of Sales Tax, Orissa & Anr Vs. Jagannath Cotton Company & Anr  INSC
347 (28 July 1995)
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Sen, S.C. (J) B.P.Jeevan Reddy.J.
1995 SCC (5) 527 JT 1995 (5) 569 1995 SCALE (4)584
appeals are preferred against a common judgment of the Orissa High Court in
five writ petitions. All the five writ petitions were filed by the respondent
herein, Jagannath Cotton Company, wherein the question is whether the respondent
is entiled 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 'manufacturing' activity.
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 incentives to
those establishing new industries in the State and also those who expanded
their existing capacities. Inter alia, it provided for certain concessions 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 payment of sales tax
for a particular period was provided. The State was 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 and 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 tune with the said policy resolution as would be evident from Entry 30(ff)
referred to in the counter filed by the respondent in this Court-but this is
one of the aspects requiring clarification. Entry 30(ff) seems to provide
exemption from sales tax of the products of a small scale industry set up on or
after Ist April, 1986 and starting commercial production thereafter inside the
State subject to certain further conditions.
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 necessarily be engaged in
the manufacture or production of goods and (2) that the process adopted by the
respondent by which he obtains cotton from waste cotton does amount to
as the first ground given 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 I.P.R. states, "(T)herefore, the major thrust
should be on development of sophisticated industries including electronics, upgradation
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 I.P.R. relating to sales tax concessions bear out the said object.
The relevant provisions read thus:
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 purchase of spare parts of Machinery, raw materials and packing materials
for a period of 5 years from the date of their commercial production.
new medium and jarge industries will be eligible for similar facility for 3
years in Zone B and C and for 5 years in Zone A.
Exemption of Sales Tax on finished products- (a) Products of all existing and
new Khadi, village cottage industries and Handicrafts will be exempted from
sales tax when sold by the concerned manufacturing units or sales outlets of authorised
Products of all existing and new electronics industries so declared by the
State Electronics Development Corporation will also be exempted from Sales Tax.
Products of new small scale industries will be exempted from Sales Tax for a
period of 5 years from the date of their commercial production.
Sales Tax Deferment Scheme-New medium and large industrial units will be
eligible to defer payment of Sales Tax collected on their finished products for
a period of 5 years in Zone-'B' and 'C' and 7 years in Zone-'A' from the date
of their commercial production.
amount in respect of each year would be paid in full after the expiry of the
period of deferment annually.
Exemption of Sales Tax on finished products in lieu of deferment:- In lieu of
the Sales Tax Deferment Scheme, new medium 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) 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
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 exemption in the case of small scale industries both in respect of raw
materials as well as finished products indicates that these concessions at
substantial cost 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 different goods
emerge as a result of application of such process.
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 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
I.P.R. or are they different- and if different, what is the effect of such
difference. It is, therefore, necessary to ascertain the relevant provisions in
the Sales Tax Act, rules and notifications, if any, issued thereunder before
expressing a final opinion in the matter.
is yet another important aspect upon which there is 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 clarfied
in the counter-affidavit filed in these matters.
process employed by him is not set out or clarified in the counter-affidavit
filed in these matters. 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 Before the Court can express itself on the question whether a particular
process amounts to manufacture/production or not, it must know what is 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
dealers and assessees normally contend that the process undertaken by them does
not involve manufacture, 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.
of the opinion that in the above state of affairs, the proper course would be
to remit the matter to the High Court for a decision afresh in the light of the
observations made herein.
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.