2004 (11) TMI 529 - HC - VAT and Sales Tax

Court Rules Activities Not 'Manufacturing' for Tax Breaks; Government Barred from Retroactive Tax Demands via Estoppel.

Panchalingal Carbonic Gas Pvt. Ltd. Versus State of Andhra Pradesh and others (and another case)

The HC determined that the petitioners' activities did not constitute 'manufacturing' under the 'Target-2000' scheme, thus disqualifying them from the ... Eligibility for sales tax exemption under the scheme - benefit of deferment/tax holiday on sales tax - scheme framed by the Government of A.P., known as 'Target-2000' - Definition and interpretation of 'manufacture'' - Liability to pay tax post-cancellation of incentives​​​​​​​ - Petitions are small-scale industries - HELD THAT:- It is settled principle of law that the statutes of taxation have to be construed strictly and where two views are possible in relation to a provision, the one beneficial to the subject has to be adopted. The law in this regard was succinctly stated by the Supreme Court in Commissioner of Sales Tax v. Modi Sugar Mills Ltd.[1960 (10) TMI 65 - SUPREME COURT]. The interpretation of the provision granting exemption from taxation, however stand on a different footing. It is evident that the word 'manufacture', unless defined by the concerned statute, shall be taken to mean the process through which an altogether new product from the point of utility, marketability and commercial value is brought about. Mere change of form by itself, cannot be treated as process of manufacturing. In the instant case, it is not in dispute that the petitioners purchased, oxygen or carbon dioxide, as the case may be, in its liquid form, converted the same into gaseous form, filled it in cylinders, and supplied the same to the customers. The said gases are converted into liquid form by the original manufacturers only for the purpose of effective and safe transport to the bulk customers, such as the petitioners. The gases in their liquid form are, in no way different, when they are converted into gaseous form. The chemical properties and other characteristics of both are the same. In fact, before transformation into liquid form, it is in gaseous state only. In highly compressed state, and at a very low temperature, the gas assumes liquid form. Huge volumes of gas can be transported or preserved in a relatively smaller container in liquid form. It is true that the conversion of gas from the liquid to gaseous state needs specific equipment and maintenance of different temperatures, etc. This, however by itself, cannot be treated as a manufacturing process, as long as the product continues to hold the same characteristics. Therefore, it cannot be said that the petitioners were undertaking any manufacturing process. Thus, it is held that; (a) the activity of the petitioners does not involve the process of manufacture, irrespective of the difference as to the form, in which it is purchased by the industry, and the form in which the same is supplied to its customers. (b) Incentive of deferment/tax holiday on sales tax under are available only to those industries, where the process of manufacturing takes place, subject, to their not having been excluded under the annexure. (c) The liability to pay the tax arising out of cancellation of incentives would start from the date on which such orders become operative, and it shall be open to the Government to recover any tax from such units, if it is found that they have collected the sales tax on such product during the subsistence of the incentives. There shall be no order as to costs. Petition disposed of accordingly. Issues Involved:1. Eligibility for sales tax deferment/tax holiday under the 'Target-2000' scheme.2. Whether the activities of the petitioners constitute 'manufacturing.'3. Application of the principle of equitable estoppel against the government.4. Liability to pay sales tax following the cancellation of incentives.Summary:1. Eligibility for Sales Tax Deferment/Tax Holiday:The petitioners, small-scale industries, were initially granted sales tax deferment/tax holiday under the 'Target-2000' scheme by the Government of Andhra Pradesh. However, this exemption was later canceled, prompting the petitioners to challenge the cancellation orders.2. Whether the Activities Constitute 'Manufacturing':The court examined whether the activities of the petitioners, involving the conversion of liquid gases (oxygen and carbon dioxide) into gaseous form and bottling them, constituted 'manufacturing.' The court referred to the definition and interpretation of 'manufacture' in various legal contexts. It concluded that 'manufacture' implies a transformation resulting in a new and different product. Since the conversion of gases from liquid to gaseous form did not change their essential characteristics, the court held that the petitioners' activities did not constitute manufacturing.3. Application of the Principle of Equitable Estoppel:The petitioners argued that they were entitled to the benefits under the principle of equitable estoppel, as they had established their industries based on the government's promise of incentives. The court acknowledged that the government had made a clear and unambiguous promise, and the petitioners had not misrepresented their activities. The court held that the principle of promissory estoppel applied, preventing the government from demanding the tax that the petitioners were initially exempted from collecting.4. Liability to Pay Sales Tax Following Cancellation of Incentives:The court ruled that the liability to pay sales tax would commence from the date the cancellation orders became operative. However, since the petitioners were prohibited from collecting sales tax during the incentive period, they could not be compelled to pay the tax they did not collect. The government could only recover the tax if it was found that the petitioners had collected sales tax from their customers during the incentive period.Conclusion:(a) The petitioners' activities do not constitute manufacturing.(b) Incentives under G.O. Ms. No. 108 are available only to industries engaged in manufacturing.(c) The liability to pay tax starts from the date of operative cancellation orders, and the government can recover tax if collected by the petitioners during the incentive period.Petition disposed of with no order as to costs.