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Judgment
Alok Aradhe, J
In this appeal preferred under Section 16 of the Karnataka Tax On Entry Of Goods Act, 1979 (hereinafter referred to as 'the Act' for short), the
question which arises for consideration is whether the assessee is entitled to claim the benefit of exemption as contained in Explanation I to the
Notification dated 30.03.2002 issued by the Government of Karnataka under Section 3(1) of the Act. The said question in turn depends on whether
the cutting tools used by the appellant such as twist drills, reamers, cutters and tapes etc can be termed as component parts of inputs in the
manufacture of finished product viz., textile machinery and auto parts.
Facts leading to filing of this appeal briefly stated are that the appellant was engaged in the business of manufacture and supply of textile machinery
and auto parts. The appellant purchases and causes entry of tools viz., twist drills, reamers, cutters and tapes for manufacture of finished products
such as textile machinery and auto parts. The appellant by placing reliance on Explanation I to Notification dated 30.03.2002, claimed exemption from
levy of entry tax on cutting tools. The Assessing Authority by an order dated 17.02.2010 passed for Assessment Years 2005- 06, 2006-07 and 2007-
08 levied entry tax on cutting tools at the rate of 2%.
The appellant thereupon filed an appeal before the first Appellate Authority. The first Appellate Authority by an order dated 17.12.2012 inter alia
held that three type of goods viz., drill bits, millers and inserts are inputs, which have gone into manufacturing activity and have been consumed in the
process. Therefore, the appellant is entitled to benefit of Explanation-I to the Notification dated 30.03.2002. Accordingly, the appeal preferred by the
appellant was allowed. The matter was taken up suo motu revision under Section 15(2) of the Act by the revisional authority and by an order dated
28.04.2017 set aside the order passed by the first Appellate Authority on the ground that cutting tools used by the appellant are not used as raw
materials, component parts or inputs in the manufacture of textile machinery / auto parts manufactured by the assessee. Therefore, the Explanation-I
in the Notification dated 30.03.2002 does not apply to the case of the assessee. It was further held that the order dated 27.11.2012 passed by the first
Appellate Authority is erroneous and is prejudicial to the interest of the revenue. Accordingly, the order passed by the Appellate Authority dated
17.02.2010 was maintained. In the aforesaid factual backdrop, this appeal has been filed.
Learned counsel for the appellant while inviting the attention of this court to the words 'Consumption' or 'Use' in Explanation submitted that
specified goods need not necessarily be part of intermediate or finished product and since, the specified goods there consumed / used in the
manufacturing activity, as component parts / inputs, the appellant is entitled to benefit of exemption contained in Explanation-I to the Notification dated
30.03.2002. It is further submitted that first Appellate Authority after examining the sample of cutting tools of each category produced before it held
that cutting tools are used and consumed and inputs in manufacturing activity. It is also urged that decision of this court in 'ADDISON AND CO.
LTD. VS. State of Karnataka', (2008) 64 KAR.L.J 211 (HC) (DB) does not apply to the facts of the case. It is further submitted that without
reversing the finding recorded by the first Appellate Authority, a conclusion has been recorded that cutting tools are not used as raw materials,
component parts or inputs but are used as capital machinery. It is also submitted that an 'input' need not necessarily go into the final product but it is
sufficient that if an input enters the system of manufacturing process of the final product. It is further submitted that the order of the first Appellate
Authority can neither be said to be erroneous nor prejudicial to the interest of the revenue and therefore, the revisional power could not have been
invoked in the fact situation of the case. In support of aforesaid submissions, reliance has been placed on decision of Supreme Court in 'STAR
PAPER MILLS LTD. VS. COLLECTOR OF CENTRAL EXCISE', (1989) 4 SCC 724, 'HINDUSTAN SANITARYWARE & INDSUTRIES
LTD., VS. COLLECTOR OF CUSTOMS', (2000) 10 SCC 224, 'COLLECTOR OF CENTRAL EXCISE VS. BALLARPUR INDUSTRIES LTD',
(1989) 4 SCC 566 and 'TATA ENGINEERING & LOCOMOTIVE COMPANY LIMITED VS. STATE OF BIHAR', (1994) 6 SCC 479.
On the other hand, learned counsel for the Additional Government Advocate has submitted that cutting machines used by the appellant can neither
be treated as input nor component parts and cutting machines are not used as raw materials for manufacture of finished product. It is further
submitted that the revisional authority has therefore, rightly held that the appellant is not entitled to benefit of exemption under Explanation I to the
Notification dated 30.03.2002. It is also submitted that the order passed by the revisional authority does not call for any interference in this appeal.
We have considered the submissions made by learned counsel for the parties and have perused the record. The relevant extract of the Notification
dated 30.03.2002 issued by the State Government in exercise of powers under Section 3(1) of the Act, which reads as under:
In exercise of powers conferred by sub- Section (1) of Section 3 of the Karnataka Tax on Entry of Goods Act, 1979 (Karnataka Act 27 of 1979), the
Government of Karnataka, hereby specify that with effect from the First day of April, 2002, tax shall be levied and collected under the said Act on the
entry of goods specified in column (2) of the table below into a local area for consumption, use or sale therein at the rates specified in the
corresponding entries in column (3), thereof.
Sl. Commodity Rate
No. of
Tax
1 (i) Crude oil 2%
(ii) Petrol 5%
(iii) Diesel 5%
(iv) Furnace oil 5%
(v) Naphtha other than for use 5%
in manufacture of fertilizers
(vi) Low Sulphur Heavy Stock 5%
(vii) Rectified Spirit, Neutral Spirit, Ethyl 4% Alcohol
(viii) Petroleum products that is to say:
(a) Lubricating oil,
(b) Transformer oil,
(c) Brake fluid or Clutch fluid,
(d) Bitumen (asphalt),
(e) Tar and others Excluding Liquefied Petroleum Gas (LPG), Aviation Fuel and kerosene XXXXXXX
Machinery (all kinds) and parts and 2% accessories thereof but excluding agricultural machinery Explanation-I- No tax shall be payable by a dealer
on the goods specified in Serial Number 2, 3, 4, 7, 8 and 9 in the table above when brought by him into a local area for consumption or Use as raw
materials, component parts and inputs in the manufacture of an intermediate or finished product but excluding when brought for use in the
manufacture of tobacco products and liquor.
Thus, from perusal of the relevant extract of the aforesaid Notification, it is evident that if goods specified in the table are bought by the dealer into
the local area for 'consumption' or 'use' as raw materials, component parts and inputs in the manufacture of an intermediate or finished product, such
goods are exempted from levy of tax.
A constitution bench of the Supreme Court examined the correctness of the ratio laid down by three judge bench in 'SUN EXPORT CORPN.
VS.COLLECTOR OF CUSTOMS', (1997) 6 SCC 564, in which it was held that an ambiguity in a tax exemption provision or Notification must be
interpreted so as to favour the assessee claiming the benefit of such exemption and answered the reference in the following terms:
66.1. Exemption Notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case come
within the parameters of the exemption clause or exemption Notification.
66.2. When there is ambiguity in exemption Notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the
subject / assessee and it must be interpreted in favour of the Revenue.
Thus, in view of aforesaid enunciation of law of the constitution bench of the Supreme Court, it is evident that an exemption Notification should be
strictly interpreted and the burden of proving its applicability is on the assessee to show how his comes within purview of exemption Notification. It is
the case of the appellant, which is evident from the reply dated 06.03.2017 submitted by it to the revisional authority that assessee had purchased and
caused entry of various cutting tools for use and consumption of process of manufacture of intermediate and finished goods. The appellant's stand is
that cutting tools were used by it for roughing, drilling and boring of semi finished goods and for cutting and shaping of metals and other materials
during the process of manufacture of textile machines. The exemption was claimed on the ground that the cutting tools were used in the process of
manufacture of intermediate or final products. The first Appellate Authority after perusal of samples of drill bits, millers and inserts accepted the
explanation of the appellant that they were consumed as inputs in the process of manufacture. Accordingly, it was held that the appellant is entitled to
benefit of exemption under Explanation I to the Notification dated 30.03.2002.
However, the revisional authority without assigning any reasons has concluded that cutting tools are not used as raw materials, component, parts
and inputs in the manufacture of intermediate of finished product. The revisional authority is required to record the findings on the factual aspect viz.,
whether goods viz., drill bits, millers and inserts have been consumed as inputs in the process of manufacture of finished goods viz., textile machinery
and auto parts. However, no finding has been recorded by the revisional authority. In the absence of the aforesaid finding on the factual aspect of the
matter, we are unable to adjudicate the question of applicability of Notification in case of the appellant. Therefore, it has become inevitable for us to
set aside the order passed by the revsiioanl authority and to remit the matter for decision afresh in accordance with law.
In the result, impugned order dated 28.04.2017 passed by the Additional Commissioner of Commercial Taxes is set aside and the matter is remitted to
the aforesaid authority to decide the matter afresh after affording an opportunity of hearing to the parties. It is made clear that this court has not
expressed any opinion on the claim made by the appellants.
In the result, appeal is disposed of.