Kothari Industries vs The State of Maharashtra

This reference from the Maharashtra Sales Tax Tribunal seeks an opinion and answer to the following question and stated to be of law:--

"In the facts and circumstances of the case and in view of and in the context of the express provision in rule 31AA of the Bombay Rules providing for calculation of CQB equal to the amount of sales tax, additional tax, surcharge, turnover tax which would have been payable by a dealer if he was not holding Certificate of Entitlement, whether the Tribunal is justified in not allowing in deduction as provided in Rule 46A of the Bombay Rules while calculating the CQB (Cumulative Quantum of Tax Benefits enjoyed by the applicant) on sales side."

The Tribunal has passed an order on Reference Application No. 17 of 2007. By its order dated 25.1.2008 the above reproduced question has been referred for opinion and answer of this Court by the Tribunal. That is on the footing that it is a question of law. According to the Tribunal, this question arises out of the order dated 18.3.2006 in Second Appeal No. 557 of 2005 alongwith the Miscellaneous Application No. 185 of 2006.

The few facts relevant for the purpose of the disposal of this application are that the applicant before us at whose instance this question is referred is duly registered under the Bombay Sales Tax Act, 1959. It is a manufacturer of PVC Pipes. The applicant is holding Certificate of Entitlement granted under the Package Scheme of Incentives and opted for exemption mode of incentives. The applicant was assessed to tax for a period commencing from 1.4.2000 to 31.3.2001 by the Assistant Commissioner of Sales Tax on 18.6.2004. The applicant was granted exemption from payment of tax in respect of existing unit as well as the expansion unit. The Assessing Officer worked out the Cumulative Quantum of Benefits as per Rule 31AA of the Bombay Sales Tax Rules, 1959 (hereinafter referred to as "the Bombay Rules"). The assessment order resulted in refund of Rs. 9,64,855/-.

The applicant being not satisfied with the working of the cumulative quantum of benefits (for short ''CQB''), preferred first appeal before the Deputy Commissioner of Sales Tax (Appeals), Pune. It was urged before him that the Assessing Officer did not work out the CQB correctly. It was worked out without allowing deduction of tax element as provided by Rule 46A of the Bombay Rules. This contention was not accepted by the First Appellate Authority and it proceeded to reject the First Appeal on 30.12.2004. The applicant, therefore, filed a second appeal before the Tribunal. The Second Appeal was heard by the bench of the Tribunal and after it referred to the Rules in question, it dismissed the same on 18.3.2006.

Thereupon a reference application was filed being Reference Application No. 17 of 2007 and after hearing both sides the Tribunal has referred the above question for opinion and answer by this Court.

Mr. Thakar, learned Counsel appearing on behalf of the applicant and at whose instance this question has been referred, submits that there is an exemption certificate and which is carrying a monetary ceiling. Mr. Thakar would submit that the language of Rule 31AA enables calculation of CQB. In the case which is admittedly covered by sub-rules (1) and (2), the CQB has to be calculated in terms of sub-clauses (a) to (e) of sub-rule (2) and proviso below the same. Mr. Thakar would submit that in the present case the language of sub-clause (e) falls for consideration and determination. It is that language which enables the Authorities to calculate these benefits on notional or deemed basis. The legislature contemplates that the calculation has to be made by assuming that the tax liability falls on the applicant/dealer. Even if, he enjoys the package scheme of incentives and all benefits thereunder as far as he is concerned as well the calculation will have to be made by ignoring the certificate. If the price that is charged includes the component of tax, then, that component has to be clearly taken into account. That is on the language of Sub-clause (e) itself. That opens with the word "a sum equal to the amount of tax". Hence, there is no basis for going back to Rule 46A. Once this basic fallacy in the conclusion of the Tribunal is noted, then, it is inevitable that the calculations have to be redone. Mr. Thakar invites our attention to the fact that the copies of sales Invoices were produced. The sale price prior to the period of exemption is stated to be more or less equal. However, the Tribunal has wrongly and erroneously taken assistance of the language of Rule 46A. Thereby it has completely ignored the manner of calculation of CQB as stipulated by Rule 31AA. In these circumstances, he would urge that the question of law has to be answered in favour of the applicant and against the Revenue.

Mr. Thakar placed heavy reliance upon the Judgment of the Division Bench of this Court reported in Prasad Power Control Pvt. Limited, a Private Limited Company and Shri B.P. Yadav of Mumbai and a Director of Petitioner No. 1 Vs. Commissioner of Sales Tax and Others, . He would also rely upon the order passed following the ruling in this case in the matter of Shakti Arora Exports Pvt. Ltd. Vs. State of Maharashtra, . Finally, reliance is placed upon the judgment of the Karnataka High Court in the case of The Deputy Commissioner of Commercial Taxes (Vigilance) Vs. Hindustan Lever Limited (Lipton Division), ".

On the well settled principles that the word "deemed" will have to be interpreted in such a way that the things which do not exist must be taken to be existing and real, Mr. Thakar relies upon the judgment of the Supreme Court in the case The State of Bombay Vs. Pandurang Vinayak Chaphalkar and Others, "

On the other hand Mr. Sonpal, learned Counsel appearing on behalf of the Revenue submits that really there is no question of law and arising for answer and opinion by this Court. However, now that the Tribunal has framed it and not very happily, the question will have to be answered in favour of the Revenue. In that regard, he invites our attention to the admitted factual position. He submits that before the Assessing Officer the dealer appeared on notice through his Chartered Accountant. The applicant - dealer admitted that he is holding an Entitlement Certificate bearing date namely 8.9.1997. The period is from 1.9.1997 to 30.4.2007 and the ceiling amount is fixed at Rs. 83,40,944/-. There is an expansion unit for which as well the similar certificate is issued on 21.1.2000 and the period covered is 1.2.2000 to 31.7.2007. The ceiling amount is fixed at Rs. 34,62,750/-. Mr. Sonpal would submit that therefore, the language of Rule 46A has been taken assistance of and to hold that during the period under consideration namely 1.4.2000 to 31.3.2001 no tax could have been collected. There is an exemption. All invoices prior to 1.9.1997 are wholly irrelevant because the unit was not enjoying exemption. Mr. Sonpal submits that the sale price is the basis and there is no question of levy of tax when the entitlement certificate is of the above nature. The language of Rule 46A contemplates a tax which is payable. In this case no tax was payable. In the definition of the term ''sale price'' as appearing in Section 2(29) of the Bombay Sales Tax Act, 1959, Mr. Sonpal placed heavy reliance on Explanation II which denotes as to how component of tax has to be ignored for determining the sale price. Then, our attention is invited to Section 3 , 8 , 9 and 10 as well as Section 37 to urge that there is no question of any tax payable by the applicant-dealer and when the exemption is enjoyed. In such circumstances, there was no question of the sale price including any element of tax. If for the relevant period that is what the Tribunal has found and the conclusion is that the sales are claimed as exempted from tax, there remains no scope to then contend that sale price includes the tax element for the purpose of working of CQB. Therefore, the question of law is required to be answered in favour of the Revenue and against the applicant-dealer. The reference be disposed of accordingly.

With the assistance of Mr. Thakar and Mr. Sonpal, we have perused the reference application and the annexures thereto. We have proceeded on the footing that this reference can be disposed of without the assistance of the record and proceedings from the Tribunal. It is agreed by both sides that the question being referred from admitted facts and noted in both the orders of the Tribunal, then, there is no need to call for record and proceedings from the Tribunal''s Registry. Though the Tribunal has failed to perform its duty and has merely forwarded the statement of case but not the original record and proceedings, in the light of this agreed position we proceed to answer the reference.

Upon perusal of both Rules, we find ourselves in agreement with Mr. Sonpal. There is no dispute on facts. The facts have been noted by us. The period for which the applicant was assessed was 1.4.2000 to 31.3.2001. That there is an entitlement certificated based on which the applicant-dealer enjoyed tax exemption is undisputed. In the case of the present applicant, therefore, the question was how to calculate the Cumulative Quantum of Benefits (for short ''CQB''). The Assessing Officer found that the applicant-dealer holds such certificate. He found that there is a refund which accrues to the applicant. The applicant has claimed several benefits in the form of set off etc. Therefore, the assessment order was made accordingly.

It is the refund quantum with which the applicant was dis-satisfied. One of the grounds on which the same was challenged before the First Appellate Authority is that CQB''s calculation is erroneous and the same be recalculated. The First Appellate Authority found that there is no documentary evidence to support the argument that the calculation is erroneous and incorrect. The appeal was, thus, dismissed.

The Tribunal referred to the language in Rule 31AA and Rule 46A as well. Both these Rules read as under:--

"[31AA. Calculation of the cumulative quantum of benefits:-- (1) The cumulative quantum of benefits received by a dealer (hereinafter referred to as "the said dealer") to whom a Certificate of Entitlement has been granted by the Commissioner under entry 136 *[or entry 3 or entry 11 or entry 12 in Group E of the Government Notification, Finance Department, No. STA. 1095/387/Taxation-2, dated 22nd September 1995, as a case may be,] of the Schedule to the notification issued under section 41 shall be calculated by the Commissioner in respect of any period commencing on or after the 1st January, 1980 in the manner prescribed herein.

(2) The cumulative quantum of benefits received by the said dealer to whom the said certificate has been granted under the 1979 Package Scheme of Incentives including the amended 1979 Package Scheme of Incentives and the 1983 Package Scheme of Incentives shall be aggregate of the following sums, that is to say.---

(a) a sum equal to the amount of purchase tax which would have been payable on the purchase of raw materials to the Government by the said dealer under any of the provisions of the Act and the amount of additional tax in relation to such purchase tax which would have been payable to the Government if the exemption granted under the said entry was not available;

(b) a sum equal to the amount of [sales tax and turnover tax] which would have been payable by a selling dealer not holding a Certificate of Entitlement on the sale of raw materials to the said dealer if the set-off under Rule 42 AC is not admissible to the said dealer in respect of such purchases :

Provided that during the period from 15th April 1994 to 30th November, 1994, the calculation shall be made at the rate of tax applicable to such goods as reduced by 4% from the applicable rate of tax:

(c) a sum equal to the amount granted as drawback, set-off or, as the case may be, refund under rule 42AC to the said dealer;

(d) a sum equal to 4 per cent of the turnover of inter-State sales of finished products manufactured by the said dealer in the eligible unit and specified in the Eligibility Certificate granted to him by the implementing agency and if the inter-State sales of such products are generally liable for Central Sales Tax at a rate less than 4 per cent then a sum calculated at such lower rate on the said turnover;

(e) a sum equal to the amount of tax (including sales tax, additional tax, [surcharge] and turnover tax) which would have been payable to Government on any sales of products manufactured by the said dealer in the eligible unit and specified in the Eligibility Certificate granted to him by the implementing agency if the said dealer was not holding the said Certificate of Entitlement and no regard was had or any deduction from the said turnover or full or partial exemption from payment of tax on any account of any sale made against any declaration or certificate prescribed under the Act, rules or any notification issued under the Act or Rules:

[Provided further that, in respect of periods starting on or after the 1st April 1997, if the said dealer would have been entitled to claim set-off drawback or as the case may be, refund under rule 41D [or, as the case may be 41G]. If he was not, holding the said Certificate of Entitlement, then in respect of such turnover of purchases, the sum mentioned in clauses (a), (b) and (c) shall be reduced by an amount equal to such set-off which have been allowed to such dealer.]

Provided further that if the said dealer has consigned any goods manufactured by him in the eligible unit and specified in the Eligibility Certificate granted to him in the course of inter-State trade or commerce to himself or to any agent situated outside the State otherwise than by way of sale, then the sums mentioned in clauses (a), (b) and (c) shall be increased by an amount equal to 6 per cent of the purchase price of raw materials (other than declared goods) corresponding to such goods sent by way of consignment transfer:

Provided also that where by virtue of Rule 3 of the Bombay Sales Tax Rules, 1959, the process employed by the said dealer does not amount to a manufacture, then no sum shall be calculated under clause (e), if the corresponding purchases of raw materials are made from registered dealers.

(3)(a) for the purpose of calculation of the cumulative quantum of benefits under the 1988 Package Scheme of Incentives, the provisions contained in sub-rule (2) [and under the 1993 Package Scheme of Incentives [or Power Generation Promotion Policy, 1998] the provisions contained in clauses (a), (b), (c) and (e) of sub-rule (2)] shall apply mutatis mutandis with the qualification that the expression "finished products" shall be deemed to include by-products and scrap products generated during the process of manufacture in the eligible unit of products specified in the Eligibility Certificate granted to the said dealer.

[(b) An amount equal to the Central Sales Tax would have been payable to the Government by the said dealer on his inter-State sales of finished products manufactured by the said dealer in the eligible unit of finished product specified in the eligibility Certificate granted to him, if the said dealer was not holding the said Certificate of Entitlement under Package Scheme of Incentives under 1993 Scheme, [or Power Generation Promotion Policy]]

Provided that, for the purpose of calculation of the cumulative quantum of benefits received by the Mega Project, a sum equal to 1 per cent of the turnover of inter-State sales of goods by the said dealers, covered by sub-section (1) of section 8 of the Central Sales Tax Act, 1956 and specified in the Eligible Certificate granted to him, shall be included in the aggregate to be calculated under clause (a) above.]

[(4) If any dealer holding a Certificate under entry 136 or as the case may be entry E-3 of the Schedule to the notification, issued by the State Government under section 41 of the Act, has for the purpose of entry 10 of Group-E of the Schedule to the said notification has agreed to calculate the cumulative quantum of benefit on the maximum retail price specified in condition at serial number 3 in column (4), then for the purpose of clause (e) of sub-rule (2), the amount of tax which would have been payable to the Government on any sale of product will be taken to be equal to the amount of such tax payable on the aggregate of maximum retail price of the goods so sold.]

[(5) In this rule the expression "raw materials" shall have the same meaning as assigned to it in the Explanation II appended to the said entry *[or entry 3 or entry 11 or entry 12 in Group E of the Government Notification, Finance Department No. STA.1095/387/Taxation-2, dated 22nd September 1995, as the case may be,]

(6) In this rule the expression "Sale" includes the sale of a depot, head office or selling agent of the dealer of products manufactured by the said dealer in the said unit.]"

"Rule 46-A. Reduction of sale price for levy of tax.--[A Registered dealer may -

(a) in respect of any sale effected [before the notified day] on which the sales tax or general sales tax is payable by him either-

(i) exclude the amount, if any, collected by him separately by way of sales tax or, as the case may be, general sales tax from the sale price on which tax is leviable, or

(ii) deduct from the sale price of the goods a sum calculated in accordance with the formula given in the Table hereunder:--

TABLE

The formula shall be as follows:--

R/100+R

''R'' means the rate of tax (other than retail sales tax, applicable to the sale of goods, that is to say, where the sale price is liable only to sales tax, the rate of sales tax, and where it is liable only to general sales tax, the rate of general sales tax, and where it is liable to sales tax and general sales tax both, the rate of both the taxes.]

[(b) in respect of any sale effected on or after the notified day on which sales tax is payable by him either-

(i) exclude the amount, if any, collected by him separately by way of sales tax from the sale price on which tax is leviable, or

(ii) if he has not separately collected any such amount by way of sales tax but has reimbursed himself in respect of any tax liability in the sale price itself, deduct from such sale price a sum collected in accordance with the formula given in the Table hereunder:--

TABLE

The formula shall be as follows:--"

R+S+T/100+ R+S+T

R= Rate of sales tax applicable to the sale of the goods.

[S= Rate of surcharge (i.e. 10% of ''R'' rate of sales tax applicable to the sale of the goods) if applicable.

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

Provided that for the purpose of sub-clause (ii) of clause (b), "sale price" means sale price reduced as per the provisions of rule 46-B and rule 46-C wherever applicable.]

[(c) in respect of any sale effected on which resale tax under section 10 is payable by him either -

(i) exclude the amount, if any, collected by him separately by way of resale tax from the same price on which resale tax is leviable, or

(ii) if he has not collected separately any such amount by way of resale tax but has reimbursed himself in respect of resale tax liability in the sale price itself, deduct from such sale price a sum calculated in accordance with the formula given in the Table hereunder:--

TABLE

The formula shall be as follows:--"

Sale Price X RT/100+ RT

RT= Rate of resale tax applicable to the sale of the goods]"

A bare perusal of Rule 31AA would denote as to how calculation of CQB has to be made. Sub-rule (1) postulates the case where the dealer like the applicant has in his possession a Certificate of Entitlement granted by the Commissioner under Entry 136 or in terms of the entries inserted by Government Notification dated 13.5.2000 and in case of such a dealer the CQB has to be calculated in the manner prescribed in Rule 31AA. The period commencing on or after 1st January, 1980 is the period which is reckoned for such calculation. By sub-rule (2), the Legislature makes a specific reference to the Certificate under the 1979 Package Scheme of Incentives including the amended 1979 Package Scheme of Incentives and the 1983 Package Scheme of Incentives. Before us the applicant-dealer satisfied this criteria. The calculation of cumulative quantum of benefits in the applicant''s case shall be aggregate of the sums set out in Rule 31AA(2)(a) to (e) and we are concerned with clause (e) of sub-rule (2). That refers to a sum equal to the amount of tax which would have been payable to Government on any sales of products manufactured by the said dealer in the eligible unit and specified in the Eligibility Certificate granted to him by the implementing agency. The Tribunal concluded that this assessment and covered by clause (e) cannot be made in the case of the present applicant simply because the applicant is not required to pay any tax to the Government. The reason why this conclusion was reached because if there is an exemption enjoyed by the applicant, then, the sale price would not include the tax element. Thus, the conclusion reached is that for the purposes of clause (e) of sub-rule (2), the requirement would be a sum equal to the amount of tax which would have been payable to Government on any sale of products manufactured by the said dealer in the eligible unit and specified in the Eligibility Certificate granted to him by the implementing agency if the said dealer was not holding the certificate of entitlement. In the present case, this assessment could not have been made as all the invoices would indicate that the sale price was not to include the component of sales tax. The tax element could not have been, therefore, forming a part of the price and as depicted in the invoices. That is why and for that limited purpose the language of Rule 46A has been taken assistance of. The Tribunal has correctly come to the conclusion that the sale effected by the dealer is not liable for payment of sales tax. Therefore, the calculation of the CQB as made in the applicant''s case is not required to be altered or changed. The sums that are referred to in clause (e) cannot be taken into consideration as far as the present applicant is concerned. Such a conclusion in the case of the present applicant-dealer and concurrently reached, could not have been termed as perverse or vitiated by any error of law apparent on the face of the record. If on the plain, clear and unambiguous language of the Rule 31AA(2)(a) to (e), the Tribunal reached this conclusion, then, we do not see any need or occasion to make a reference to this Court as no question of law arises from the same. Be that as it may, the question as referred will have to be answered in favour of the Revenue and against the applicant-dealer. It is answered accordingly.

In reaching this conclusion, we are mindful of the fact that the Division Bench of this Court had in the cases of "Prasad Power Control Pvt. Ltd. & Anr. v. Commissioner of Sales Tax, Mumbai and others" (supra) and "Shakti Arora Exports Pvt. Ltd. v. State of Maharashtra" (supra) concluded, as urged by Mr. Thakar, that there is a Government Resolution and which was to be interpreted. In interpreting that and going by its plain language the conclusions relied upon by Mr. Thakar are reached by the Division Bench. We must immediately note the factual position when the reference was made to Rule 31AA in "Prasad Power Control Pvt. Ltd." The challenge in that petition was to the constitutional validity of Section 41B of the Bombay Sales Tax Act, 1959 as also Rule 31AA of the Bombay Sales Tax Rules, 1959 to the extent that the provisions are made applicable retrospectively from 1st January, 1980. The basic dispute is that when a unit is established as per the Government Resolution dated 30th September, 1988 which provides for a mechanism to calculate the notional sales tax liability of a unit covered under the 1988 Package Scheme of Incentives, whether a different mechanism for calculating the notional sales tax liability can be introduced with retrospective effect from 1st January, 1980 by inserting section 41B in the Bombay Sales Tax Act and Rule 31AA to the Bombay Sales Tax Rules. That is urged to be defeating the rights vested in the Units established under the 1988 Scheme prior to insertion of Rule 31AA. It is in dealing with such a challenge and finding inconsistency in the language of paragraph 2.11 of the 1988 Government Resolution and the Rule, that the Division Bench reached the above conclusion. We cannot, therefore, read the conclusion in paragraphs 28 to 30 relied upon by Mr. Thakar out of context and in isolation. This is clear from further reading of this judgment and particularly paragraphs 31 and 32 thereof. In such circumstances, the judgment must be read as confined to the facts and the challenge dealt with by the Division Bench.

The decision in "Shakti Arora Exports Pvt. Ltd. v. State of Maharashtra" (supra) only follows ''Prasad Power Control Pvt. Ltd." (supra) and nothing beyond that is to be found therein. For the reasons that we have assigned above even this judgment is distinguishable.

Before the Karnataka High Court, the controversy was entirely different. The respondent - Hindustan Lever Limited established a new industrial unit engaged in the production of blended packed teas at Dharwad and availed the benefit of sales tax exemption for a period of six years. Subsequently, the Assistant Commissioner of Commercial Tax on the basis of a detailed study held that the respondent had taken into consideration the sales tax in fixing the price of the tea and thereby contravened the specific conditions laid down under Explanation III(a)(e) to the notification dated 19th June, 1991. That is how an adverse order was passed and which was unsuccessfully challenged in the appeal. The Tribunal in second appeal referred the point to a Full Bench and which allowed the appeal of the assessee - respondent. The Revenue approached the Hon''ble Karnataka High Court and the Bench agreed with the Tribunal. In agreeing, it held that unless the price of an article was controlled, it was always open to the buyer and the seller to agree upon the price to be payable and while doing so it was open to the dealer to include in the price the tax payable by him to the Government. If he did so he could not be said to be collecting the tax payable by him from his buyers. It is once again in the background of the admitted facts that the Tribunal inferred that the respondent collected the tax when there was a specific legend in the invoice that it was exempted from paying tax. It had also noticed that the ''consideration'' concept could not be equated with the ''collection''. That is why the Tribunal''s conclusion that there was no collection of tax was accepted. We do not see how such conclusion reached by the Karnataka High Court would assist Mr. Thakar in the present case.

Even reference to the settled principle as to how the word ''deemed'' is to be interpreted, will not be of any assistance to the Dealer in this case.

As a result, the reference is disposed of by answering the question in favour of the Revenue and against the applicant.