Anand International vs The Commissioner of Sales Tax

A.K. Menon, J.—By this order, we dispose of two references pertaining to the same assessee pursuant to Reference Application Nos. 137 & 138 of 2003 which pertain to assessment years 1995-96 and 1996-97.

The facts in both the cases are similar. The common question in both these appeals is as follows:-

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the appellant is not entitled to set-off under Rule 41D of the Bombay Sales Tax Rules, 1959, in respect of the export sales of the fountain pens sold at Rs. 30/- per piece and ball pens sold at Rs. 25/- per piece during the period 01-04-1995 to 30-09-1995 covered by Notification Entry 304 and export sale of fountain pens and ball pens sold at a price upto Rs. 30/- per piece during the period 01-10-1995 to 31.03.1997 covered by Notification Entry A-23 ?"

For the sake of convenience, we will refer to the facts in Reference Application No. 137/2003 in brief :-

By notification issued under Section 41 at serial No. 304 (old) (pens) sold at a price not exceeding Rs. 30/- per piece and part thereof and ball pens upto Rs. 25/- per piece were exempt from the whole of the tax for the period 1st April, 1995 to 30th September, 1995. A similar notification was issued w.e.f. 1st October, 1995 under a new group entry A-23 of the notification under Section 41 of the Bombay Sales Act, 1959. The Applicant in the above matter is a partnership concern manufacturing, selling and exporting pens and ball pens (the goods). The Applicant is registered under the Bombay Sales Act, 1959 (''the Bombay Act'') as well as Central Sales Tax Act, 1956 (''the Central Act''). It was assessed for the period from 1st April, 1995 to 31st March, 1996. The Applicant''s claimed set off under rule 41D of the Bombay Sales Tax Rules, 1959 (''Rules'') which was partly allowed by the Assessing Officer.

Being dissatisfied with the order, the Applicant filed an appeal before the Deputy Commissioner of Sales Tax (Appeals) 3, Mumbai and contended that the partial denial of set off under rule 41D was improper. In Appeal, the Deputy Commissioner (Appeals) found that the Assessing Officer had erred in calculating the percentage of tax free sales which included export sales of manufactured goods. The Deputy Commissioner reduced the set off allowed. The Deputy Commissioner relied on some audit note and reduction in set off under Rule 41D was increased from 9% to 51.3% for the financial year 1995- 96. In case of financial year 1996-97 i.e. in Reference No. 13 of 2006, it entailed increase in reduction from 5.52% to 51.25%.

Being aggrieved by the said order, the Applicant preferred a second appeal before the Tribunal in respect of the order. The Applicant contended before the Tribunal that the Deputy Commissioner (Appeals) has incorrectly decided the percentage while granting set off and that he erred in considering part of export sales as exempted for reducing the set-off along with exempted local sales.

Mr. Surte, learned counsel appearing on behalf of the Applicant referred to the definition of taxable goods under section 2(33) of the Bombay Act as meaning "goods other than those on the sale or purchase of which no tax is payable under Section 5". He then relied upon item 28 of schedule C-II upto 30th September, 1995 which set out the percentage of tax applicable on fountain pens, ball pens, etc. during the period in question. He also relied upon notification entry No. 304 under section 41 of the Bombay Act which provides for exemption from whole of the tax on sale or purchase of the goods.

For case of reference, Section 41 of the Bombay act is reproduced below:-

" 41. (1) subject to such conditions as it may impose, the State Government may, if it is necessary so to do in the public interest in the Official Gazette, exempt any specified class of sales or purchases from payment of the whole or any part of any tax payable under the provisions of this Act any notification issued under this section may be issued so as to be retrospective to any date not earlier than 1st January, 1960.

(2) Where any dealer or person has purchased any goods under a declaration given by him under any of the notifications issued under this section and-

(a) any of the conditions subject to which such exemption was granted, or

(b) any of the recitals or the conditions of the declaration."

are not complied with, for any reason whatsoever, [or, in any other case, where such dealer or person was not entitled to issue such declaration, then, without prejudice to the other provisions of this Act] such dealer or person, shall be liable to pay purchase tax on the purchase price of the goods so purchased, and the purchase tax shall be levied at the rates set out against each of such goods in column 4 of Schedules B and C, notwithstanding that such dealer or person was not liable to pay tax under section 3, and accordingly the dealer or the person who has become liable to pay purchase tax under this sub-section shall file return in the prescribed form to the prescribed authority within a prescribed time and shall include the purchase price of such turnover in his return, and pay the tax in the prescribed manner. The tax due from any such dealer or person shall be assessed or re-assessed under section 33 or 35, as the case may be :

Provided that, the amount of tax (if any) paid by the dealer or such person to a Registered dealer on such purchases, on which he has become liable to pay purchase tax under this sub-section, shall be set off against the purchase tax so leviable.

Provided further that, if the dealer or the person liable to pay purchased tax as aforesaid has been assessed to purchase tax and if he has paid such tax, then the dealer from whom such goods are purchased shall be exempted from payment of tax on such goods to the extent such purchase tax has been paid.

(3) If the Commissioner has reason to believe that any person is liable to pay tax under sub-section (2), the Commissioner shall, after giving him a reasonable opportunity of being heard, assess the amount of tax so due."

Mr. Surte also drew our attention to the Notification under section 41 which reveals that under entry A23 of C-II, sales or purchases of fountain pens not exceeding thirty rupees per piece and ball pens not exceeding twenty-five rupees made on or after 1st October, 1995 were exempted from whole of the tax. Mr. Surte took us through the provisions of rule 41D which reads as under:-

" Rule 41D. Drawback, setoff etc. of tax paid by a manufacturer in respect of purchases made on or after the notified day-

(1) In assessing the amount of tax payable in respect of any period by a Registered dealer who manufactures [goods] for sale or export (hereinafter in this rule referred to as "the claimant dealer") the Commissioner shall, in respect of purchases made by the claimant dealer on or after the notified day, of any goods specified [in entry 6 of Schedule B and in Schedule C and used by him within the State,

(i) in the manufacture of [goods] [not being kerosene for sale which manufactured goods have in fact been sold by him or exported by him, or

(ii) in the packing of goods so manufactured, grant him subject to the reduction specified in sub-rule (3) a drawback, set-off, or as the case may be a refund of aggregate of the sums determined in accordance with the provisions of rule 44D.

Provided that where the turnover of sale of such manufactured goods consists principally of sales of waste or scrap goods, then the claimant dealer shall not be entitled to any drawback, set-off or as the case may be a refund under this rule :

Provided further that where such manufacture results in production of goods other than taxable goods, then such draw back, set-off, or as the case may be, the refund, shall not be granted on purchase of goods including capital assets effected prior to the 1st April 1998 and also in respect of capital assets on which depreciation has been earlier claimed by any other person or dealer and which have been purchased by the claimant dealer on or after the 1st April, 1998,

Provided also that, the claimant dealer shall not be entitled to claim any drawback, set-off or refund in respect of purchases of molasses and rectified spirit used by him in the manufacture of country-liquor and Indian Made Foreign Liquor.

Provided also that, set-off under this rule shall not be granted to a dealer, in respect of purchases of goods, which are used by him in the manufacture of goods, treated as capital assets by him or parts and components of such capital

Provided also that, the claimant dealer shall not be entitled to claim any drawback, set-off or, as the case may be refund of the sum mentioned in clause (a) of rule 44D in respect of purchases of the goods purchased against declaration in Form A1 in accordance with the entry 148 of Group "A" of Schedule appended to the notification issued under section 41 of the Bombay Sales Tax Act, 1959.

(2) For the purpose of this rule the expression "export" shall include.

(i) a sale in the course of inter-State trade and commerce or in the course of export of the goods out of the territory of India, where such sale occasions the movement of the goods from the State;

(ii) Despatches made by the "claimant dealer" to a person outside the territory of India, with a view to selling the goods to the said person and the said goods have actually been sold to him within the period of one year from the date of despatch; and

(iii) Despatches made by the claimant dealer to his own place of business or to his agent outside the State where the claimant dealer produces certificate in Form 31C issued by his manager, or as the case may be, his agent declaring inter alia that the goods will in fact be sold by him or will be used by him in the manufacture of goods which will in fact be sold by him and that he, his manager or, as the case may, his agent is registered under the Central Sales Act, 1956 (LXXIV of 1956) in respect of that place of business.

(3) ----------------------------

Mr. Surte relied upon the judgment of the Supreme Court in the matter of Commissioner of Sales Tax, U.P. Vs. M/s. Indra Industries, , wherein the Court was considering the binding nature of a circular issued by the sales tax authorities. The Court held that even if the Court holds it as not binding, including, upon the assessee, the interpretation that is placed by the taxing authority on the circular is binding on that taxing authority. In other words, the taxing authority cannot be heard to advance an argument that is contrary to its interpretation of its own Rules. Mr. Surte, therefore, submitted that once the sales tax authority has held that the Applicant''s ball pens and fountain pens were priced within the budget of Rs. 25/- and Rs. 30/- each, the authority could not differentiate between local sale and export sale and the Applicant was entitled to set-off under Rule 41-D in respect of export sales as well. He submitted that the question referred is liable to be answered in the negative.

Mr. Sonpal, special counsel appearing on behalf of the respondents submitted that the matter did not call for any interference and he submitted that the question is liable to be answered in the affirmative in favour of the revenue and against the Applicant. Mr. Sonpal took us through the judgment of the second Appellate Authority dated 30th June, 2003 inter alia pointing out that the Deputy Commissioner of Sales Tax had erred in revising the assessment order in a summary manner and erroneously. According to him, the first Appellate Authority had erred in law and on facts in working out the ratio for proportionately reducing the set-off under Rule 41D considering the export of exempted goods. He has submitted that the assessee has not claimed exemption from the sales tax under section 41 for the goods which are exported out of the territory of India.

Having considered the facts, we find that the Tribunal has observed in the course of disposing of the second appeal that there is no dispute that when the goods are wholly exempted or chargeable below 4% locally, then inter state sales of those goods are also exempted from tax. The Tribunal observed that after examining, notified entry A-23, it appeared that the exemption is a general and price linked exemption which could be availed by any dealer.

The Tribunal then proceeded to decide whether the sales of fountain pens and ball pens sold at a price below Rs. 30/- per piece in the course of export out of the territory of India should be taken into consideration while disallowing the set-off under Rule 41D. While rejecting the grant of set off under rule 41D, the Tribunal observed that the words ''sale'' under section 2(28) of the Bombay Act cannot be restricted only for the local sales. The Tribunal relied on the provisions of rule 42-I and the expression ''sale'' used therein so as to include sales in the course of export. The Tribunal also held that disallowance of set off was not by way of tax free goods as contemplated in the Notification entry A-23 but by way of standard condition No. 3 in Annexure-1. It held that there was no mention that disallowance of setoff is by way of free sales and disallowance of set-off under Rule 41D on the goods was upheld.

Entry A-23 reads as follows:-

Entry A-23

ANNEXURE-I

Standard conditions

(1) ......................

(2) ......................

(3) The claimant dealer shall not be entitled to claim any drawback, set-off or refund under the Bombay Sales Tax Rules, 1959, in respect of the purchase of goods used by him in manufacture of packing of goods referred to in column 2 of this entry.

(4) .......................

(5) ......................."

It is also appropriate at this juncture to refer to Section 2(28), which reads as under:-

Section 2(28)

"sale" means a sale of goods made within the State for cash or deferred payment or other valuable consideration, and includes any supply by a society or club or an association to its members on payment of a price or of fees or subscription, but does not include a mortgage, hypothecation, charge or pledge; and the words "sell", "buy" and "purchase", with all its grammatical variations and cognate expressions, shall be construed accordingly.

Explanation - For the purchase of this clause-

(a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in sub-section (2) of section 4 of the Central Sales Tax Act, 1956.

(b) ........... "

The Tribunal found that the sales of fountain pens and ball pens sold at a price not exceeding Rs. 30/- and Rs. 25/- respectively per piece are wholly exempted from tax from 1st October, 1995 to 30th April, 1997 but at the same time as per standard condition No. 3 in Annexure-I, the dealer can be entitled for set off under rule 41D on the purchase of goods used by him in the manufacture of those impugned goods. According to the Tribunal, condition No. 3 in Annexure-I which read as under, excludes export sales and is restricted to local sale :-

"The claimant dealer shall not be entitled to claim any draw-back, set-off refund under the Bombay Sales Tax Rules, 1959, in respect of the purchase of goods used by him in the manufacture or packing of goods referred to in column 2 of this entry."

According to the Applicant, they have not claimed any exemption from the sales tax under Section 41 and, therefore, the standard condition No. 3 in Annexure-1 referred to in column (4) of Entry A-23 reproduced above was not applicable to them as far as the export of goods are concerned. The Tribunal did not agree with the Applicant and held that there is no question of granting any set-off on the purchases used in the manufacture or packing of those goods.

Goods are either taxable or tax free. Taxable goods are either chargeable with tax or exempt from tax. The product sold by the assessee are in the exempted goods category. Section 2(33) determines whether goods are taxable or tax free and not Section 41. The Applicant has sold pens locally in the course of inter State trade and also in the course of exports. It is not possible to accept the views of the Tribunal. The basic conditions were, set off under Rule 41D require the dealer to be a registered dealer having purchased goods covered by Schedule C, using the goods to manufacture taxable goods contemplated in Section 2(33) of the Bombay Sales Tax Act for sale or export. The goods manufactured should in fact have been sold or exported and goods purchased should have been used in the manufactured goods. Since taxable goods include goods exempt from tax and the Assessee has not claimed exemption from sales tax under section 41, there is no reason to apply standard condition No. 3 of Annexure-1 to notified entry A 23. We agree with the Applicant''s contention that not having claimed exemption from Sales Tax under Section 41, the condition No. 3 cannot be imposed upon them. Accordingly, we find that the disallowance of set off is unsustainable. The Tribunal''s reasoning for such disallowance is not justifiable especially when the Assessee has not claimed benefit under section 41. In the circumstances, we hold that the Tribunal was not justified in holding that the Applicant was not entitled to set off in respect of the export sales of the goods in question for the relevant period. The question referred for the opinion of this Court is answered in the negative in favour of the Applicant-Assessee and against the Respondent-Revenue. No order as to costs.