opportunity of being heard.”

[Emphasis added]

14. On a bare reading of the said Rule, it is evincible

that the conditions which are imposed have been

enumerated in clause I (ii) of the said sub-rule 11 (a) of

Rule 28A to the effect that in the event of non-

maintenance of the quality of production after the

expiry of the exemption, the assessee has to pay the

tax benefit availed with interest. In the case at hand,

the revenue has pressed clause I (ii) into service. The

Division Bench has relied on the decision in R.K. Mittal

Woolen Mills (supra) wherein the High Court was

dealing with the withdrawal of eligibility of certificate as

provided in sub-rules 8 and 9 of Rule 28A. After

referring to sub-rule 8 of Rule 28A that deals with the

withdrawal of eligibility certificate under certain

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circumstances. Analysing the said Rule, it was stated

thus :-

“A perusal of the aforesaid sub-rule would show that the grounds on which the eligibility certificate and be withdrawn are mentioned therein but the ground of non-production of the change of land use permission from the Town and Country Planning Department is not one of the grounds mentioned therein. Sub-rule (8) of Rule 28A being a part of a taxing statute has, in the nature of things, to be construed very strictly and, therefore, the eligibility certificate can be withdrawn only on the grounds mentioned therein and on no other grounds. The authorities cannot add any other ground to the said sub-rule. We are, therefore, satisfied that the eligibility certificate granted to the petitioner could not be withdrawn only on the ground of non- production of the change of land use permission by the Town and Country Planning Department”

15. The said decision, as we perceive, was rendered in

a totally different context. In the present case, we are

not concerned with the withdrawal of eligibility

certificate. We are concerned with the consequences

that have been enumerated in clause (b) of sub-rule 11

of Rule 28A which clearly stipulates that in case of

violation of clause 11 (a) (i) of Rule 11, the assessee

shall be liable for making, in addition to the full amount

of tax-benefit availed of by it during the period of

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exemption/deferment, with interest chargeable under

the Act. Thus, reliance placed by the High Court on the

said decision is misconceived and inappropriate.

16. The hub of the matter is whether production of

two different units can be combined together to meet

the requirement of the postulate enshrined under the

Rule. The production of the beneficiary unit had failed

to fulfil the stipulation incorporated in sub-rule 11 (a)(i)

of Rule 28A of the Rules. It is also the undisputed

position that the production of the expanded unit has

been computed and clubbed with the first unit to reflect

the meeting of the criterion. The competent authority

has come to a definite conclusion that the expanded

capacity had been created to show that the rate of

production is maintained but it is fundamentally a

subterfuge. The authority has also taken into

consideration the different items produced and how

there has been loss of production of EPBT in the first

unit. The High Court has failed to appreciate the

relevant facts and, without noticing that the

respondent-assessee had clubbed the production of the

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units, lancinated the orders passed by the forums

below.

17. Mr. Jain, learned counsel for the respondent has

drawn our attention to clause (f) of sub-rule (2) of Rule

28A which defines ‘eligible industrial unit’. The

definition reads as follows:-

“(f) 'eligible industrial unit' means:-

(i) a new industrial unit or expansion or diversification of the existing unit, which-

(I) has obtained certificate of registration under the Act;

(II) is not a public sector undertaking where the Central Government held 51 per cent or more shares;

(III) is not availing incentive of interest free loan from the Industries Department for investment after the 1st day of April, 1988;

(IV) is not included in Schedule III appended to these rules except the tiny units set up in a rural area on or after 1-4-1992, in which capital investment in plant and machinery including market price of plant and machinery taken on base or otherwise, does not exceed rupees five lakhs, shall not form part of Schedule III;

(V) is not availing or has availed of exemption under Section 13 of the Act;

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(ii) a sick industrial unit recommended by the High Powered Committee for the grant of fiscal relief either in the form of exemption from the payment of sales tax or purchase tax or both or deferment of tax.”

18. He has laid immense emphasis on the term

‘expansion’ of the existing unit. The term

‘expansion’ has been defined in clause (d) of

sub-rule (2) of Rule 28A which reads thus:-

(d) "expansion/diversification of industrial unit" means a capacity set up or installed during the operative period which creates additional productions/manufacturing facilities for manufacture of the same product/products as of the existing unit (expansion) or different products (diversification) at the same or new location -

(i) in which the additional fixed -capital investment made during the operative period exceeds 25% of the fixed capital investment of the existing unit, and

(ii) which results into increase in annual production by 25% of the installed capacity of the Existing Unit in case of expansion.

On a careful reading of the aforesaid provisions, it is

quite clear as day that they deal with the eligibility to

get the benefit of exemption/deferment from the

payment of tax. On a studied scrutiny of clause (f) (i)

(I), it is manifest that it is incumbent on the unit to

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obtain certificate of registration under the Act. The

submission of Mr. Jain is that the second unit has

obtained the registration certificate under the Act and,

hence, the production of the said unit, being eligible, is

permitted to be included. Needless to say, obtainment

of registration certificate is a condition precedent to

become eligible but that does not mean that the

production of the said unit will be taken into account for

sustaining the benefit of the first unit. They are

independent of each other as far as sub-rule 11 of the

Rule 28A is concerned. We are disposed to think so as

the grant of exemption has a sacrosanct purpose. The

concept of exemption has been introduced for

development of industrial activity and it is granted for a

certain purpose to a unit for certain types of good.

Exemption can be granted under the Rules or under a

notification with certain conditions and also ensure

payment of taxes post the exemption period. The

concept of exemption is required to be tested on a

different anvil, for it grants freedom from liability. In

the case at hand, as we understand, it is ‘unit’ specific.

The term ‘unit’ has not been defined. The grant of

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exemption unit wise can be best understood by way of

example. An entrepreneur can get an exemption of a

unit and thereafter establish number of units and try to

club together the production of all of them to get the

benefit for all. It would be well nigh unacceptable, for

what is required is that each unit must meet the

condition to avail the benefit.

19. We will be failing in our duty if we do not address

to a submission, albeit the last straw, of Mr. Jain

that any provision relating to grant of exemption,

be it under a rule or notification, should be

considered liberally. In this regard, we may

profitably refer to the decision in Hansraj

Gordhanadas v. H.H. Dave, Assistant

Collector of Central Excise and Customs,

Surat and others2 wherein it has been held as

follows:-

“...It is well established that in a taxing statute there is no room for any intendment but regard must be had to the clear meaning of the words. The entire matter is governed wholly by the language of the notification. If the tax-payer is

2 AIR 1970 SC 755

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within the plain terms of the exemption it cannot be denied its benefit by calling in aid any supposed intention of the exempting authority. If such intention can be gathered from the construction of the words of the notification or by necessary implication therefrom, the matter is different...”

20. In Commissioner of Sales Tax v. Industrial

Coal Enterprises3, after referring to CIT v.

Straw Board Mfg. Co. Ltd4 and Bajaj Tempo

Ltd. v. CIT5, the Court ruled that an exemption

notification, as is well known, should be construed

liberally once it is found that the entrepreneur

fulfills all the eligibility criteria. In reading an

exemption notification, no condition should be

read into it when there is none. If an entrepreneur

is entitled to the benefit thereof, the same should

not be denied.

21. In this context, reference to Tamil Nadu

Electricity Board and Another v. Status

Spinning Mills Limited and another6 would be

fruitful. It has been held therein :-

3 (1999) 2 SCC 607 4 (1989) Supp (2) SCC 523 5 (1992) 3 SCC 78 6 (2008) 7 SCC 353

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“It may be true that the exemption notification should receive a strict construction as has been held by this Court in Novopan India Ltd. v. CCE and Customs7, but it is also true that once it is found that the industry is entitled to the benefit of exemption notification, it would received a broad construction. (See Tata Iron & Steel Co. Ltd. v. State of Jharkhand8 and A.P. Steel Re-Rolling Mill Ltd. v. State of Kerala9). A notification granting exemption can be withdrawn in public interest. What would be the public interest would, however, depend upon the facts of each case.”

22. From the aforesaid authorities, it is clear as crystal

that a statutory rule or an exemption notification which

confers benefit to the assessee on certain conditions

should be liberally construed but the beneficiary should

fall within the ambit of the rule or notification and

further if there are conditions and violation thereof are

provided, then the concept of liberal construction would

not arise. Exemption being an exception has to be

respected regard being had to its nature and purpose.

There can be cases where liberal interpretation or

understanding would be permissible, but in the present

case, the rule position being clear, the same does not

arise.

7 1994 Supp (3) SCC 606 8 (2005) 4 SCC 272 9 (2007) 2 SCC 725

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23. At this juncture, it is apposite to refer to the

pronouncement in State of Haryana and others v.

A.S. Fuels Private Limited and another10. In the

said case, the State of Haryana had approached this

Court as the High Court had construed the effect of sub-

rule 10 (v) of Rule 28A of the Rules which authorises

the department to withdraw the tax exemption

certificate but had granted liberty to the State to

scrutinize if it was a case for withdrawal of the eligibility

certificate under sub-rule (8) of Rule 28A of the Rules

and, thereafter, to proceed in accordance with the law.

This Court, scanning the anatomy of Rule 28A, opined

that under sub-rule (8)(b), when the eligibility

certificate is withdrawn, the exemption/entitlement

certificate is also deemed to have been withdrawn from

the first day of its validity and the unit shall be liable to

payment of tax, interest or penalty under the Act as if

no entitlement certificate had ever been granted to it.

Thereafter, the Court adverted to sub-rule 11 (a) and, in

that context, it observed thus:-

10 (2008) 9 SCC 230

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“...there are several conditions which are relevant; firstly, there is a requirement of continuing the production for at least next five years; secondly, consequences flowing in case of violation of the conditions laid down in clause (a). In other words, in case of non continuance of production for next five years, the result is that it shall be deemed as if there was no tax exemption/entitlement available to it. The proviso permits to the dealers to explain satisfactorily to the DETC that the loss in production was because of the reasons beyond the control of the unit. The materials have to be placed in this regard by the party. The High Court seems to have completely lost sight of sub-rule (11)(b).”

24. In the case at hand, as we have already held,

clubbing is not permissible. It amounts to a

violation of the conditions stipulated under Rule

11(a)(i) of Rule 28A and, therefore, the

consequences have to follow and as a result, the

assessee has to pay the full amount of tax benefit

and interest. The approach of the High Court is

absolutely erroneous and it really cannot withstand

close scrutiny.

25. In view of our aforesaid analysis and prismatic

reasoning, the appeal is allowed and the judgment

and order passed by the High Court is set aside and

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those of the tribunal and other authorities are

restored. There shall be no order as to costs.

……………………………….J. [H.L. Dattu]

……………………………….J. [Dipak Misra]

……………………………….J. [S.A. Bobde]

New Delhi; January 20, 2014.

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