The Commissioner of Sales Tax vs Mutha Alloys Pvt. Ltd.

This Reference by the Maharashtra Sales Tax Tribunal, Mumbai seeks this Court''s opinion and answer on the following questions:

"(i) Whether of the facts and circumstances of the case and on a true and correct interpretation of Rule 41E of the Bombay Sales Tax Rules 1959, was the Tribunal legally justified in holding the opponent dealer as legally entitled to the set off under the said Rule 41E, even though his manufacturing activity was undisputedly carried on in some other State and not in Maharashtra ?

(ii) Whether on the facts and circumstances of the case and on a true and correct interpretation of Rule 41E of the Bombay Sales Tax Rules 1959, the Tribunal was justified in law in holding the opponent dealer as entitled to the set off under the said Rule 41E, by ignoring the specific condition put by the Government for the admissibility of the set off under the said rule 41-E ?"

The order passed by the Tribunal on Reference Application No. 32 of 2000 dated 17th September, 2002 refers to the basic facts. Before referring to them we must mention that the Reference arose in the context of the judgment dated 13th April, 2000 delivered by the Tribunal in Second Appeal Nos. 2162 and 2163 of 1998. The second appeals were filed by the respondent-assessee before us. The Respondent-assessee is duly served. Mr. Thakkar appearing on behalf of the respondent-assessee undertakes to file Vakalatnama within a period of one week, if not already filed.

The Tribunal exercised the jurisdiction under section 61 of the Bombay Sales Taxes Act, 1959 (for short "BST") in referring these two questions in the backdrop of the following facts: -

The Respondent-assessee/original appellant in Second Appeal Nos. 2162 and 2163 of 1998 is engaged in the activity of conversion of S.S. Flats into S.S. Patta and in the context of the said activity, it is duly registered under the Bombay Sales Taxes Act, 1959. The case of the assessee is that it purchases S.S. Flats locally in the State of Maharashtra from other registered dealers on payment of taxes under BST Act. These "flats" are inputs and they are sent for processing in other States where these inputs are converted in S.S. Patta, S.S. Patta is thereafter brought back in Maharashtra and sold in Maharashtra in that form to other parties. The assessee''s stand was that this activity does not amount to manufacture under the BST Act and therefore, he need not pay tax demanded thereon. Alternatively, it was contended that the assessee is entitled to set off under rule 41E of the Bombay Sales Tax Rules, 1959 (for short "Bombay Rules"). It is urged that the tax paid on purchase of S.S. Flats which is used in manufacture of S.S. Patta and which in turn is sold in Maharashtra is due compliance with the requirement of rules enabling set off. Therefore, this alternative claim atleast be granted. The assessment in question is for period from 16th January, 1995 to 31st March, 1995 and 1st April, 1995 to 31st March, 1996. The appellant''s sales of output i.e. S.S. Patta was assessed to tax at 4% in addition to the 4% tax paid on purchases of S.S. Flats by him. Therefore, the set off was claimed by relying on the Rule 41E. However, that alternate claim was also rejected. That is why the matter was carried by the assessee in the second appeal to the Tribunal. On 13th April, 2000, the Tribunal delivered the order in the second appeal. It upheld the claim of the assessee of set off by concluding that rule 41E of the Bombay Rules under which the set off has been claimed are "to the extent the same imposing a condition of the user within the State" liable to be ignored. That is permissible because the judgment of the Hon''ble Supreme Court in the case of Loarn Steel Industries Ltd. and another etc. Vs. State of Andhar Pradesh and another, lays down the principle that any such stipulation where a benefit of exemption is restricted to manufacture within the State alone is ultra vires Article 304(a) of the Constitution of India. It is liable to be struck down as such. Following this judgment of the Hon''ble Supreme Court, the Tribunal held that the stipulation in the Bombay Rules to the above effect cannot apply and is thus liable to be ignored.

The revenue sought Reference because of the fact that the Tribunal while passing the order in the second appeal relied on its judgment in the case of M/s. Uday Udyog Vs. State of Maharashtra which has been delivered by the Tribunal in Second Appeal No. 229 of 1998 dated 7th November, 1998. However, there is in field a larger bench judgment of the Tribunal and which has been delivered on 25th October, 2001 in Second Appeal Nos. 638 and 639 of 1998 and Appeal Nos. 72 and 73 of 1999. That lays down the principle that the tribunal is a creature of the Statute, namely, Bombay Sales Tax Act, 1959. It cannot declare any provision either under the same statute as unconstitutional or ultra vires and that can only be done by the Court which is exercising the constitutional powers and jurisdiction.

It is in these circumstances that the revenue sought reference of the above two questions to this Court. The reference application in that behalf has been allowed and two questions are forwarded for our opinion.

Mr. Sharma, learned A.G.P. appearing on behalf of the Revenue submits that the Tribunal ought to have noted that it is a creature of the Statute. It cannot decide the issue of validity and constitutionality of the provisions in the Statute. In the present case, the tribunal purported to declare rule 41E as ultra vires and unconstitutional by relying on the judgment of the Hon''ble Supreme Court in the case of M/s. Loharn Steel Industries Ltd. (supra). However, the issue before the Hon''ble Supreme Court arose out of Andhra Pradesh General Sales Tax Act. That was not identical to the taxing provision involved but exemption from the same was the issue involved therein. Thus, the interpretation of a Exemption Notification but under the Andhra Pradesh General Sales Tax Act was the issue in M/s. Loharn Steel Industries Ltd. (supra), which is not on par with the present issue. In the present case, the assessee was claiming set off. The set off is in the nature of concession. The assessee has no vested right in such concession. The tribunal has seriously erred by relying on the judgment of the Supreme Court and virtually declaring rule 41E to the extent noted above as ultra vires and unconstitutional. This is clear overreaching the jurisdiction vested in the tribunal and under the BST Act. If it is exercising powers and functioning under the statute, then, it had no authority to declare any provisions of the statute or rules framed thereunder as unconstitutional or ultra vires.

Mr. Sharma has placed reliance on the settled principle of law of the tribunal deriving its authority and exercising powers under a statute being unable to declare any provision of that statute as ultra vires and unconstitutional. Mr. Sharma has also relied upon some of the observations made in M/s. Loharn Steel Ltd. (supra) to submit that the judgment of the Hon''ble Supreme Court does not ipso facto declare a rule whereunder the set off is claimed as unconstitutional and ultra vires Article 304(a) of the Constitution of India. There could be distinguishing features and can be pointed out by the revenue as and when the occasion arises. Mr. Sharma emphasized that it was not open for the tribunal to undertake the exercise as is undertaken while deciding the second appeal. For all these reasons, the Reference be answered accordingly.

Mr. Thakkar appearing on behalf of the assessee submits that in case of M/s. Uday Udyog Vs. State of Maharashtra, the Reference is stated to be pending and that should be dealt with before any order is passed in the present Reference. Secondly, there is good reason for the tribunal taking the above view inasmuch as it is not as if the tribunal has declared the rule ultra vires and unconstitutional. The tribunal has relied on ratio of the judgment of the Supreme Court which declares identical rule or provision as unconstitutional and ultra vires Article 304(a) of the Constitution of India.

In such circumstances it is erroneous to urge that the tribunal has declared any statutory provision or rule as unconstitutional. The Reference, therefore, does not deserve to be answered as suggested and in favour of the revenue.

We have with the assistance of both counsel perused the Reference Application, the order made therein and the tribunal''s order in the second appeal. We have also perused the tribunal''s order in the matter of M/s. Uday Udyog Vs. The State of Maharashtra. We have also perused the judgment of the larger bench of the tribunal. Since the Reference has been made in the light of the larger bench judgment of the Tribunal dated 25th October, 2001 holding that the tribunal being a creature of the BST Act cannot ignore the statutory provisions that we have to essentially answer the questions forwarded on this basis. In other words, whatever may be wording of the questions, in effect and substance, the exercise undertaken by the tribunal in this case of comparison of two statutory provisions, the judgment in the case of M/s. Loharan Steel Ltd. (supra) and holding of Bombay rule as ultra vires or unconstitutional of Article 304(a) of the Constitution of India, is the foundation on which we would have to proceed.

In M/s. Loharan Steel Industries Ltd. (supra) the registered dealer-appellant no. 1 before the Supreme Court was dealing in iron and steel. He purchased iron and steel scrap and ingots in the State of Andhra Pradesh. Iron and steel scrap and ingots were sent by appellant no. 1 to its re-rolling mill situated in the State of Karnataka. The raw material were re-rolled into rounds and flats in the re-rolling mills of appellant no. 1 and the re-rolled products were brought back to Andhra Pradesh and sold there. There was certain exemption granted by a notification in that behalf under Andhra Pradesh General Sales Tax, 1957. There was a certain condition therein and which made the exemption conditional upon reaching a satisfaction that re-rolled finished products of steel in units situated within Andhra Pradesh State. Thus, the notification under which exemption came to be granted became applicable to only re-rolled finished products of the steel re-rollers which was situated within the State of Andhra Pradesh. Since re-roller mills of the appellant no. 1 was situated outside Andhra Pradesh, the re-rolled products of the appellant no. 1 brought in the State of Andhra Pradesh became ineligible for this exemption. The argument was that there is discrimination vis-�-vis local products and therefore exemption has been wrongfully denied. It is in dealing with that argument and in the context of Article 304 of the Constitution of India and particularly clause (a) thereof, that the Hon''ble Supreme Court delivered its judgment.

Rule 41E and which was applicable rule in the present case reads as under:

"41E. Drawback, set-off etc. of tax paid by a manufacture of goods specified in entry 6 in Schedule B: --

In assessing the amount of tax payable in respect of any period by a registered dealer (hereinafter in this rule referred to as "the claimant dealer) the Commissioner shall, in respect of the purchases made by the claimant dealer (on or after 1st April, 1984) of goods specified (in entry 6 of Schedule B) which were (used by him within the State) in the (process of manufacture of goods (not being waste goods or scrap goods or by products) ("specified in entry 6 of Schedule B") for sale or export, grant him a drawback, set-off or as the case may be, a refund of the aggregate of the sums determined is in accordance with the provisions of rule 41D.

Provided that, drawback, set-off or as the case may be, refund shall be granted under this rule where the goods manufactured by the claimant dealer have been sold by him in the State in respect of which sale the claimant dealer has been allowed deduction under clauses (i), (ii) or (iii) or sub-section (2) of section 7 of the Act".

Provided further that where the process of manufacturing results in the production of goods specified in entry 6 of Schedule B as well as goods other than those specified in entry 6 of Schedule B, then such drawback, set-off or as the case may be, the refund shall be apportioned as between goods specified in entry 6 of Schedule B and the goods other than those specified in entry 6 of Schedule B (on the basis of the purchase price of goods specified in entry 6 of Schedule B used in the process of manufacture and shall be allowed only to the extent to which it pertains to the manufactured goods specified in entry 6 of Schedule B and where such purchase prices are not ascertainable, the apportionment shall be on the basis of the sale prices of such manufactured goods and shall be allowed only to the extent that it pertains to the manufactured goods specified in entry 6 of Schedule B."

A perusal thereof would indicate that the rule came to be substituted on several occasions. The assessee''s claim is that the "flats" in present case were sent for processing outside the State and the product emerging after such processing was brought within the State of Maharashtra and sold. The condition that came in the way of claiming set off is that the processing has not been undertaken in the State of Maharashtra and that is why sending raw material for processing outside the State of Maharashtra and bringing back processed material for sale within the State disentitles the assessee in this case from claiming set off. This stipulation is therefore ultra vires of Article 304(a) of the Constitution of India. There is hostile discrimination insofar as units or processors/dealers within the State and those outside.

We are of the view that in the present Reference this larger issue or controversy need not be answered. There is substance in the contention of Mr. Sharma that in the garb of deciding the issue of applicability of the Hon''ble Supreme Court''s judgment in M/s. Loharn Steel Ltd. (supra) to the facts and circumstances of the present case, the tribunal travelled beyond its jurisdiction and authority. It declared rule 41E as ultra vires and unconstitutional and which it has no authority to declare. Apart therefrom the tribunal was obliged to consider the issue as to whether any assistance can be derived from the judgment of the Supreme Court assuming that the issue involved was identical. Assuming that the controversy dealt with by the Supreme Court was identical then relying on the said judgment whether rule 41E and plain language thereof can be ignored is a further question. The tribunal in the present case and in the second appeal of the assessee could not have therefore ignored rule 41E and virtually declared it unconstitutional being ultra vires Article 304(a) of the Constitution of India. This was not a permissible exercise as the tribunal derived its authority under BST Act itself.

It is in these circumstances and on this short ground alone that the questions have to be answered by holding that issue of constitutionality and legality of rule 41E to the extent noted above could not have been decided by the tribunal in the second appeal of the assessee. It has clearly erred in law in undertaking the exercise of deciding the constitutionality and legality of the said rule. Therefore, the two questions will have to be answered by holding that the claim which was made in alternate would have to be dealt with and decided on the touch stone of rule 41E as it stood at the relevant time and its clear language. The tribunal could not have ignored the same in dealing with the alternate claim.

However, we clarify that when we answer the Reference in the above terms and the questions posed and forwarded to us it should not be held that we have expressed any opinion on the legality and constitutionality of the rule 41E of the Bombay Rules. That issue will have to be decided on its own merits and in accordance with law at an appropriate stage and in appropriate jurisdiction. For the present, in the backdrop of the powers of the tribunal that we have answered this Reference as above. It is accordingly disposed of.