By TIOL News Service

NEW DELHI , JAN 23, 2014: THE facts 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 sub-rule 11 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.

As the facts would uncurtain, on 3.05.1997, the assessee submitted an application seeking 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.

After the expiry of the period of exemption, the Deputy Excise and Taxation Commissioner (Gurgaon), 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 thereby liable to make full payment of tax exemption benefit already availed by it along with interest. 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 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.

The adjudicating authority rejected the said contention. The reasoning adopted 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. It was held that it was obligatory on the part of the assessee industrial unit, having availed the benefit of tax exemption for the specified period, 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.

The matter reached the High Court where a Division Bench referred to the rule position and quantity manufactured in lacs and turnover of goods 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.

The State is in appeal before the Supreme Court.

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 Supreme Court observed,

" 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 units, lancinated the orders passed by the forums below.

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 obtain certificate of registration under the Act. The submission 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 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.

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.

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 those of the tribunal and other authorities are restored."

(See 2014-TIOL-03-SC-CT-LB)