Kerala High Court Holds MRF Eligible For Tax Exemption On 'Compound Rubber'

The Kerala High Court on 14 August held that MRF Limited is entitled to tax exemption under S.R.O. No. 1729/1993 for “compound rubber” manufactured by the company. It stated exemption cannot be denied by treating the product as covered by the negative list introduced through S.R.O. No. 38/1998

Justice Harisankar V. Menon allowed MRF's petition challenging the State Level Committee on Sales Tax Exemption's decision, which had denied the company exemption in respect of compound rubber. He held:

"...the petitioner would also be entitled for the benefit of exemption pursuant to S.R.O. No.1729/1993 as regards “compound rubber” and the said claim is not to be curtailed with reference to negative list at clause (h) introduced by S.R.O. No.38/ 1998",

MRF manufactures and sells tyres, tubes, tread rubber and other rubber products. The company had sought tax exemption under S.R.O. No. 1729/1993 for additional investments made in its industrial unit and modernisation undertaken there.

The Directorate of Industries and Commerce issued eligibility certificates to MRF for the additional investment and modernisation. Based on these certificates, the Deputy Commissioner (General) passed orders granting the exemption. However, the authorities restricted the exemption for “compound rubber” to 14 January 1998, relying on an amendment to S.R.O. No. 1729/1993 introduced through S.R.O. No. 38/1998 with effect from 15 January 1998.

MRF challenged the restriction before the State Level Committee on Sales Tax Exemption. The Committee rejected the company's appeal, relying, among other things, on an earlier Division Bench judgment of the Kerala High Court in State of Kerala v. M.R.F. Limited, reported in (2016) 90 VST 304 (Ker). MRF then approached the High Court challenging the Committee's decision.

The dispute before the High Court concerned the effect of the negative list introduced through S.R.O. No. 38/1998. The amendment specified processes that would not qualify as “manufacture” for claiming exemption. Clause (h) covered processes involving treatment of raw rubber with chemicals to form a compound of rubber.

MRF argued that the Division Bench had already examined whether compound rubber manufactured by the company could be treated as a finished rubber product despite the exclusion contained in the relevant notification.

The State contended that the earlier judgment concerned S.R.O. No. 1516/1990, whereas MRF's present exemption claim arose under S.R.O. No. 1729/1993. It therefore argued that the earlier ruling could not directly apply to the present dispute.

The Court examined both notifications and found that the exclusion in the earlier notification and the negative list subsequently introduced through S.R.O. No. 38/1998 were “more or less worded similarly.” It therefore held that the principles laid down by the Division Bench in the earlier MRF case would also apply when determining the company's eligibility for exemption under S.R.O. No. 1729/1993.

The Bench relied on the earlier finding that compound rubber is essentially a finished rubber product. The Division Bench had examined MRF's manufacturing process and expert evidence concerning rubber and polymer technology.

The earlier Court had found that compound rubber is produced by bringing together the ingredients required to achieve the required properties and is itself a finished rubber product. It rejected the contention that compound rubber was merely an intermediary product because MRF subsequently used it to manufacture tyres and tubes. It noted that the earlier Division Bench had categorically found that compound rubber could not be treated as a product covered by the exclusion merely because its manufacture involved processing or mixing with chemicals.

Further, the Bench noted that although the State Level Committee had considered the earlier Division Bench judgment, it had not examined the issue specifically with reference to the wording of the two notifications. In view of the similarity between the relevant provisions, it held that the principles laid down in the earlier MRF judgment applied to the present exemption claim.

Accordingly, the High Court set aside the State Level Committee's proceedings to the extent that they denied MRF the benefit of exemption for compound rubber. It directed the competent authority to issue consequential orders as expeditiously as possible and, in any event, within two months from the date of the judgment.

For Petitioner: Advocates Kuryan Thomas, M. Gopikrishnan Nambiar, K. John Mathai, Joson Manavalan, Paulose C. Abraham and Raja Kannan

For Respondent: Government Pleader Harima Hariharan