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2004 DIGILAW 644 (KAR)

ITC LIMITED, BANGALORE v. STATE OF KARNATAKA.

2004-11-18

J.V.ANGADI HIREMATH, UDAYARAJ M.NAYAK

body2004
JUDGMENT (Per Udayaraj M. Nayak, CTM) These Appeals are filed by the Appellant under Section 22(1) of the Karnataka Sales Tax Act, 1957 (for short, the 'Act') directed against the Appeal Orders passed on 19.3.2004 by the Joint Commissioner of Commercial Taxes (Appeals), Bangalore City Division-I, Bangalore (hereinafter referred as the 'First Appellate Authority' - for short 'FAA') in KST.AP No. 164 of 2003-04 and KTEG.AP No. 45 of 2003-04, dated 28.10.2003 in dismissing the Appeals preferred against the orders dated 1.9.2003 passed by the Assistant Commissioner of Commercial Taxes, II Circle, Bangalore (hereinafter referred as Assessing Authority - for short, the 'AA') for the Assessment Year 2001-02 under Section 12(2) of the KST Act, 1957 and under Section 5(4) of the Karnataka Tax on Entry of Goods Act, 1979. The Appeals filed are in time and in order. The Appeals are admitted, notified to both the Appellant and Respondent who through their respective Counsels as aforesaid have appeared, submitted the facts and argued the case. The submissions on both sides heard, facts perused on the basis of records. Although these Appeals pertain to the KST and KTEG Acts separately, the issues involved are in common and the issue decided under KST would have a bearing under KTEG in terms of Set-off or Refund Adjustment claimed. The Appellate Authority has passed Common Order and the Appellant has submitted common grounds of Appeal as both the orders relate to the same year i.e., 2001-02 and therefore, we deem it proper to dispose these two Appeals through this Common Order. The brief facts of the case are as follows : The Appellant is a Public Limited Company with its headoffice at Calcutta with one of its units at Bangalore, engaged in the business of manufacture and sale of Cigarettes. The Appellant is Registered Dealer both under the KST and KTEG Acts on the files of the AA. The AA concluded the Assessment for the year 2001-02 under both Acts vide Order dated 1.9.2003, wherein a total turnover of Rs. 786,64,52,136/- and taxable turnover of Rs. 48,29,014/- and total tax levied is Rs. 8,23,135/-. Under the KTEG Act, a total tax of Rs. 10,33,83,148/- is determined for the year 2001-02. The AA concluded the Assessment for the year 2001-02 under both Acts vide Order dated 1.9.2003, wherein a total turnover of Rs. 786,64,52,136/- and taxable turnover of Rs. 48,29,014/- and total tax levied is Rs. 8,23,135/-. Under the KTEG Act, a total tax of Rs. 10,33,83,148/- is determined for the year 2001-02. The only issue involved is that the AA did not consider the claim of the Appellant in toto, with regard to the reimbursement of tax paid on raw materials as provided under Section 5-A of the Act, as adjustment towards the tax payable under KTEG. The reasoning of the AA was that although the Appellant had purchased raw materials and components like Filter Rods for use in manufacture, the major portion of the Cigarettes manufactured have been sent outside the State for sale instead of a local sale or a sale in the course of inter-State sale, and no tax thus accrued on such Consignment Sale. He therefore opined that the goods transferred may be meant for sale outside the State but in order to be eligible for claiming reimbursement of tax paid on raw materials, the goods manufactured should have been sold from the place of manufacture. The AA who had considered the objections of the Appellant had found after analysing the provisions of Section 5A of the Act, that although the conditions like goods purchased for use in manufacture of other goods inside the State is fulfilled, he disputes the aspect of sale of goods in view of the stock transfer. The AA further did not consider the decisions cited in support by the Appellant before him as not applicable to the facts of the case. He has also discounted the Commissioner of Commercial Taxes clarification cited by the Appellant in support as that was in the context of the use of Form 37 before the amendment to the provisions of Section 5A prior to 1.4.2001 when the concept of reimbursement was introduced. Aggrieved by the orders of the AA, the Appellant preferred Appeal before the FAA who has vide Orders under Appeal dismissed the Appeals upholding the Order of Assessment. The FAA also considered the almost similar grounds put forth by the Appellant before him which grounds were urged before the AA. Aggrieved by the orders of the AA, the Appellant preferred Appeal before the FAA who has vide Orders under Appeal dismissed the Appeals upholding the Order of Assessment. The FAA also considered the almost similar grounds put forth by the Appellant before him which grounds were urged before the AA. The FAA, who had analysed the provisions of the Section 5A, observed that the Industrial Inputs shall be used inside the State in manufacture of other goods which shall be sold. The word 'sale' occurring in Section 5 A is referable to the 'sale' as defined under Section 2(1)(t) of the KST Act, 1957. He then relies on the decision of the Hon'ble High Court of Karnataka in the case of M/s. Surfa Coats Private Limited, Bangalore v. Deputy Commissioner of Commercial Taxes (Assessments IV), Bangalore and Another, 1999 (46) Kar. L.J. 478 (HC) : (1999) 115 STC 157 (Kar.) which has held that stock transfer to branch does not amount to 'sale'. He therefore States that "the sale whether within the State or outside the State or in the course of export shall be effected from within the State so as to avail the benefit of reimbursement of tax paid on Industrial Inputs under Section 5A of the KST Act, 1957 but not in respect of the stock-transfer of such manufactured goods". The FAA further relies on the decision of the Kerala High Court in the case of MRF Limited v. Assistant Commissioner of Sales Tax (Assessment II), Special Circle, Kottayam, (2000) 117 STC 23 (Ker)., and also that of the Supreme Court in Hotel Balaji and Others v. State of Andhra Pradesh and Others, 1993 (37) Kar. L.J. 204 (SC) : AIR 1993 SC 1048 : (1993) 88 STC 98 (SC) and also in K.B. Handicrafts Emporium and Others v. State of Haryana and Others, (1993) 90 STC 477 (SC) : 1993 SC Supp. (4) 587. He therefore, upheld the order of the AA. Aggrieved by the above orders, the Appellant is before us by way of Second Appeal. (4) 587. He therefore, upheld the order of the AA. Aggrieved by the above orders, the Appellant is before us by way of Second Appeal. The Appellant has raised the grounds of Appeal briefly stated as below : A. On a plain reading of the provisions of Section 5-A of the Act w.e.f. 1.4.2001, there is no condition that in order to avail the benefit of concessional rate of tax by way of reimbursement, there should be a sale of the manufactured goods in the State itself but suffice it that they be sold whether within the State or outside the State. B. The expression 'sale' occurring in Section 5-A is not qualified by any condition that the manufactured goods must be sold in the State only. Thus if the manufactured goods are taken outside the State and sold then also the 'sale' is satisfied for the purpose of Section 5-A. C. The decision of the Hon'ble Supreme Court in the case of M/s. Polestar Electronic (Private) Limited v. Additional Commissioner of Sales Tax, New Delhi, (1978) 41 STC 409 (SC) : 1978 Tax. L., 1097 (SC) : AIR 1978 SC 897 : (1978) 1 SCC 636 is cited in support and is quoted extensively. D. The decisions of the Hon'ble Supreme Court in the case of Assessing Authority-cum-Excise and Taxation Officer, Gurgaon and Another v. East India Cotton Manufacturing Company Limited, Faridabad, (1981) 48 STC 239 (SC) : AIR 1981 SC 1610 , and that of the Hon'ble High Court of Karnataka in the case of Sipani Fibres, Bangalore v. State of Karnataka, 1993 (37) Kar. L.J. 401 (HC) (DB) : (1993) 91 STC 261 (Kar.) (DB) are cited in support of the contention that no geographical limitations can be attributed to the expression "sale" occurring in Section 5-A. E. The Commissioner's clarifications issued regarding the availment of Form 37 specially that in Nos. CLR CR 855 of 1989-90, dated 20.3.1990 and CLR CR 929 of 1989-90, dated 21.3.1990 wherein it was clarified that Form 37 concessions can be made available even if the finished products are being sent for Consignment Sales and that there is no restriction that they be sold in the State of Karnataka only. The learned Advocate for the Appellant appeared and argued the case reiterating the above. The learned Advocate for the Appellant appeared and argued the case reiterating the above. The State Representative on the other hand while defending the orders under appeal submits that the real intention of the Legislature that the tax on the finished goods shall accrue to the State and capital shall not flow outside the State shall be considered. He also cites the decisions referred by the FAA in support. Heard the arguments on both sides. In view of the above averments, the following points arise for our consideration and determination. - 1. Whether in order to avail the benefit of reimbursement of tax paid on raw materials, consumables or inputs, as provided under Section 5A of the KST Act, 1957, is it essential that the goods manufactured using such materials, have to be invariably sold within the State of Karnataka ? 2. What order ? Our findings are. - Point No. 1 : 'Negative' Point No. 2 : As per the final order, for the following reasons. - REASONS Point No. 1. - Section 5A of the KST Act, 1957 upto the year 2000-01, that is upto 31.3.2001, provided for taxation of Industrial Inputs at concessional rates subject to certain conditions and restrictions fully spelt out thereunder. From 1.4.2001, a new provision was inserted in place of the existing one, by Act of 2001, introducing the concept of reimbursement of tax paid on the raw materials in excess of the rates specified thereunder in the place of the concept of concessional rate of tax which was available against Form 37, earlier. However, again the said substituted provision was replaced with another provision substituted with effect from 1.4.2002 by Act 1.4.2002, bringing back the concept of Form 37 again. The provisions so substituted and applicable for the year 2001-02 relevant to the case on hand read as follows : "5-A. Reimbursement of tax on Industrial Inputs. - (1) Where a Registered Dealer purchases any Industrial Input liable to tax under Section 5 from another Registered Dealer for use by the former as a component part or raw material or packing material of any other goods which he intends to manufacture inside the State for sale or purchases consumables liable to tax under Section 5 for use in such manufacture, he shall be eligible for reimbursement of tax. - (a) in respect of declared goods mentioned in column (2) of the Fourth Schedule, paid at a rate exceeding three per cent on the turnover relating to such purchase. (b) in respect of any other goods, paid at a rate exceeding two per cent on the turnover relating to such purchase. (2) Such amount shall be reimbursed to the Registered Dealer making such purchase. - (i) by adjustment towards tax payable by him for any month or year as the case may be, under the Act or the Central Sales Tax Act, 1956 (Central Act 74 of 1956) or the Karnataka Tax on Entry of Goods Act, 1979 (Karnataka Act 27 of 1979), in such manner and subject to such condition as may be prescribed; (ii) by refund in such manner and subject to such condition as may be prescribed : Provided further that such reimbursement shall be made only against a bill or cash memorandum issued by the seller showing separately the amount collected by way of tax : Provided also that if any dealer, after claiming reimbursement of tax on purchase of any inputs under the first proviso to this sub-section fails to make use of the whole or part of such inputs in the manufacture of other goods before the expiry of the accounting year immediately succeeding the one in which such inputs are purchased, either due to cessation of his manufacturing activity or for any other reason, but has not sold away such inputs, he shall be liable to pay the difference between the tax payable at the rate specified under Section 5 and the tax computed at the rate of two or three per cent, as the case may be on the turnover relating to the sale of such quantity of these inputs to him as have remained unutilised with him for the declared purpose at the end of the period specified above. (3) If any person. (3) If any person. - (i) not having his manufacturing unit inside the Stale, purchases any inputs and claims reimbursement under sub-section (2), or (ii) having his manufacturing unit inside the State and claiming reimbursement on purchase of any inputs under sub-section (2), sells away such inputs contrary to such claim, the Assessing Authority, after giving such person a reasonable opportunity of being heard, shall, by order in writing, impose upon him by way of penalty a sum, which shall not be less than double the amount of tax leviable under Section 5 on the sale of the inputs so purchased, but which shall not exceed three times the amount of such tax; (iii) having the manufacturing unit inside the State and claiming reimbursement on purchase of any inputs under sub-section (2), uses such inputs contrary to such claim, the Assessing Authority, after giving such person a reasonable opportunity of being heard, shall, by order in writing impose upon him by way of penalty a sum which shall not be less than twice the amount of tax leviable under Section 5 but not exceeding thrice the amount of such tax on the inputs so purchased. (4)(a) Every dealer who, during the course of the year, claims reimbursement of tax on purchase of any inputs under sub-section (2), shall maintain in the prescribed manner a day-to-day account of the opening balance, purchases, consumption and closing balance of every input, which is purchased by him under sub-section (2). (b) If any dealer fails to maintain in the prescribed manner, true and complete accounts as required by clause (a) of this sub-section, the Assessing Authority shall, after giving such dealer a reasonable opportunity of being heard, pass an order. - (i) disentitling such dealer from making use of reimbursement specified under sub-section (2); and (ii) imposing upon him a penalty not exceeding double the amount of tax leviable under the provisions of Section 5 on the sale value of the inputs already purchased by him on which he has claimed reimbursement, (c) If any dealer, in respect of whom an order has been passed under clause (b) of this sub-section, pays the penalty and complies with other terms of such order, the Assessing Authority may, in his discretion, permit such dealer to claim reimbursement on purchase of inputs in the State". On a plain reading of the above, the following are clear. On a plain reading of the above, the following are clear. (a) That there shall be a purchase of raw materials, component parts, packing materials by a Registered Dealer which are taxable from other Registered Dealers in the State. (b) The said purchase of goods must be for use in the manufacture of other goods in the State. (c) The goods manufactured shall be for sale. There is no dispute as regards the conditions at (a) and (b) above but it is only with reference to the condition (c) that the dispute has arisen. It is the view of the A A and upheld by the FAA that the sale of the manufactured goods must be in the State of Karnataka so that a tax accrues on such sale, and if the goods so manufactured are sent outside the State for commission sales or branch sales, to that extent the reimbursement cannot be granted. Thus they interpreted that the word 'sale' appearing in Section 5A as stated above should be sale in the State of Karnataka in the form of a local or inter-State trade. As seen from the above provisions, there is no express condition that the sale should be either taxable or a sale in the State and neither the expression 'sale' appearing in the above section is qualified by any further expressions or conditions, as has been contended by the Appellant right through. However, the expression 'sale' for the purpose of this section has been specifically interpreted so that it shall be a sale in the State, in other words a sort of a 'situs' or 'geographical limitations' have been attributed to the said expression 'sale' so that its arm of 'a sale outside the State' is amputated, which it otherwise normally would comprise of. As seen from the order of the FAA, it states that the word 'Sale' appearing in Section 5A is referable to the Sale as defined in Section 2(1)(t) of the Act. No doubt any 'sale' appearing anywhere in the Act, has to be understood within the meaning it has been carrying under the definition clause only, but the definition is in respect of any 'sale' and not a definition as to what is meant for 'sale in the State'. Nowhere in the said definition it is stated that any 'sale' wherever it occurs shall mean a 'sale in the State only'. Nowhere in the said definition it is stated that any 'sale' wherever it occurs shall mean a 'sale in the State only'. It only defines as to what contracts could be qualified or deemed to be sales and what others are not, by implication. It also does not say that a Consignment Sale as not a Sale. The FAA thereafter cites the decision of the Hon'ble High Court of Karnataka in the case of Surfa Coats Limited wherein it has been held that branch transfer is not a sale. It is nobody's case that any branch transfers wherein only one party is involved could be considered as a sale. What has been decided is that branch transfers established on facts cannot be considered as sales let alone sales in the State. The FAA has failed to read the provisions in the right perspective as the words used in Section 5A are 'for sale' not sale alone which means the goods manufactured must be intended to be sold and not as for other purposes such as use by the manufacturer himself. Although it should be intended for sale, where to be sold is not specified. After the goods are sent to the branches they are sold and thus the intention is fulfilled as the AA himself has allowed the claim of the branch transfer to the places outside the State. Therefore, the FAA has erred in relying on the said decision, which is on a different footing altogether. The Authorities further cited the decisions of the Hon'ble Kerala High Court in the case of M.R.F. Limited, where the issue involved was an alleged violation of Section 5(7) of the Kerala General Sales Tax Act, where the Appellant removed the goods to the places outside the State contrary to the specific declarations he made to that effect. Whereas in this case no such restrictions or conditions are put under the provisions of Section 5-A so that the manufactured goods shall not be taken outside the State on consignment basis, and neither any declaration has been prescribed thereunder for 2001-02. The principles again are in a different context and the FAA has erroneously sought to apply the same to the facts of the case. The principles again are in a different context and the FAA has erroneously sought to apply the same to the facts of the case. The reliance on the reported decisions of the Hon'ble Supreme Court in the case of Hotel Balaji, and that in the case of K.B. Handicrafts Emporium, which decisions are applicable while interpreting the provisions of Section 6 of the KST Act, 1957 wherein it is specifically provided that if the goods which are taxable under the Act are purchased under the circumstances that no tax is leviable on their sale price, or either consumed, or disposed other than by way of 'sale in the State' then a tax under Section 6 is leviable. Certainly if the goods so purchased are sent outside the State not as a result of sale, it would not amount to a 'sale in the State' and hence the sale price qualifies to be taxable under Section 6 of the Act. Here in this section there is no such 'sale in the State' mentioned and hence the attempt to apply the law as per the above decisions is erroneous. The Authorities have rejected the CCT Circulars as not applicable on the plea that they were issued in the era of Form 37 and since No. 37 Forms are issued, the said clarification as not applicable. It is to be noted here that while using the Form 37, the purchaser used to get the concessional rate of tax at the stage of the purchase itself as the seller would have charged and collected such reduced rates on issue of Form 37 by the purchaser, in the case of reimbursement, the concession available to the manufacturer is not instant but postponed by adjustment towards tax payable by him under the KST, CST or KTEG Acts or a virtual refund as the case may be. In either case the issue and the concession is similar and therefore the interpretation of the CCT should have been appreciated on the real issue The clarification was direct on the issue and the Authorities have erred in not considering the same. In the case of Sipani Fibres, which decision was relied upon both by the Appellant and the FAA is in relation to the declaration as to the manufacture of 'taxable goods' and the scope of the words 'sale' appearing in Section 5A. In the case of Sipani Fibres, which decision was relied upon both by the Appellant and the FAA is in relation to the declaration as to the manufacture of 'taxable goods' and the scope of the words 'sale' appearing in Section 5A. The words 'taxable under this Act' appearing immediately after the words 'of any other goods' and before the words 'which he intends to manufacture inside the State' have been omitted w.e.f. 1986 by Act 9 of 1986. Thus the interpretation made by the Court insofar as it relates to the taxable goods and that relied by the FAA does not hold good in view of the amendment. However, the portion of the judgment as regards the 'sale' is still relevant and aids the case of the Appellant. The Hon'ble Courts has in paragraph D has observed thus : "......... The idea is to give benefit of Section 5-A(1) to the Industrial Input to be used in the manufacture of goods in the State, the manufacture is to be inside the State, but said goods are to be manufactured for sale. If the manufacture is not for sale then Section 5-A(1) cannot be availed of by the purchaser of the inputs. If taxable goods are manufactured inside the State, though the said goods may not be sold inside the State, but meant for sale anywhere, benefit of Section 5A(1) can be availed of by the dealers ......". Thus it can be seen from the above that the Hon'ble High Court has clearly said that the intended sale of the manufactured goods need not be inside the State but anywhere. The lower Authorities have clearly erred in ignoring the binding decision of our High Court. Regarding the intention and the construction of the word 'sale' the decision of the Hon'ble Supreme Court in the case of Polestar Electronic Limited, as elaborately cited by the Appellant is clearly applicable to the facts of the case. Further when the Legislature omitted the words 'taxable goods' in the section from 1986 itself, it is more than clear that the Legislature does not bother the tax on the manufactured goods that may be accrued, and as such the manufactured goods might be exempted either. Further when the Legislature omitted the words 'taxable goods' in the section from 1986 itself, it is more than clear that the Legislature does not bother the tax on the manufactured goods that may be accrued, and as such the manufactured goods might be exempted either. This means the concession either by way of concession against Form 37 prior to 1.4.2001 and after 31.3.2002, and the reimbursement for the year 2001-02, is meant for the manufacturing unit irrespective of whether the goods so produced fetch any revenue to the State, provided the goods so purchased shall be for the use in manufacture of goods for sale and the manufacture taking place inside the State. The expression 'for use in manufacture of goods for sale', appearing in Section 5A is crucial and does not stipulate that the manufactured goods shall be sold in the State and in the cases where any such manufactured goods are transferred outside the State for sale, then also the concession is still available as there can be no territorial limitation ever attributed to the word 'sale' there in the said section and neither any sort of 'situs' can be fastened by any interpretation. Hence, we answer the Point No. 1 in Negative. Point No. 2, - In view of our findings on Point No. 1, we proceed to pass the following - ORDER The Appeals are allowed. The order of the AA as upheld by the FAA insofar as it relates to the issue of reimbursement is set aside and the case is remitted to the AA to allow the claim of the Appellant under Section 5A after verifying the details. Send records immediately to the concerned.