Milan Supari Co. Pvt. Ltd. vs The Commissioner of Sales Tax

This reference has been forwarded by the Tribunal at the instance of the original applicant/Assessee. He preferred Reference Application No. 23 of 2002 and requested the Tribunal to forward the question of law for being answered by this Court. That application was granted and the following question has been referred for opinion and answer of this Court:

"Whether the Tribunal was justified in holding that set off under Rule 42-H of the Bombay Sales Tax Rules, 1959 is not admissible if the goods sold are covered by a declaration in Form N-14B."

Reference application No. 23 of 2002 preferred by the Assessee applicant before us arises out of the Judgment of the Tribunal in Second Appeal No. 1198 of 2000 decided on 31st January, 2002. That Appeal was preferred by the Assessee to challenge the order dated 28th April, 2000 passed by the Deputy Commissioner of Sales Tax (Appeals) IV, Mumbai City Division, Mumbai. The period in question is from 1st April, 1996 to 31st March, 1997.

The Assessee is the registered dealer both under the Bombay Sales Tax Act, 1959 and the Central Sales Tax Act, 1956 (for short "the BST" and "the CST"). The Assessee carrying on the business of making scented supari. The process of decorticating, colouring, scenting etc. of Betel nuts does not amount to manufacture in view of Rule 3 of the Bombay Sales Tax Rules, 1959. The Assessee was assessed by the Assistant Commissioner of Sales Tax (Assessment) for this period. As the turnover of the Assessee for the previous year was more than Rs. 50 lacs, the Assessee claimed that it was eligible for a set off under Rule 42H of the Bombay Sales Tax Rules, 1959. The Assessing Officer did not grant this set off. Therefore, an Appeal was preferred against this order before the Deputy Commissioner of Sales Tax. That Appeal also failed. That is how the Second Appeal was filed before the Tribunal.

The Assessee argued before the Tribunal that the set off under Rule 42-H as claimed is to the tune of Rs. 1,89,749/- however, it was allowed and confirmed in the First Appeal at Rs. 1,35,052/-. Thus, disallowance of Rs. 54,697/- was made on two counts. We are not concerned with this Appeal with regard to the disallowance of tax paid on materials other than supari. We are only concerned with 11% set off disallowed, because the Assessee had effected sales against declaration in Form ''N14B''. That is referable to Rule 42H. Thus, the Assessee succeeded partially but could not obtain this relief.

Mr. Surte, the learned Counsel appearing for the Assessee reiterated the arguments as canvassed before the Tribunal. He submitted that the Tribunal has failed to take note of the language of Rule 42H as appearing prior to 1st October, 1995 and after the same came to be reworded from 1st April, 1999. During the period 1st October, 1995 to 31st March, 1999, which is the period with which we are concerned, Mr. Surte argued that, the explanation II was deleted. It was not there in the Rule Book. Since that was not there, the effect of its absence for the relevant period should have been considered by the Tribunal. In not considering the effect of that absence, the Tribunal has committed an apparent error. The explanation had some crucial words according to Mr. Surte. For the purpose of Rule 42H and for the purpose of explanation ''I'', the expression ''sale'' was defined in a inclusive manner and only excluded the sale covered by Sub-Section (3) of Section 5 of the CST. In absence of such an application and these crucial words, the setoff could not have been disallowed is the submission of Mr. Surte.

Mr. Surte further submits that all other conditions have been fulfilled by the Assessee. In these circumstances, the Tribunal''s order cannot be sustained.

Mr. Surte relied upon a clarification stated to have been given on 17th September, 1999 by the Commissioner of Sales Tax, Maharashtra State, Mumbai to one M/s. K. Mahendra kumar and Company. He also relied upon a circular to submit that the set off was admissible in the case of manufactured goods exported or sold in the course of interstate trade and commerce. Mr. Surte also relied upon on the Judgment of the Hon''ble Supreme Court in the case of Commissioner of Sales Tax, U.P. vs. Indra Industries Vol. 122 Sales Tax Cases 100. He also relied upon and rather brought to our notice an order passed by the Tribunal on 11th February, 2005 in the matter of M/s. Sriniwas Chemicals Industries Pvt. Ltd. vs. State of Maharashtra Second Appeal No. 1794 of 2002.

On the other hand, Mr. Sonpal, the learned Counsel appearing for the Respondent submits that the Tribunal''s conclusion cannot be said to be vitiated by any error of law apparent on the face of STR. 17.2006.6. doc record or perversity. Mr. Sonpal submits that primarily the Revenue has to be satisfied that the sales of the Assessee like the present one, should not be out of the purview of or beyond the reach of the BST. In the present case, sales were beyond the BST. If that is so, then there is no question of the further stipulations under Rule 42-H being satisfied. There was no case of any disallowance under Section 8 of the BST. Considering the transactions and the sales, the Tribunal was right in upholding the disallowance. For all these reasons, he submits that, this reference be answered in favour of the Revenue and against the Assessee. Mr. Sonpal submits that there is no question of a letter addressed to M/s. K. Mahendra kumar and Company on 17th September, 1999 being construed as a circular, as a circular only emanates from the Commissioner, which is addressed to all and not a reply to any letter by a particular Assessee, as is in this case, namely of M/s. K. Mahendra kumar and Company. Secondly, this was not forming part of the record of the Tribunal. The circular dated 15th November, 1999 relied upon by Mr. Surte deals with Rule 42I and not Rule 42H. Therefore, it is of no assistance in construing or interpreting Rule 42H. Mr. Sonpal submits that Rule 42H as worded and prior to 1st October, 1995 and from 1st April, 1999 so also between 1st October, 1995 and 31st March, 1999 needs to be looked into and considered minutely. He submits that prior to October, 1995 and subsequent to 1st April, 1999, the explanations are to be found below Rule 42H. There is some sort of parity inasmuch as, prior to 1st October, 1995 the Rule was dealing with registered dealer, who had a trademark or patent in the goods in which he transacted. In the present case, we are concerned with Rule 42-H appearing between 1st October, 1995 to 31st March, 1999. That is a standalone provision. That only deals with a situation of a setoff and being admissible to the goods under Schedule ''C''. Therefore, it must be interpreted on its own and without the aid of any explanation inserted prior or subsequently. He therefore submits that the Tribunal was right in distinguishing its own Judgment in the case of M/s. W.R. Talwalkar Bros. Pvt. Ltd. vs. The State of Maharashtra Second Appeal No. 943 & 944 of 2000 decided on 12th October, 2001.

With the assistance of Mr. Surte and Mr. Sonpal, we have carefully perused this Reference Application, the question posed for our determination and all the orders in the Appeal. We have also perused the material supplied in the form of a compilation by Mr. Surte.

Since a very limited issue has been raised for consideration, we would commence with reproduction of Rule 42-H, which reads as under:

"R. 42-H. Drawback, setoff etc. of tax paid on goods purchased by a dealer liable for levy of value added of sales tax on goods specified in Schedule C. 3 Second Appeal No. 943 & 944 of 2000 (1) While assessing the amount of tax payable by a Registered dealer (hereinafter, in this rule, referred to as "the claimant dealer") in respect of any period starting on or after the 1st October 1995 on his sales of goods (being goods in respect of which the deduction from turnover of sales has not been allowed under subsection (1) of section 8 because of the provision contained in subsection (3) or, as the case may be, in subsection (3A) of section 12A the Commissioner shall, subject to the provisions of sub-rule (2), grant him drawback, set-off or, as the case may be, a refund of aggregate of the sums determined in accordance with the provisions of rule 44-D in respect of purchase of such goods including the goods used for packing of such goods. Provided that, drawback, set off or, as the case may be, refund under this rule shall not exceed the tax payable on the sale of such goods, not being sales against any declaration or certificate prescribed under the Act, Rules or as the case may be, any entry of Schedule to the notification issued under section 41:

Provided further that, if the dealer effects any sales by way of a delivery of goods as hire purchase of any system of payment by installments, then the amount of drawback, setoff, or as the case may be, refund under this rule shall be in proportion to the purchase price of that installment.

(1A) Notwithstanding anything contained in sub rule (1), the amount of drawback, setoff or as the case may be, refund shall be subject to the condition that if on any sale, (not being a sale against any declaration or certificate prescribed under the Act, rules or as the case may be, any entry of the Schedule to the notification issued under section 41) effected by the dealer, tax is payable at a rate which is lower than the rate applicable to the corresponding purchase of the same goods, then, the amount of drawback, setoff, or as the case may be, refund shall not exceed the amount of tax payable on the sales. (2)(a) The claimant dealer shall not issue a certificate in Form 31 of the sale is made by the claimant dealer against any declaration or certificate prescribed under the Act, rules or, as the case may be, any entry of the Schedule to the notification issued under section 41.

(b) No drawback, setoff or refund shall be allowed under this rule in respect of purchases of any goods on the sale of which the claimant dealer has claimed reduction of sale price under rule 46B."

A bare perusal thereof would indicate that the same deals with drawback, set off etc. on the tax payable on sale of goods purchased by dealer (liable for levy of, value added of Sales Tax on goods specified in Schedule ''C''). Sub Rule (1) refers to tax payable by a Registered Dealer on sale of his goods in respect of any period starting on or after 1st October, 1995. These goods ought to be goods in respect of which deduction from turnover of sales has not been allowed under Sub-Section (1) of Section 8 of the BST because of the provisions contained in Sub-Section (3) or as the case may be Sub-Section (3A) of Section 12A. Such a dealer can claim the set off and the Commissioner shall, subject to the provisions of sub Rule (2), grant the same and in the manner set out by Rule 42H.

In the present case, the Tribunal noted that the Assessee before it had effected sale of Schedule ''C'' goods against Form ''N14B''. That Form is prescribed in relation to the goods which have been procured from another dealer who sold them in the course of export, out of the territory of India within the meaning of Section 5(3) of the CST. That Form is prescribed by virtue of Rule 21A. That is a Form of a certificate to be furnished by a dealer in support of his claim for exemption in respect of sales deemed to be in the course of export, out of the territory of India. Rule 21A of the Bombay Sales Tax Rules reads as under:

"21A. Form of Certificate to be furnished by dealer in support of his claim for exemption in respect of sales deemed to be in the course of export out of the territory of India-.

A dealer may in support of his claim that he is not liable to pay tax under the Act in respect of the sale of goods on the ground that the sale of such goods is a sale in the course of export of the goods out of the territory of India within the meaning of subsection (3) of section 5 of the Central Sales Tax Act, 1956 (LXXIV of 1956) produce before the Commissioner a certificate in Form N14B duly filled in and signed by the exporter to whom the goods are sold, along with the evidence of export of such goods."

A bare perusal of this Rule would indicate that a dealer may make a claim that he is not liable to pay tax under the BST in respect of his sale of goods on the ground that the sale of such goods is a sale in the course of export of the goods out of the territory of India within the meaning of Sub-Section (3) of Section 5 of the CST. He can therefore produce a certificate in the Form referred by us above along with evidence of export of such goods and claim exemption in respect of the liability to pay the Sales Tax. Pertinently, this form has to be filled in and signed by the exporter to whom the goods are sold. Section 5 of the CST contains Sub-Section (3). Section 5 has been inserted in the CST so as to determine as to when a sale or purchase of goods can be said to be taking place in the course of import or export. Sub-Section (3) was inserted therein with retrospective effect from 1st April, 1976, which reads as under:

"(3) Notwithstanding anything contained in subsection (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export."

A bare perusal thereof would indicate that the same has been inserted so as to take out of the purview of the provision namely, Section 5, the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India. That is also deemed to be in the course of such export, provided such last sale or purchase took place after and was for the purpose of complying with an agreement or order for or in relation to such export. Ordinarily this would not have been within the purview of Sub-Section (1) of Section 5. Therefore, notwithstanding any contained in Sub-Section (1) of Section 5, such sale or purchase is also deemed to be in the course of the export. This aspect becomes clear if one peruses Section 75 of the BST, which specifically excludes, from the purview of the BST, certain sales and purchases. This Section reads as under:

"S. 75 Certain sales and purchases not to be liable to tax. Nothing in this Act or the rules made thereunder shall be deemed to impose or authorise the imposition of a tax on any sale or purchase of any goods, where such sale or purchase takes place-

(a) (i) outside the State; or

(ii) in the course of the import of the goods into the territory of India, or the export of the goods out of such territory; or

(b) in the course of inter State trade or commerce, and the provisions of this Act and the said rules shall be read and construed accordingly.

Explanation. for the purpose of this section whether a sale or purchase takes place Page

(i) outside the State, or

(ii) in the course of the import of the goods into the territory of India or export of the goods out of such territory, or

(iii) in the course of inter State trade or commerce, shall be determined in accordance with the principles specified in section 3, 4 and 5 of the Central Sales Tax Act, 1956."

Therefore, the sales and purchases which are not liable to tax under the BST by virtue of Section 75 have been rightly excluded or taken out of the purview of Rule 42-H and that is the only interpretation which can be placed on the said Rule. If one peruses Section 5 and particularly Sub-Section (1) and Sub-Section (3) of the CST together with Section 75 of the BST, Rule 21A of the Bombay Sales Tax Rules, Form N-14B harmoniously and together, it would be apparent that what is not within the purview of the BST can never be brought in for the purposes of claiming a deduction or set-off under Rule 42H. If that is the intent of legislature and it has been given effect to by the Tribunal in the impugned order, then we do not find that its conclusion is vitiated.

The absence of the explanation therefore is an aspect which need not be considered by us, however, since a debate was raised by Mr. Surte, we must at once clarify that prior to 1st October, 1995 Rule 42H was dealing with a case of drawback, set-off of tax paid on goods purchased by a dealer holding a trademark or a patent. If a purchase was in respect of such sale, if the dealer registered under the BST holds a trade mark or a patent, then the drawback, setoff can be allowed and that is why Rule 42H as appearing prior to 1st October, 1995 contained the explanation. In assessing the amount of tax payable by a registered dealer paying tax for any period on its sale of taxable goods not being declared goods in respect of which he holds trademark or patent, then the Commissioner shall, in respect of his purchase of such goods or in respect of his purchase of the goods referred to in Sub-Clause (ii) of Clause (a) of Sub-Rule 2, grant him that relief. The expression ''sale'' had to be defined and to mean a sale of purchased goods and that is why two explanations have been inserted. Even the legislature was careful and excluded, from the purview of expression ''sale'' and for the purpose of Rule 42H, the one covered by Sub-Section (3) of Section 5 of the CST. That such an explanation was not there when the Rule 42-H was on the statute book from 1st October, 1995 to 31st March, 1999 does not make any difference, as we see clearly that in respect of the amount of tax payable by registered dealer on his sales or goods on which deduction under Section 8(1) has been not allowed is a case of the registered dealer to whom the BST was applicable. If it was applicable because the sale was not a sale which was beyond the purview or reach of the BST, it is to enable such a dealer to claim the drawback, set off etc. on goods purchased by him and liable for value added Sales Tax that Rule 42H was worded accordingly. That once again the explanation appears in Rule 42H and after 1st April, 1999 is because a similar case of dealer holding a trademark or patent was before the legislature. In such circumstances, we do not see any force in the contention of Mr. Surte that in the absence of the explanation, the intent was not to deprive the registered dealer i.e. the Assessee before us from claiming setoff under Rule 42H of the Bombay Sales Tax Rules.

We have also perused paras 11 to 13 of the Tribunal''s conclusion and as appearing in its Judgment. Our reading of the Rule is in consonance with the understanding of the same by the Tribunal. In the circumstances, we do not see any basis for holding that the Tribunal should have allowed the Second Appeal of the Assessee in its entirety. The Tribunal''s Judgment deserves to be upheld and for the reasons recorded by us above, the reference is answered in favour of the Revenue and against the Assessee.