Pferd Tools Pvt. Ltd. vs The Commissioner of Sales Tax, Maharashtra State

S.C. Dharmadhikari, J—The Tribunal, by its order dated 29th September, 2008, has referred the following two questions of law for answer and opinion of this Court. They read as under:

"(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of set off claimed under Rule 41-D of the Bombay Sales Tax Rules, 1959, by the Deputy Commissioner of Sales Tax, by Rs. 1,22,267/- in respect of the tax paid on the consumables which were treated as components, parts and accessories of machinery by the Deputy Commissioner of Sales Tax?

(2) Whether the Tribunal was justified in confirming the reduction of set off by the Deputy Commissioner of Sales Tax by 1.5% by calculating the exports at 96.1% in place of 97.6% calculated by the Sales Tax Officer after excluding the sales of scrap?"

The factual backdrop in which these questions have been referred needs to be noticed. The applicant-assessee is manufacturer of steel files and rasps. The assessee holds an Entitlement Certificate under the Package Scheme of Incentives 1993 for the period 4th December 1998 to 31st December, 2003 with monetary ceiling of Rs. 1,32,48,400/-. The assessee is an export oriented unit certified by the Government of India. The Sales Tax Officer assessed the assessee for the period 1st April, 1999 to 31st March, 2000, and allowed full set off under Rule 41-D(3)(c)(ii) of the Bombay Sales Tax Rules, 1959, as the unit was an export oriented unit. The assessment resulted in refund in the sum of Rs. 15,67,499/-. The assessment under the Central Sales Tax Act, 1956, resulted in demand of Rs. 2,01,536/-. As against the refund under the Bombay Act, the dues under the Central Act were adjusted.

From the record it appears that the Deputy Commissioner of Sales Tax, Nasik Division, Nasik noticed an illegality and irregularity in the order of the Sales Tax Officer and, therefore, decided to exercise his powers of revision under the Bombay Act. He passed an order on 8th May 2002, holding that the exports ought to be worked out at 96.1% instead of 97.6%. Therefore, he came to the conclusion that there was an excess set-off. He, therefore, revised that order by withdrawing the set-off in the sum of Rs. 34,501/- and consequential interest under section 36(3)(b) of the Bombay Act in the sum of Rs. 52,776/- also came to be computed.

It was also held by him that instead of deducting the set-off under Rule 41-D(3)(b) of the Bombay Rules, on the purchases of component parts and accessories at 4%, the set off was deducted at 3%. He, therefore, withdrew the set-off in the sum of Rs. 1,22,267/- granted in excess by 1% being the purchases of capital nature. The total set-off disallowed thus was arrived at Rs. 1,46,768/-. Against this revisional order, an appeal was preferred by the assessee before the Tribunal which came to be numbered as Appeal No. 109 of 2002. It was subsequently decided by the First Bench of the Tribunal on 25th April, 2003. The appeal was partly allowed. The withdrawal of the set-off under the aforementioned two Rules was confirmed but the interest under section 36(3)(b) was deleted. That is how a Reference Application was filed but which came to be rejected by the Tribunal on 25th April, 2003. Thereafter, the assessee approached this Court and this Court directed that the Tribunal should refer the above two questions of law for opinion and answer by this Court.

It is in this background that the Reference was placed before us.

Mr. Surte appearing on behalf of the applicant submitted that the authorities under the Bombay Act completely misread and misinterpreted the Rule in question. Mr. Surte has placed before us even the appellate order. He would submit that there was no scope for any deduction. The plain language of the Rule and which enables an export oriented unit to earn a set-off permitted the assessee-applicant in this case to avail of the same. Mr. Surte submits that the Sales Tax Officer has in no way misconstrued or misinterpreted the Rule in question. He has found that there is a very convincing answer given by the assessee inasmuch as the exports sales were substantial. What has been disposed of in the local market is scrap. That resulted from the manufacturing process itself. If any scrap or waste results and which is not a final product nor is the assessee dealing in scrap and waste materials then the language of the Rule ought to be borne in mind by the Tribunal. The Revisional Authority and the Tribunal, therefore, were in complete error in denying the relief.

On the other hand, Mr. Sharma appearing on behalf of the Revenue would submit that the revisional order rightly considers the issue. That has been upheld by the Tribunal. There are concurrent findings of fact. He relied upon the revisional order and particularly the discussion therein to the effect that the dealer has not set out the correct details and of export sale. The determination of the export sale has to be correlated with the ratio of scrap sale. Precisely that has been done in the present case and insofar as the other aspect is concerned, viz. the second question, Rule 41-D(3)(b) covers parts, components and accessories of capital assets for retention. In the present case, the dealer has not disclosed or has not treated the goods as capital assets, but has treated them as consumables. That cannot change the nature of the same and even on the second question, this Court must confirm the concurrent findings and give its answer and opinion accordingly.

With the assistance of both counsel, we have perused the paper book and the orders passed by the Sales Tax Officer, the Revisional Authority and the Tribunal. At the relevant time, the subject Rule read as under:

"R. 41D. Drawback, set-off, 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 draw-back, set-off, or as the case may be, a refund of aggregate of the sums determined in accordance with the provisions of rule 44-D.

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 drawback 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 part and components of such capital assets

Provided also that, the claimant dealer shall not be entitled to claim any draw-back, 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 which 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 be, his agent is registered under the Central Sales Tax Act, 1956 (LXXIV of 1956) in respect of that place of business.

(3) The aggregate of the sums referred to in sub-rule (1) shall be in respect of purchases made on or after the 1st April 1999 reduced by, -

(a) 6 per cent of the purchase price representing the sums in respect of the goods which are despatched in a manner referred to in clause (iii) of sub-rule (2);

(b) 4 per cent of the purchase price representing the sums in respect of goods which are treated as capital assets by the claimant dealer and parts components and accessories of such capital assets;

(c) 3 per cent of the purchase price representing the said sums in all other cases:

Provided that, no reduction under clause (c) shall be made, -

(i) if the claimant dealer was holding a Certificate of Registration as required by section 22 on the 30th September 1995, then as regards the first turnover of rupees twelve lakh in respect of the said purchase price if the turnover of all sales or, as the case may be, all purchases does not exceed rupees twelve lakh in the immediately preceding year; or

(ii) if the claimant dealer is a 100 per cent Export Oriented Unit certified by the government of India, then in respect of the purchase price representing the sums corresponding to the sales covered by subsection (1) of section 5 of the Central Sales Tax Act, 1956.

Explanation. - In so far as the aggregate sum for the purpose of grant of draw-back, set-off or as the case may be, refund is calculated in accordance with the clause (c) of rule 44D, then, for the purposes of this sub-rule the expression "purchase price representing the sum" shall be determined as per the formula given in the Table below.

P = Purchase price of the goods.

R = Rate of Sales Tax applicable to the sale of the goods.

S = Rate of surcharge i.e. 10% of the sales Tax applicable to the sales of the goods.

T = Rate of Turnover Tax applicable to the sale of goods.

RT = Rate of resale tax applicable to the resale of goods.

Provided that, if the quantum of draw-back, set-off or as the case may be, refund, calculated in accordance with rule 44D read with this rule has been increased or reduced in accordance with the Second or Third proviso to rule 44D, then, the purchase price determined in accordance with the Table shall be increased or reduced in a like manner;

Provided further that, if the claimant dealer proves to the satisfaction of the Commissioner that the surcharge or the turnover tax is not included in the purchase price referred to in sub-rule (1), then the Commissioner may for the purpose of calculation, as per the formula given in the Table, exclude the component of the surcharge or as the case may be, the turnover tax

Provided further that, if the claimant dealer proves to the satisfaction of the Commissioner that surcharge, turnover tax or as the case may be, resale tax is not included in the said purchase price, then the Commissioner may for the purpose of calculation as per formula given in the Table, exclude the component of surcharge, turnover tax or as the case may be, resale tax.

(4) Nothing contained in sub-rule (1), (2) and (3) shall apply in respect of any purchases made by the claimant dealer where on an earlier transaction of purchases of these goods for use in the manufacture of goods for sale a drawback, set-off or, as the case may be, a refund has been granted or where the goods manufactured by the claimant dealer out of such purchases have been sold by him in section (1) of section 7, or where the said manufactured goods, being food or drinks as defined in sub-clause (f) of clause (29-A) of Article 366 of the Constitution, have been sold at any time, -

(a) during the period on or after the 7th September 1978 upto the 2nd February 1983 by any restaurant or eating house (by whatever name called); or

(b) during the period on or after the 4th January 1972 upto the 2nd February 1983 by any manufacturing dealer other than any restaurant or eating house (by whatever name called), and the same sales are claimed as exempt under the provisions of sub-section (2) of section 6 of the Constitution (Forth-sixth Amendment) Act, 1982."

A bare perusal of this Rule would indicate that it deals with drawback, set-off etc. of tax paid by manufacturer in respect of purchases made on or after the notified date. Sub-rule (1) of Rule 41-D clarifies that in assessing the amount of tax payable in respect of any period by registered dealer who manufactures goods for sale or export the Commissioner shall in accordance therewith and take into account the purchases made. In the present case, we are concerned with a claimant-dealer who is exporting goods. Then, 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 in the manufacture of goods for sale which manufactured goods have in fact been sold by him or exported by him or in the packing of goods so manufactured, grant him, subject to reduction specified in sub-rule (3), a draw-back, set-off or as the case may be, a refund of aggregate of the sum determined in accordance with the provisions of Rule 44-D.

The fourth proviso to this sub-rule clarifies as to how the set-off under the Rule can 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 assets. The other Rules and particularly Rule 41-D(3) enumerate as to how there should be a reduction made and of the percentages specified therein.

In the present case, the facts are undisputed. The dealer is carrying on business of export of goods. At the relevant time, he purchased goods and utilised them for manufacturing the finished product/the goods which came to be exported by him. That is how he approached the authorities. The refund was worked out by the Sales Tax Officer and when he arrived at the same, he considered the submission of the dealer regarding determination of percentage of export sales. He has specifically held that in the process of manufacture, scrap is generated which is sold locally and if the ratio of such sale is ignored then the determination of percentage of export sale will not be correct because scrap is not exported. Therefore, the ratio of scrap sales while working out the percentage of export should be taken into consideration and that is how he determined the percentage and by his order he has concluded that the dealer is 100% export oriented unit certified by the Government of India as is valid upto 4th December, 2001. The ratio of export is 97.6% and domestic sales, including sales of OMS are effected at 2.4% of the total sales effected during the period. Therefore, set-off under Rule 41-D was worked out by him. Then, he also arrived at the figure and for the purposes of Rule 41-D (3)(c). There, purchases of raw materials were referred to and he specifically termed them as hardware, packaging material, bearing etc. and full set-off was allowed by him. It is the Revisional Authority which reduced it in terms referred by us hereinabove.

The said reasoning of the Revisional Authority has been upheld by the Tribunal. The Tribunal referred to the rival contentions and in paragraph 12 concluded that the Assessing Authority allowed set-off to the extent of 96.10%. The finished goods manufactured for export also generate some scrap during the process of manufacture and the assessee urged that as such it should be considered for the purpose of export. If this scrap amounting to Rs. 1,36,462/- is considered as export sale, then, the percentage goes upto 97.6%. The Tribunal concluded that if the goods are actually exported, then, the set-off has to be worked out inasmuch as export ought to be of finished goods. The percentage cannot be worked out on the basis of the material used in the manufacture of goods for export. That is how the Revisional Authority''s conclusion came to be upheld. Then, the Tribunal concluded that the machinery parts and accessories do not get consumed in end product and, therefore, they cannot be called as consumables. Therefore, the parts and accessories of machinery have to be treated as capital assets and withdrawing the set-off granted in excess was justified.

This conclusion of the Tribunal must be seen in the light of the clear language of the Rule. The purchase of goods and which have been utilised for manufacturing a product or goods for export is what is dealt with in the Rule. The purchases made by the claimant-dealer of any goods specified in Entry No. 6 of Schedule B and in Schedule C and used by him within the State qualify for the set-off or drawback. There is no dispute in this case that the dealer purchased the goods and of the nature specified in the above Entry. There is no dispute that he is manufacturing goods for export. There is no dispute that the purchases were made by the dealer. Therefore, the reduction that is specified in sub-clause (3) is in relation to first 6% of the purchase price representing the sums in respect of the goods which are despatched in a manner referred to in clause (3) of sub-rule (2). In the present case, that will have no application because the goods have been exported. The expression "export" has been defined in an inclusive manner and it includes despatches made by a 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 having actually been sold to him within a period of one year from the date of despatching. The export is also a despatch made by the claimant-dealer to his own place of business or to his agent outside the State and thereafter he has to produce the requisite certificates. We are concerned in the present case with the proviso below clause (2) of sub-rule (1) of Rule 41-D where the Legislature has clarified 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. It is not the conclusion drawn by both authorities in the present case that the turnover of sales of the manufactured goods and intended for export and in fact exported consisted principally of sale of waste or scrap goods. The words "consists principally of sales of waste or scrap goods" are completely ignored by both the Revisional Authority and the Tribunal. The dealer in this case has not been found to have principally dealt with waste or scrap goods. The exported goods were manufactured with the purchases of goods styled as raw materials that have been made by the dealer. In such circumstances, we do not see how the dealer was ineligible or not qualified for the refund under the Rule. A finding of fact, therefore, should have been rendered and in terms of this proviso.

Equally, on the second aspect, the disentitlement comes in the case of a dealer in respect of purchase 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 assets. The Sales Tax Officer found that the dealer has not treated them as purchases of capital goods. The Revisional Authority has in fact noted the dealer''s submission and stand in paragraph 8 of its order at running page 8. There the dealer contended that during the course of manufacturing activities along with raw materials, various types of consumables are used like oil, cutter chisel, chemicals, bench vice, high pressured hose, impeller etc. These items do not remain in existence after manufacturing process is over. Their life is very limited for about 3 to 6 months. These were never treated by the dealer as capital assets. It is such a stand which came to be accepted by the Sales Tax Officer/Assessing Authority that the Revisional Authority interfered with. It found that retention of 4% of tax is required to be made in respect of goods which are treated as capital assets. It held that merely because the dealer has not treated the goods as capital assets but has treated them as consumables cannot change the nature of the goods. In view of the clear provision of Rule 41-D (3) clause (b), which covers parts, components and accessories of capital assets, retention of 4% of the tax was directed.

We have noted that there is no discussion at all in both the orders as to why goods or assets were indeed not treated as capital assets by the dealer. The authorities ought to have indicated with clarity and precision as to what is meant by capital goods and which capital goods and of what description have been acquired. If the dealer has treated them as consumables by the claimant-dealer and parts, components and accessories of capital assets alone qualify for retention of 4% of the purchase price in respect of the good which are treated as such, then the obligation and the duty of the authorities was to indicate as above. They have not and in both orders concluded as to which assets could be treated as capital assets and parts and components of which, therefore, get covered by clause (b) of sub-rule (3) of Rule 41-D. In the instant case, when the dealer pointed out the nature of the consumables, then, there was no reason to doubt the veracity and genuineness of his version. When no contrary material was available on record, then, all the more the set-off/refund should not have been denied. There was no reason, therefore, to rework or recompute and recalculate the set-off in terms of the assessment order.

We are of the opinion that the authorities have completely misread and misinterpreted the Rules and the concurrent conclusion is not in accordance with law.

The questions, therefore, and posed for our opinion in this case by the Tribunal need to be answered accordingly. In fact, we are of the clear view that the answer to the questions lies in the framing of the questions themselves. The words employed by the Tribunal while referring the question No. 1 indicate as to how the tax was paid on consumables and which were treated as components, parts and accessories of machinery by the Deputy Commissioner of Sales Tax. Therefore, question No. 1 is answered in favour of the dealer and against the Revenue. In view of the aforesaid discussion and reasoning, even question No. 2 will have to be answered in favour of the assessee and against the Revenue by upholding the conclusion of the Sales Tax Officer in excluding the sale of scrap.

The Reference is, accordingly, disposed of.