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2005 DIGILAW 671 (KAR)

MYSORE CHIPBOARDS LIMITED v. STATE OF KARNATAKA

2005-10-05

S.ABDUL NAZEER

body2005
S. ABDUL NAZEER, J. ( 1 ) IN all these cases since the question of law and fact are common they are taken up together and disposed of by this common order. ( 2 ) IN all these cases petitioners are the Assessees under the Karnataka Sales Tax Act (for short 'kst Act') and Central Sales Tax Act (for short 'cst Act' ). ( 3 ) THE Government of Karnataka has issued Industrial Policy 1996-2001 in GO. No. CI 30 SPC 96, dated 15-3-1996 offering tax concessions and incentives to new industrial units and also to the existing units making investment in expansion/modernisation/ diversification. Eligible industrial units were extended the option availing incentives in the form of sales tax exemption (KST/cst) or in the form of sales tax deferral (KST/cst ). The said Policy was implemented by notification under Section 19-C of the KST Act in FD 32 CSL 96 (I) dated 15-11-1996 and under Section 9 (2) of the CST Act read with Section 19-C of the KST Act in No. FD 32 CSL 96 (II) dated 15-11-1996. Petitioners had applied and were granted sales tax exemption certificate. As per the said certificates of exemption, the petitioners were entitled for sales tax exemption both KST and CST under the expansion programme of sale of finished products for a period of five years and limited to 80% of the investment made on fixed assets. The quantum of exemption from the tax was granted in terms of Industrial Policy to the Industrial Units concerned. In each assessment year, the taxable sales coming under the purview of the KST Act, 1957 and taxable sales coming under the purview of the CST Act, 1957 and the amount of tax payable thereon was computed. The total amount thus arrived at is set off against the total quantum of exemption granted to the industrial unit and the balance is carried forward to the next year and so on, until the exemption to the full extent is availed or until expiration of the period of eligibility. ( 4 ) THERE was no tax so leviable on stock transfer to own branches in other States or to consignment agents appointed in the other States. ( 4 ) THERE was no tax so leviable on stock transfer to own branches in other States or to consignment agents appointed in the other States. There is nothing in the Industrial Policy express or implied, that the total amount of tax exemption granted to an Industrial unit would include any notional tax to be calculated on the value relating to stock transfer. No such condition is either contemplated by the implementation of the Notification dated 15-11-1996. ( 5 ) THE Government of Karnataka amended Rule 20-C of the KST Rules by Notification No. FD 63 CSL 98 dated 1 -8-1998 with effect from 10-8-1998 titling it as 'procedures and conditions for granting deferred payment of tax or exemption of tax of new industry'. Clause (c) of sub-Rule (1) of Rule 20-C prescribes that amounts of tax that should be computed for the purposes of quantifying the eligibility to exemption from tax of eligible industrial units. According to Clause (a) of Sub-Rule (1), it is the aggregate amount of tax leviable on the taxable sales under CST Act, 1956. Clause (c) of Sub-Rule (1) prescribes that in addition a notional tax or an imaginary tax at the rate of 4% should also be calculated on the price of the goods stock transferred and the amount so calculated together with the amounts of KST and CST calculated under Clauses (a) and (b) should be computed as the total amount of incentive and set off against the total quantum of tax exemption granted to an industrial unit. The petitioners are aggrieved by clause (c) of Sub-Rule (1) of Rule 20-C in these petitions. Consequently, they have also sought for quashing of the Assessment/reassessment notices or the orders of assessments wherein tax has been levied in terms of the impugned Rule. ( 6 ) I have heard the Learned Counsel for the parties. ( 7 ) SRI G Sarangan, Learned Senior Counsel appearing for the petitioners submits that the industrial Policy of 1996-2001 was approved by the State Cabinet. As per the Industrial Policy and the eligibility certificate issued by the Department of Industries and Commerce, exemption from tax contemplated is in respect of the tax payable on taxable sales coming under the purview of the KST Act and taxable sales coming under the purview of CST Act, 1956. No tax is payable on stock transfer. As per the Industrial Policy and the eligibility certificate issued by the Department of Industries and Commerce, exemption from tax contemplated is in respect of the tax payable on taxable sales coming under the purview of the KST Act and taxable sales coming under the purview of CST Act, 1956. No tax is payable on stock transfer. It is thus not within the contemplation of Industrial Policy 1996-2001 or the implementation of Notification that any notional tax should also be calculated on stock transfers and treated as a part and parcel of the amount allowed to Industrial Unit to be availed as tax exemption. It is further argued that the prescription in Clause (c) of Sub-Rule (1) of Rule 20-C of kst Rules that tax at the rate of 4% or a lower rate prescribed under the KST Act should be calculated on stock transfers and set off against the amount of tax which has been sanctioned to the Industrial Unit availed tax exemption is repugnant and is not authorised to industrial policy of 1996-1997. It is argued that as per the eligibility certificates issued by the Department of industries and Commerce, petitioners were granted exemption from tax on additional capacity credited from the investment made in the expansion project. Therefore, the levy of notional tax as per the impugned Rule on the stock transfers made to own branches/ agents located outside karnataka contrary to the Industrial Policy. Sri Rabinathan, Learned Counsel appearing for some of the petitioners has raised similar contentions while arguing the matter. ( 8 ) ON the other hand, Sr. Vedamurthy, Learned Counsel appearing for the State submits that state is free to impose a condition that for earning exemption from payment of tax the sales must take place within the State and if the goods are sold outside the State, entitlement to the benefit of incentive will stand reduced to the extent of the Revenue loss caused by such diversion. If the condition as laid in rule 20-C is removed it would have effect of enlarging the scope of exemption. There is no scope of severing condition and exemption is granted subject to that contention. ( 9 ) I have carefully considered the arguments of the Learned Counsel for the parties. If the condition as laid in rule 20-C is removed it would have effect of enlarging the scope of exemption. There is no scope of severing condition and exemption is granted subject to that contention. ( 9 ) I have carefully considered the arguments of the Learned Counsel for the parties. ( 10 ) IT is well established that the object of granting exemption from payment of sales tax has always been for encouraging capital investments and establishment of Industrial Units for the purpose of increasing production of goods and promoting the development of the Industrial Units in the State particularly in the backward areas Commissioner Of Sales Tax v. Industrial Coal enterprises AIR1999 SC 1324 , JT1999 (2 )SC 6 , 1999 (1 ) SCALE626 , (1999 )2 SCC607 , [1999 ]1 SCR871 , [1999 ]114 STC365 (SC ). The Government has framed industrial Policy incentive package having regard to the liberalisation of Economic-Industrial Trade policies initiated by the Government of India in July 1991. The Policy provides for packages for incentives and concessions. Sub-clause (d) of Clause 5 of the Industrial Policy provides for sales tax concessions for existing units making new investments under expansion/diversification. It states that industrial units in specified categories set up in developed areas and the units set up in developing areas including growth centers, undertaking new industrial investments for expansion/diversification shall be eligible for sales tax exemption/sales deferment, mutatis and mutandis as applicable to new industrial units. However, the benefit shall be available only for additional production created out of such investment. Existing production on which tax liability would continue, would be computed based on the average production of three years prior to commencement of expansion project. This was followed by notification issued under Section 19-C of the KST Act and another notification issued under Section 9 (2) of the CST Act read with 19-C of the KST Act. In terms of the aforesaid notification, Commerce and Industries Department has issued Certificate of exemption. The certificate of exemption states that the unit is eligible to avail sales tax exemption both (KST and CST) under expansion programme on the sale of finished goods in accordance with the notification issued by the Finance Department for a period of five years from the date of commercial production and limited to 80% of the investment made on fixed assets. In accordance with the terms of the Industrial Policy the petitioners have undertaken expansion in its existing unit. ( 11 ) RULE 20-C as existed prior to 1 -8-1998 provided conditions to defer the payment of tax as per monthly or quarterly statement or annual returns. The said Rule was not applicable in so far as exemptions are concerned. The impugned Rules have been incorporated w. e. f. 1. 8. 1998. The relevant Rule is Sub-rule (1) (c) of Rule 20-C which is as follows: 20-C (1) Procedure and conditions for deferred payment of tax or exemption of tax for new industry:-Where a new industrial unit referred to in Section 19-C is eligible for specified tax incentive with reference to the investment made in fixed assets, the extent of such incentive shall be arrived at, on the basis of the following: (c) aggregate amount of tax at the rate of four percent or the rate applicable under the Karnataka sales Tax Act, 1957, whichever is lower on the sale price of the goods transported by the eligible new industrial unit to its own place of business or to the place of business of its agent at any place within India but outside the State of Karnataka for sale there ( 12 ) THE Department is enforcing the said Rules and are assessing taxes accordingly. The conditions mentioned in the said Rule is not contained either in the industrial policy or in the certificate of Exemption. The Hon'ble Supreme Court, in State of Bihar and Ors. v. Suprabhat steel Limited (1999) 112 STC 258 has held that issuance of a notification under Section 7 of the bihar Finance Act, 1981, entitles industrial units to avail of the incentives and benefits declared by the State Government in its own industrial incentive policy. But in the exercise of such power it would not be permissible for the State Government to deny any benefit which is otherwise available to an industrial unit under the Industrial Incentive Policy itself. The Industrial Policy is issued by the State Government after such policy is approved by the Cabinet itself. The issuance of the notification under Section 7 by the Bihar Finance Act by the State Government. The Industrial Policy is issued by the State Government after such policy is approved by the Cabinet itself. The issuance of the notification under Section 7 by the Bihar Finance Act by the State Government. Therefore, any notification issued by the Government in exercise of the power under Section 7 of the Bihar finance Act if it is" found to be repugnant to the Industrial Policy declared in a Government order or resolution, then such notification must be held to be bad to that extent. The relevant portion is as follows: coining to the second question, namely, the issuance of notification by the State Government in exercise of power under Section 7 of the Bihar Finance Act, it is true that issuance of such notifications entitles the industrial units to avail of the incentives and benefits declared by the state Government in its own industrial incentive policy. But in exercise of such power it would not be permissible for the State Government to deny any benefit which is otherwise available to an industrial unit under the incentive policy itself The Industrial Incentive Policy is issued by the state Government after such policy is approved by the Cabinet itself. The issuance of the notification under Section 7 of the Bihar Finance Act is by the State Government in the Finance department which notification is issued to carry out the objectives and the policy decisions taken in the industrial policy itself. In this view of the matter, any notification issued by the government Order in exercise of power under Section 7 of the Bihar Finance Act, if is found to be repugnant to the Industrial Policy declared in a Government Order resolution, then the said notification must be held to be bad to that extent. In the case on hand, the notification issued by the State Government on April 4, 1994 has been examined by the High Court and has been found, rightly, to be contrary to the industrial incentive policy, more particularly the policy engrafted in Clause 10. 4 (i) (b ). Consequently, the High Court was fully justified in striking down that part of the notification which is repugnant to Sub-clause (b) of Clause 10. 4 (i) and we do not find any error committed by the High Court in striking down the said notification. We are not persuaded to accept the contention of Mr. 4 (i) (b ). Consequently, the High Court was fully justified in striking down that part of the notification which is repugnant to Sub-clause (b) of Clause 10. 4 (i) and we do not find any error committed by the High Court in striking down the said notification. We are not persuaded to accept the contention of Mr. Dwivedi that it would be open for the Government to issue a notification in exercise of power under Section 7 of the Bihar Finance Act, which may override the incentive policy itself. In our considered opinion the expression "such conditions and restrictions as it may impose" in Sub-section (3) of Section 7 of the Bihar Finance Act will not authorise the State Government to negate the incentives and benefits which any industrial unit would be otherwise entitled to under the general Policy Resolution itself. In this view of the matter, we see no illegality with the impugned judgment of the High Court in striking down a part of the notification dated April 4, 1994. (emphasis supplied) ( 13 ) IT is not in dispute that the petitioners have undertaken expansion programme in terms of the industrial Policy and they are entitled for the benefit granted to them under the policy followed by Notification issued by the State Government and the Certificate of Exemption granted to them by the competent Authority. It is not the case of the State Government that the industrial policy has been amended or that the certificate of exemption has been withdrawn. If that is so, by applying amended Rules of 1998, which has come into force subsequent to the industrial policy the benefit granted to them cannot be withdrawn. ( 14 ) IN the result, I declare that the Industrial Units which have made new investments under expansion/diversification pursuant to the Industrial Policy of 1996-1997 are not bound by the impugned Rules. Accordingly, the assessment orders passed/proposition notices issued by the assessing Authorities by applying Rule 20-C ( 1) (c) are hereby quashed. The Assessing authorities are directed to pass fresh orders of Assessment in so far as the petitioners are concerned in the light of the observations made above and in accordance with law. Petition is disposed of accordingly.