The State of Andhra Pradesh vs Godavari Plywoods Ltd.

A. Lakshmana Rao, J.—All these tax revision cases filed by the State arise out of the common order dated April 22, 1983, of the Sales Tax Appellate Tribunal, Andhra Pradesh, Hyderabad, allowing the appeals preferred by M/s. Godavari Plywoods Ltd., the respondent in all these cases.

The respondent is a company incorporated under the Companies Act, 1956, on October 11, 1973. It was granted permission to set up an industrial unit near Rampachodavaram village, East Godavari district, which is a scheduled area notified by the President of India under sub-para (1) of paragraph 6 of the Fifth Schedule to the Constitution of India, for the manufacture of commercial and decorative plywood. It purchased indigenous machinery worth Rs. 5,25,891.30 during the year 1976 and erected a pilot plant. During the year 1977-78 it imported machinery worth Rs. 70,43,113.60 and also purchased indigenous machinery worth Rs. 17,42,379.34 and installed it. The Electricity Board had given high tension electricity connection to the respondent-unit on September 1, 1977.

It is stated by the learned counsel for the respondent that a pilot plant was installed by the respondent for the purpose of test production on experimental basis, to test the quality of the product as well as the raw materials. The pilot plant was operated with the help of a generator. In that pilot plant 28,604.93 square meters of plywood during the period from September 1, 1976 to December 17, 1976 and 1,15,698.52 square metres of plywood during the period December 8, 1976 to December 17, 1976 was produced. The respondent effected sales of plywood worth Rs. 32,502.43 during the period from December 8, 1976 to December 17, 1976 and Rs. 59,197.61 during the period from December 18, 1976 to December 1, 1977.

The imported machinery worth Rs. 70,43,113.60 and indigenous machinery worth Rs. 17,42,379.34 purchased by the respondent was installed during the year 1977-78 and the unit went into regular production with effect from December 1, 1977. The respondent has produced a certificate dated June 23, 1981, issued by the Director of Industries that the respondent commenced regular production with effect from December 1, 1977.

While so, the Commercial Tax Officer No. I, Rajahmundry, levied sales tax on the sales of plywood effected by the respondent, by way of final assessment for the years 1977-78 and 1978-79 and provisional assessment for the months of April, May, June and July, 1981, rejecting the plea of the respondent that it was entitled for exemption from payment of sales tax for a period of five years from December 1, 1977, the date on which the unit went into regular production in terms of G.O. Ms. No. 606, Revenue (S), dated April 9, 1981.

Aggrieved by those orders, the respondent preferred appeals before the Appellate Deputy Commissioner of Commercial Taxes, Kakinada. Those appeals were dismissed. Then the respondent preferred appeals before the Sales Tax Appellate Tribunal which allowed the appeals holding that the industrial unit of the respondent set up after December 17, 1976, had gone into regular production only from December 1, 1977 and was therefore entitled to claim exemption from payment of sales tax in terms of the Government Order referred to above, for a period of five years. Against that common order these tax revision cases were preferred by the State.

It was submitted by the learned Government Pleader that the respondent set up the unit and stated production of the plywood prior to December 17, 1976 and as such it was not entitled to claim the benefit provided under G.O. Ms. No. 606, Revenue (S), dated April 9, 1981. On the other hand, it was vehemently urged by the learned counsel for the respondent that the industrial unit for the manufacture of plywood was set up by the respondent only after December 17, 1976 and it went into regular production from December 1, 1977.

Whereas the learned Government Pleader placed reliance on the sales of plywood effected by the respondent during the period September 1, 1976 to December 1, 1977 to point out that the unit set up by the respondent went into production prior to December 17, 1976, the learned counsel for the respondent laid emphasis on the purchase of imported and indigenous machinery by the respondent worth Rs. 70,43,113.60 and Rs. 17,42,379.34, respectively, during the year 1977-78 for the purpose of setting up the industrial unit for production of plywood and the certificate dated June 23, 1981, issued by the Director of Industries that the industrial unit of the respondent went into regular production from December 1, 1977, to establish that the industrial unit was set up by the respondent after December 17, 1976. In that connection it was urged that the respondent was granted licence to instal an industrial unit for the manufacture of commercial and decorative plywood of standards sizes of 8'' x 4'', 7'' x 4'' and 6'' x 4'' and the regular production of such plywood by the industrial unit set up by the respondent commenced only from December 1, 1977. According to the learned counsel the plywood sold during the period September 1, 1976 to December 1, 1977 which was of the size of 4'' x 2 1/2'' was produced in the pilot plant erected by the respondent for test production on experimental basis and such production in the pilot plant cannot be treated as the production by the industrial unit intended to be set up by the respondent for regular production of plywood on a commercial basis.

The only question that arises for consideration in these cases is whether the industrial unit for the regular production of plywood, was set up by the respondent on or after December 17, 1976, in which case it would be entitled to claim the benefit of exemption from payment of sales tax as provided in G.O.Ms. No. 606, Revenue (S), dated April 9, 1981. The question as to when the industrial unit was set up is a pure question of fact and such a question normally cannot be permitted to be raised in a revision case. However, as an argument was advanced on the interpretation of G.O.Ms. No. 606, Revenue (S), dated April 9, 1981, we propose to consider the rival contentions advanced on behalf of the parties.

G.O.Ms. No. 606, Revenue (S), dated April 9, 1981 :

"In exercise of the powers conferred by sub-section (1) of section 9 of the Andhra Pradesh General Sales Tax Act, 1957 (Andhra Pradesh Act No. VI of 1957) the Governor of Andhra Pradesh hereby exempts the sales of products of industrial units, set up on or after the 17th December, 1976 in the scheduled areas declared by the President of India as such under the Fifth Schedule to the Constitution of India from the tax payable under the said Act for a period of five years from the date of going into regular production by such industrial units."

The Government Order consists of two parts -

Setting up of industrial unit, and

its going into regular production.

Only an industrial unit which has been set up on or after December 17, 1976, in the scheduled area is entitled to claim exemption from the payment of sales tax in terms of the Government Order. In other words, the setting up of the industrial unit on or after December 17, 1976, is a condition precedent to be fulfilled for claiming the benefit provided under the said Government Order. Once that condition is fulfilled, then, that industrial unit would be exempted from the payment of tax on the sales of products produced by it for a period of five years from the date of its going into regular production.

There is no dispute that the industrial unit of the respondent is set up in the scheduled area. However, the point for consideration is whether that industrial unit was set up either before or after December 17, 1976. The industrial unit mentioned in the Government Order is the one which is permitted to be set up for the purpose of production of the products on a regular basis, for which purpose the industrial unit was intended to be established. The respondent was granted a licence by the State Government to set up an industrial unit for production of commercial and decorative plywood with a licensed capacity of 15 lakhs square meters of standard sizes of 8'' x 4'', 7'' x 4'' and 6'' x 4''. For setting up the unit, the respondent imported machinery worth Rs. 70,43,113.60 and purchased indigenous machinery worth Rs. 17,42,379.34 during the year 1977-78 and erected it during the year. It is no doubt true that the respondent set up a pilot plant during the year 1976 with indigenous machinery worth Rs. 5,25,891.30, produced in that pilot plant some plywood and that plywood was sold during the period from September 1, 1976 to December 1, 1977.

The thrust of the argument of the learned Government Pleader is that once the unit established by the respondent commenced production prior to December 17, 1976, whether that unit was called a pilot plant or a regular unit, the respondent was not entitled to claim the benefit provided under the Government Order. We cannot accept the contention of the learned Government Pleader for more than one reason. The first and foremost reason is that a pilot plant established for test production on an experimental basis cannot be treated as a regular unit. The industrial unit mentioned in the Government Order is the one established for the purpose of regular production of the products which it was intended to produce. By no stretch of imagination can it be said that a pilot plant is an industrial unit installed for the purpose of regular production. The figures furnished by the respondent which are not disputed by the department, show that the value of the machinery used in the erection of the pilot plant was only Rs. 5,25,891.30 whereas the value of the machinery erected for establishing the industrial unit for the purpose of regular production is Rs. 87,85,492.94. Therefore, the pilot plant erected for the purpose of testing the quality of the raw material and the finished product cannot be characterised as an industrial unit in terms of the Government Order and the plywood produced by it cannot be treated as forming part of regular production. Therefore, the contention that the erection of the pilot plant should be treated as erection of the industrial unit itself, is rejected.

It is, however, submitted by the learned Government Pleader that the respondent-company which was incorporated on October 11, 1973, had launched itself on the work of setting up of the industrial unit ever since the date of its incorporation and the date it commenced its operations for the purpose of setting up the industrial unit shall be taken as the date on which the industrial unit was set up. We are afraid that the argument is totally misconceived. If such a contention is accepted an element of uncertainty would be introduced in the decision making process to find out as to when an industrial establishment can be said to have been set up. One may say that the person commenced the operations for the purpose of installation of the industrial unit on the date the company was incorporated. Another may say that it commenced its operation on the date when it placed orders for the purchase of machinery. It is possible for yet another person to say that the operations were commenced when the machinery was received or when the erection of the machinery or the construction of the buildings commenced. Therefore, if the contention of the learned Government Pleader is accepted it would give scope to an arbitrate decision.

The words "set up" incorporated in the Government Order bear definite meaning. The expression "setting up" means, as is defined in the Oxford English Dictionary "to place on foot", or "to establish". In the Chambers Dictionary meaning of "set up" is given as "to erect", "to put up" which is in contradistinction to "commence". The meaning of the expression "set up" was considered by the Supreme Court in a case arising under the Wealth Tax Act, 1957, in Commissioner of Wealth-tax Madras Vs. Ramaraju Surgical Cotton Mills Ltd., . The relevant provision which was construed by the Supreme Court reads as follows :

"5(1)(xxi). that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the explanation to clause (d) of section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking :

Provided further that this exemption shall apply to any such company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit."

The meaning of the expression "set up" was explained in the following terms (at page 481) :

"A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organization that it can be said that the unit has been set up ....... Operations for the establishment of a unit, from the very nature of that expression, can only signify steps that have to be taken to establish the unit. The word ''set up'' in the principal clause, in our opinion, is equivalent to the word ''established'', but operations for establishment cannot be equated with the establishment of the unit itself or its setting up."

In the instant case there is no dispute that the machinery both imported and indigenous worth Rs. 87,85,492.94 was purchased by the respondent during the year 1977-78 and was also erected during that year. High tension electricity service connection was given to the unit only on September 1, 1977. The Director of Industries certificated in his letter L. Dis. Lr. No. 1716/DSK. 2/C3/81 dated June 23, 1981, that the respondent commenced regular production from December 1, 1977. The facts that the machinery worth Rs. 87,85,492.94 was purchased and erected during the year 1977-78 and electricity service connection was obtained for the unit on September 1, 1977, clearly establish that the industrial unit was made ready to function as a "manufacturing organization" only after December 17, 1976. Therefore, no doubt can be entertained that the respondent-industrial unit was "set up" within the meaning of that expression used in G.O. Ms. No. 606, Revenue (S), dated April 9, 1981, only after December 17, 1976. If that is so, it is entitled to claim exemption from the payment of sales tax on the products it produced for a period of five years from December 1, 1977, the date on which it went into regular production as certified by the Director of Industries.

For the reason stated above, we see no grounds to interfere with the order of the Tribunal. The tax revision cases, therefore, fail and are accordingly dismissed with costs.

Petitions dismissed.