Commissioner
of Sales Tax, Bombay etc. Vs. Bharat Petroleum Corporation Ltd. [1992] INSC 52
(18 February 1992)
Rangnathan,
S. Rangnathan, S.
Ramaswami, V.
(J) Ii Agrawal, S.C. (J)
CITATION:
1992 AIR 959 1992 SCR (1) 807 1992 SCC (2) 579 JT 1992 (2) 601 1992 SCALE
(1)398
CITATOR
INFO :
D 1992
SC2078 (13)
ACT:
Bombay Sales Tax Act, 1959/Bombay Sales
Tax Rules, 1959:
Section
42/Rules 41 and 41-A-Sales tax-Right to claim set-off-Sales tax paid on
purchase of raw material used in manufacture of non-taxable goods and taxable
by-products for sale-Whether set-off would be available on the entire amount of
tax paid on purchase of raw material-Whether principle of apportionment on
basis of turnover of taxable and non- taxable goods could be invoked-Whether raw
material purchased by manufacturer dealer should be used for manufacturing
taxable goods only and sale of manufactured goods should be made by
manufacturer-dealer himself-By- product yielded in the process of manufacturer
of main product-Whether manufacture of main product-manufacturer of by-product
also.
HEAD NOTE:
The assessee-Oil
refinery, predecessor-in-interest to the respondent Corporation in one of the
appeals had registered itself as a dealer under the Bombay Sales Tax Act, 1959.
During the Calendar year 1961, it had purchased sulphuric acid from a chemical
company for processing and refining crude oil and manufacturing kerosene for a
marketing company. On the sulphuric acid so purchased sales tax was recovered
from it by the chemical company. While the refined kerosene which was not
taxable upto 31.3.1961 was sold by the marketing company, the acid sludge
yielded in the purification process was sold by the refinery. The refinery paid
sales tax on the acid sludge sold by it, and claimed a set off (and a refund,
if need be) of the sales tax paid by it on its purchase of sulphuric acid, on
the ground that all the conditions set out in clause (e) of Rule 41 of the
Bombay Sales Tax Rules, 1959 were fulfilled, viz., it was manufacturer within
the meaning of Section 2 (17) of the Act, that it was also a registered dealer,
that it manufactured taxable goods for sale, that while acid sludge was taxable
throughout the year, kerosene was taxable with effect from 1.4.1961 onwards and
that tax was recovered on the raw material purchased by it by the chemical
company.
808
The Sales Tax Officer allowed the set off only partly.
On
appeal, the Appellate Assistant Commissioner held that the assessee was
entitled to no set off at all under Rule 41 since what was manufactured by the assessee
was kerosene and not acid sludge, and the kerosene was sold not by the assessee-manufacturer,
but by some other company. The Appellate Tribunal, however, allowed the assessee's
claim in full and on reference this was upheld by the High Court.
The
respondent Cotton Mill in the other appeals purchased raw unginned cotton from
agriculturists and unregistered dealers during periods 1.7.73 to 30.6.74 and
1.7.74 to 30.6.75 and paid sales tax on the raw cotton so purchased. The cotton
was ginned yielding place to ginned cotton and cotton seed. The respondent
manufactured yarn and cloth from the ginned cotton. The cotton waste and yarn
waste obtained in the course of manufacture were also sold by the assessee. It
paid sales tax on the yarn and cotton waste sold by it and claimed a set off,
under 41-A of the Rules, of the sales tax paid on the purchase value of the
entire raw cotton purchased by it.
The
Sales Tax Officer allowed a set off of only part of the purchase tax paid on
the raw cotton purchased by the assessee proportionate to the extent of yarn
sales. On appeal, the Appellate Tribunal allowed a set off of the entire
purchase tax paid on the raw cotton, machinery and other purchases, which had
been used in the process of manufacture of cotton waste. It, however, directed
that the deductions should be so allowed as not to result in a double deduction
of the same amount of purchase tax.
In the
appeals, by Special leave, before this Court, on behalf of the State
Government, it was contended that Rules 41 and 41-A were intended to give
relief to a dealer in respect of purchase of goods which were used in the
manufacture of taxable goods for sale, that the manufactured goods, viz., pure
kerosene was neither sold by the respondent so as to attract sales tax in his
hands nor, was it liable to sales tax at all for the first three months, and
the cotton purchased on payment of tax was used for the manufacture of cloth
which was not liable to sales tax, and that a set off could not be allowed merely
because a by- product or waste product, viz., acid sludge and cotton waste was
sold for a nominal turn-over, which was subject to tax, and that the set off
should be split up proportionately and allowed only to a proportionate extent,
on the basis of the respective 809 turnover of the taxable and non-taxable
goods, and an apportionment of such nature was implicit in a tax law and was
also in consonance with the object and purpose of the rules.
On
behalf of one of the respondents it was contended that under Rule 41 it was not
a requirement that the manufactured goods had to be sold by the manufacturing
dealer himself and that the sulphuric acid purchased was wholly used in the
manufacture of two items-kerosene and acid sludge-one of which, viz., the sludge,
was taxable and also subjected to tax, and the amount of set off was specified
in the rule itself as the amount of purchase tax paid on the goods so used, and
could not be scaled down proportionately merely because the turnover of the
taxable goods was insignificant. The other respondent adopted these
contentions.
Dismissing
the appeals, this Court,
HELD:
1.1 The assessees are entitled to a set off of the entire tax paid by them on
the purchases of sulphuric acid and cotton respectively. The only condition
under the rule is that the goods purchased on payment of tax should have been
used in the manufacture of taxable goods for sale.
Their
concurrent user for the manufacture of another item of goods which may or may
not be taxable is immaterial though kerosene was also taxable for nine months
in the year and yarn was also manufactured and it was subject to tax.
Commissioner
of Sales Tax v. Burmah Shell Refineries Limited, (1978) 41 S.T.C. 337, referred
to.
1.2.
The principle of apportionment on the basis of turnovers of various items of
goods manufactured and restriction of the quantum of set off to a proportion
based on the turnover of taxable goods to the total turnover cannot be
accepted. No doubt under the rules, situations are conceivable where severance
of taxable element is implicit, but the type of user in the instant case is a
composite one, in which it is not possible to correlate any part of the
purchased goods as having gone in for the purpose of manufacture of taxable
goods.
Anglo-French
Textiles v. C.I.T., (1954) 25 I.T.R. 27, S.C.; Tata Iron & Steel Co. v.
State A.I.R. 1963 S.C. 577 and Best & Co. v. C.I.T. (1966) 60 I.T.R. 11,
S.C., distinguished.
810
1.3 In
the instant case the entire sulphuric acid purchased has no doubt been used in
the manufacture of kerosene though perhaps not a drop of acid clings to the
kerosene manufactured. Equally, the entire sulphuric acid has gone into the
composition of the acid sludge. Having regard to the nature of the interactions
in the instant case,it is incontrovertible that the entire sulphuric acid
purchased has gone into the manufacture of the sludge. The rules do not require
that the purchased goods must have been used only for the manufacture of
taxable goods for sale. Therefore, it is not possible to cut down the quantum
of relief clearly outlined in the rule on the basis of some general principle
claimed to underline the provision.
1.4
The basis for the relief provided is not very clear cut. Various reliefs have
been provided in a group of rules which come in for application in various
situations. The relief may be based on the principle that the manufactured
product is taxed either in the hands of the same assessee or in someone else's
hands, or that the manufactured goods are exported which may yield no tax but
earn foreign exchange, or even that the purchases are utilised for manufacture
of goods in the State thus contributing to the industrial development of the
State. It is, therefore, difficult to read into the provision a quantitative
correlation of the goods resulting in a taxable turnover and the purchases of
raw materials on which tax has been paid.
1.5
Rule 41 does not contemplate that the goods purchased by the dealer should be
used for manufacture of taxable goods for sale by him. No such restriction can
be read into this rule.
2.1
Where a subsidiary product is turned out regularly and continuously in the
course of a manufacturing business and is also sold regularly from time to
time, an intention can be attributed to the manufacturer to manufacture and
sell the subsidiary product.
State
of Gujarat v. Raipur Manufacturing Co. Ltd.,
(1967) 19 S.T.C. 1, relied on.
2.2
The assessees in the instant case do purchase sulphuric acid and unginned
cotton for use in a manufacturing process, which yield not only kerosene and
yarn/cloth, but also acid sludge and cotton waste. There is also no evidence to
suggest that acid sludge is not a commercial 811 commodity with a market but an
item of waste.
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 1031 of 1979 etc.etc.
From
the Judgment and Order dated 23/24.11.1977 of the Bombay High Court in Sales
Tax Reference No. 92 of 1976.
S.K. Dholakia,
S.M. Jadhav and A.S. Bhasme for the Appellants.
Vinod
A. Bobde, Ms. A.K. Verma, U.A. Rana, P.G. Gokhale, Ms. Sangeeta Aggarwal and
D.N. Mishra for the Respondents.
The Judgement
of the Court was delivered by RANGANATHAN,J. These are appeals by the Revenue
arising out of proceedings under the Bombay Sales Tax Act, 1959 (hereinafter
called `the Act'). The respondents, Bharat Petroleum Corporation Ltd. (in CA
1031 of 1979) and Phulgaon Cotton Mills Ltd. (in the four other appeals) are assessees
to sales tax. They claimed a set-off, against the sales tax payable by them for
the years in question, of certain sums, invoking the provisions of rules 41 and
41 A framed under the Act, as they stood at the relevant time. As the wording
of these rules, in so far as it is material for our present purposes, is
identical and the basis of the claim was also common, it will be convenient to
dispose of both sets of appeals by a common judgment and we proceed to do so.
The
set off claimed by the assessees was in terms of s. 42 and rules 41 and 41A,
which may now be referred to :
(1)
Section 42 reads thus :
``42.Draw-back,
set off, refund etc.- The State Government may provide by rules that- (a)in
such circumstances and subject to such conditions as may be specified in the
rules a draw-back, set off or refund of the whole or any part of the tax- (i)
xx xx xx (ii) paid or levied or leviable in respect of any earlier sale or 812
purchase of goods under this Act or any earlier law, be granted to the
purchasing dealer ;
(b) xx
xx xx The State Government has notified various rules from time to time in
exercise of this power which are collected in Chapter VII of the Rules. Of
these we are concerned with rules 41 and 41A.
(2)
Rule 41 (omitted w.e.f. 24.6.81) was a very long rule containing several
clauses. In so far as is relevant for our present purposes, it was in the
following terms:
``41.
Drawback, set-off etc. of tax paid by a manufacturer - In assessing the amount
of tax payable in respect of any period by a Registered dealer, who
manufactures taxable goods for sale (hereinafter in this rule referred to as
the ``Manufacturing dealer''), the Commissioner shall grant to him a draw-back,
set-off or as the case may be a refund of the aggregate of the following sums,
that is to say :- (a) xx xx xx (aa) xx xx xx (b) xx xx xx (bb) xx xx xx (c) xx xx
xx (cc) xx xx xx (d) xx xx xx (e) a sum recovered from the Manufacturing dealer
by another registered dealer by way of sales tax or, general sales tax or both,
as the case may be, on the purchase by him, of goods from such registered
dealer, being goods specified in schedule C to the Act other than in entries 1
to 11(both inclusive) and 15 therein and in Schedule D other than in entries 1
to 4 (both inclusive) 813 therein and in Schedule E other than in entries 1 and
2 therein, when the purchasing dealer did not hold a recognition or when the dealer
held a recognition but effected the purchase otherwise than against a
certificate under section 12 of the Act provided that such goods are used by
him in the manufacture of taxable goods for sale or in the packing of taxable
goods manufactured by him for sale.
Explanation
: xx xx xx (Material portions Underlined) (3) The relevant portion of rule 41A,
which has been invoked in the case of Phulgaon Cotton Mills Ltd., reads thus :
"41A.(1)
Drawback, set off etc. of tax paid by a manufacturer in respect of purchases
made on or after the 15th July 1962 : In assessing the amount of tax payable in
respect of any period by a Registered dealer who manufactures taxable goods for
sale or export* (hereinafter in this rule referred to as the ``manufacturing
dealer''), the Commissioner shall, in respect of the purchases made by such
dealer on or after the 15th July, 1962 of any goods specified in Schedule B, C,
D, or E and used by him within the State in the manufacture of taxable goods
(**) which have in fact been sold by him (and not given away as samples or
otherwise) or which have been exported by him or used by him in the packing of
goods so manufactured grant him a draw-back, set off or, as the case may be, a
refund of the aggregate of the following sums, that is to say:
(a) a
sum recovered from the manufacturing dealer by other Registered Dealers by way
of sales tax, or general sales tax, as the case may be, both, on the purchase
by him from such registered dealers, when the manufacturing dealer did not hold
a Recognition or when he held a recognition but effected the
--------------------------- * The words ``or export''were inserted by a
notification dated 31.8.70.
** The
words ``which have in fact.......so manufactured''were substituted by a
notification dated 15.1.1976 for the words ``for sale or export or in the
packing of goods so manufactured for sale or export''.
814
purchase otherwise than against a certificate under section 11 of the Act;
(b) xx
xx xx (c) xx xx xx (d) xx xx xx (Material portions underlined) (4)There was
also a claim under rule 43AB but we are not concerned with that in the present
appeals.
Now to
turn to the facts which give rise to these appeals.
A.Burmah
Shell The Bharat Petroleum Corporation Ltd.is before us as the successor-in-interest
of the Burmah Shell Refineries Ltd. which is the assessee with which we are
concerned. We shall refer to it as the `refinery'to distinguish it from the Burmah
Shell Oil Storage and Distributing Company of India Ltd. which will be briefly
referred to hereinafter as the `Marketing company'.
We are
concerned with the period from 1.1.1961 to 31.12.1961. The refinery registered
itself as a `dealer' under the Act and possessed a recognition certificate
under section 25,after having failed in a plea, raised in earlier assessment
years, that it was not a `dealer' and was not required to be registered as
such. It had entered into a contract with the marketing company under which it
agreed to process and refine crude oil belonging to the marketing company and
manufacture kerosene for it. This contract was in the nature of a bailment by
the marketing company to the refinery, the refinery taking the crude oil and
returning it after purification, as refined kerosene. For the performance of
this task it received payments from the manufacturing company by way refining
charges on the basis of the job- work done from time to time. The refined
kerosene was eventually sold by the marketing company and the refinery had
nothing to do with the sales. It may be mentioned here that there was no sales
tax payable on sales of kerosene till 31.3.1961 but it became liable to sales
tax thereafter.
For
the above purification process, the refinery needed to use 815 sulphuric acid.
During the calendar year 1961, it purchased 3048.760 MT of acid for Rs.
3,52,742 from Dharmsi Morarji Chemical Co. Ltd.(hereinafter referred to as ``Dharmsis'')
under an agreement dated 9.6.1955 which was to remain in force for a period of
ten years from 1.1.1966 (Sic). On the sulphuric acid it so purchased, a sales
tax of Rs.13,421.15 (Rs.15,107.72, according to the High Court) was recovered
from it by Dharmsis, as the refinery did not purchase it on the strength of the
recognition certificate held by it as the certificate could have been utilised
only if the goods purchased had been intended to be used by it in the
manufacture of goods for sale by itself, whereas the manufactured kerosene was
sold by the marketing company.
When
the sulphuric acid was used in the refining process, the crude oil got refined
and purified but the impurities therein precipitated into the acid and yielded
``acid sludge''. The refinery's contract with Dharmsis provided that the acid
sludge should be sold by the refinery to the Dharmsis which, apparently, had
its own uses for the sludge.
Accordingly,
the refinery sold 3541.985 MT of acid sludge, during the relevant period, for
Rs.68,108 - the correctness of this figure was unsuccessfully contested before
the High Court - and on this amount it paid sales tax. The record does not show
the amount of sales tax paid by the refinery on this account, but, having
regard to the nature of the commodity and turnover involved, it must,
admittedly, have been a very small amount.
Having
done this, the refinery claimed that, as against the sales tax paid by it for
the period in question (including the tax paid on the acid sludge), it was
entitled to a set off(and a refund, if need be) of the amount of Rs.
13,421.15
paid by it as sales tax on its purchases of sulphuric acid. Its argument is
that it is entitled to this refund as all the conditions set out in clause (e)
rule 41 were fulfilled this-wise :
(a) It
is a `manufacturer', as the process of refining carried out by it falls within
the wide definition of `manufacture' contained in s.2(17) of the Act viz. :
``2(17)
`manufacture', with all its grammatical variations and cognate expressions,
means producing, making, extracting, altering, ornamenting, finishing or
otherwise treating, or adapting any goods; but does not include such
manufactures or manufacturing processes as may be prescribed''.
816 It
is also a Registered dealer.
(b) It
manufactured taxable goods for sale. The acid sludge manufactured by it was
taxable throughout the year and the pure kerosene manufactured by it was
taxable .w.e.f. 1-4-1961 onwards.
(c)
Tax had been recovered from it on its purchases of sulphuric acid from Dharmsis
who are Registered dealers as the purchases had not been effected on the basis
of a recognition certificate.
The
Sales Tax Officer allowed the set off only to the extent of Rs. 1,101.40
without giving any details as to the manner in which this figure had been
arrived at. On appeal, the Appellate Assistant Commissioner held that the assessee
was entitled to no set off at all under rule 41 as what was manufactured by the
assessee was kerosene and not acid sludge and the kerosene was sold not by the assessee-
manufacturer but by some other company. The Appellate Tribunal, however,
allowed the assessee's claim in full and its view was upheld, on reference, by
the High Court. Hence the present appeal.
B.Phulgaon
Cotton In the case of Phulgaon Cotton Mills, we are concerned with four
accounting periods : 1-7-73 to 30-6-74, 1-7-74 to 30-6-75, 1-7-75 to 30-6-76
and 1-7-76 to 30-6-77. The issue as to the application of rule 41A arises in
the following circumstances.
The assessee
purchased raw unginned cotton from agriculturists and unregistered dealers. The
cotton was ginned, yielding ginned cotton and seeds. One of the issues raised
in the assessments was as to whether purchase tax should be paid on the total
value of the raw cotton purchased or on the said purchase price less the value
of the cotton seeds obtained therefrom. This question was answered against the assessee
and is no more in issue before us.
The assessee
manufactured yarn and cloth from the ginned cotton. Besides cotton and yarn,
cotton waste and yarn waste were also obtained in the course of the manufacture
and these were also sold by the assessee. Some quantity of the fabrics produced
by the assessee were also exported.
817
During the periods 1-7-73 to 30-6-74 and 1-7-74 to 30-6-75, the assessee had
paid sales tax on the purchase value of the entire raw cotton purchased by it.
It, therefore, claimed a set off, under rule 41A, of the purchase tax so paid
as it had to pay sales tax on the yarn and cotton waste sold by it. It also
claimed set off under rule 43AB in respect of the three periods other than
between 1-7-74 and 30-6-75 but we are not concerned with this claim. The Sales
Tax Officer allowed only partial relief to the assessee under rule 41A.
He
permitted a set off not of the entire purchase tax paid by the assessee on the
raw cotton purchased by it but only of a part thereof proportionate to the
extent of yarn sales.
The
Appellate Tribunal however upheld the contention of the assessee. It allowed a
set off of the entire purchase tax paid by the assessee on the raw cotton,
machinery and other purchases which had been used in the process of manufacture
of cotton-waste. In doing so it followed the principle of the decision of the
High Court in the case of Burmah-Shell Refineries, (1978) 41 S.T.C. 337. It observed
:
``21.
......When the raw-cotton is ginned or ginned cotton is used in the process of
manufacturing yarn, there is bound to be cotton waste. In view of these facts,
the appellant will also be entitled to full set-off so far as the purchases of
cotton are concerned, which have resulted in the production of taxable
commodity i.e. cotton waste. Each and every ounce of cotton is used in the
manufacture of cotton waste which is a taxable commodity. The question of,
therefore, allowing proportionate set- off so far as the purchases of cotton or
machinery which are used in manufacturing of cotton waste does not arise. The
appellant is entitled to full set-off so far as purchases of cotton machinery
and other purchases, which are used in the manufacture of cotton waste, a
taxable commodity. There is no conflict in the decisions given by the Tribunal
in earlier rulings given in the appellant's own cases.
No
such argument of production of cotton waste by- product simultaneously was
canvassed. All that was canvassed was that yarn waste was a taxable by-
product. Hence, full set-off on purchase of cotton be allowed. Tribunal negatived
this contention by pointing out that there is no simultaneous production of
yarn and cloth. First yarn is manufactured and then cloth. Thus question of
referring this issue to larger Bench does not arise. The cases will have, 818
therefore, to go back to the Assistant Commissioner for deciding the quantum of
set-off admissible under Rule 41-A on these basis for all the periods."
The Tribunal, however, directed that the deductions should be so allowed as not
to result in a double deduction of the same amount of purchase tax.
Aggrieved
by the order of the Tribunal, the Commissioner of Sales Tax filed petitions for
special leave to appeal to this Court therefrom as no useful purpose would be
served by approaching the High Court on reference in view of the decision of
that Court in the Burmah-Shell Refineries case on the point at issue having
gone against the Revenue. Leave was granted by this Court on 3-9-90 and hence
the four civil appeals by the Revenue in the case of Phulgaon Cotton Mills
Limited.
Before
dealing with issue on the interpretation of rules 41 and 41A which has been
debated before us, we wish to point out the difficulties encountered by us as
the facts in the case of Phulgaon Cotton Mills are not quite clear from the
record. From the Tribunal's order, it is seen that, during the periods 1-7-75
to 30-6-76 and 1-7-76 to 30-6-77, the assessee purchased no raw cotton from
unregistered dealers and no purchase tax was levied thereon.
Nevertheless,
some relief under rule 41A was allowed by the Officer in the assessments for
these periods as well. The basis on which a claim was made, and partially
allowed, under rule 41A in respect of these periods is not known.
Also,
the Tribunal has allowed full relief on the basis that since cotton was used in
the manufacture of cotton waste, the assessee was entitled to relief in respect
of purchase tax paid on raw cotton though for these years there was no such
tax. But the order of the Tribunal refers also to "set off so far as
purchases of machinery and other purchases'' indicating that perhaps some
purchase tax had been paid in respect of those purchases and set off had been
sought in respect thereof. But, even assuming this, the discussion regarding
cotton-waste appears to be pointless since, admittedly, the yarn manufactured
was liable to sales tax and, on the Tribunal's reasoning, this was sufficient
to enable the assessee to claim set off of the purchase tax paid on cotton,
machinery and other materials used in the manufacture. But these aspects have
not been touched upon before us. The arguments before us, as we shall refer
presently, revolved round a very simple issue. We shall discuss this issue 819
and leave the other aspects touched upon above to be clarified, if need be,
when the assessment is finally redone in the light of our judgment.
Shri Dholakia,
learned counsel for the State of Maharashtra, submits that the issue in these appeals is a very simple
one. Rules 41 and 41A are intended to give relief to a dealer in respect of
purchase of goods which are used in the manufacture of taxable goods for sale,
the clear idea being that where the manufactured goods will also be liable to
sales tax in the hands of the manufacturer there should be a relief of the
taxes paid by him on the goods purchased by him for use in such manufacture, so
as to avoid double taxation. In the Bharat Petroleum case, the manufactured
goods viz. pure kerosene were neither sold by the respondent so as to attract
sales tax in his hands nor, indeed, liable to sales tax at all for the first
three months. So also, in the case of Phulgaon Cotton Mills, the cotton
purchased on payment of tax was used for the manufacture of cloth which was not
liable to sales tax. A set off cannot be allowed merely because a bye-product
or waste product (viz. the acid sludge in the one case and the cotton waste in
the other) was sold for a nominal turnover which was subject to tax. Even
assuming that the sulphuric acid or cotton purchased can be said to have been
used for the manufacture of two commodities (viz. kerosene and acid sludge in
the one case and cloth and cotton waste in the other), the set off under the
rules relied upon should be split up proportionately and allowed only to a
proportionate extent, the proportion being decided on the basis of the respective
turnovers of the taxable and non-taxable goods.
He
submits that though the rules do not specifically provide for such a
bifurcation, an apportionment of such nature is almost invariably implicit in a
tax law and is also consonant with the object and purpose of the rules. He,
therefore, submits that the High Court and Tribunal ought to have restricted
the relief only to a proportionate extent as done by the sales tax officer. He
points out that the basis on which the apportionment was made by the officer had
not been specifically challenged before the appellate authorities and is not in
issue before us.
On the
other hand, Sri Bobde, learned counsel appearing for Bharat Petroleum laid
stress on two aspects of the rule.
First,
he points out that, under the rule, it is not a requirement that the
manufactured goods have to be sold by the manufacturing dealer himself. The
fact is that the kerosene constituted taxable goods after 1.4.61 and was sold
by the marketing company. The second aspect of the rule is that, admittedly,
the 820 sulphuric acid purchased was wholly used in the manufacture of two
items-kerosene and acid sludge - one of which viz.
the
sludge was taxable and also subjected to tax. Once this condition is fulfilled,
the amount of set off is specified in the rule itself as the amount of purchase
tax paid on the goods so used and cannot be scaled down proportionately merely
because, according to the department, the turnover of the taxable goods is
insignificant. Sri Rana, learned counsel appearing for the Phulgaon Cotton
Mills, adopts this argument mutatis mutandis.
We
have given deep thought to these contentions and we have come to the conclusion
that, plausible and attractive as the argument urged on behalf of the State is,
the conclusion arrived at by the High Court and the Apellate Tribunal has to be
upheld. But before dealing with this aspect, we may dispose of two minor
questions. The first which arises in the Bharat Petroleum case is whether rule
41 contemplates that the goods purchased by the dealer should be used for
manufacture of taxable goods for sale by him.
The
High Court has given good reasons, with which we are inclined to agree, for
holding that no such restrictions can be read into this rule but this
contention is of no significance in view of our conclusion that the assessee
would be entitled to the set off claimed even on the basis of the taxable sales
of acid sludge effected by it. The other point is whether the assesees can be
said to manufacture ``acid sludge'' and ``cotton waste'' respectively. It is
suggested for the State that the assessees are purchasing acid and cotton for
the manufacture of kerosene and yarn/cloth respectively and it is ludicrous to
suggest that the assessees are purchasing sulphuric acid and cotton for manufacturing
acid sludge and cotton waste.
Put
like that the assessee's contention seems a little artificial. But the
contention is not really absurd. For, the assessees do purchase sulphuric acid
and cotton for use in a manufacturing process which yields not only kerosene
and yarn/cloth but also acid sludge and cotton waste. As pointed out in State
of Gujarat v. Raipur Manufacturing Co. Ltd.,(1967) 19 S.T.C.1, where a
subsidiary product is turned out regularly and continuously in the course of a
manufacturing business and is also sold regularly from time to time, an
intention can be attributed to the manufacturer to manufacture and sell not
merely the main item manufactured but also the subsidiary products. There is
also no evidence on record to suggest, at least so far as acid sludge is
concerned, that it is not a commercial commodity with a market but an item of
waste. The contract with Dharmsis speaks to the contrary and moreover, as
pointed out by the High Court, the assessee had been 821 practically compelled
by the Department to apply for and obtain a recognition certificate for the
manufacture of sludge and it had also paid tax as dealers in acid sludge.
These
two contentions have, therefore, to be rejected.
Turning
now to the main question, we are inclined to agree with respondents' counsel
that they are entitled to a set off of the entire tax paid by them on the
purchases of sulphuric acid and cotton respectively. The only condition under
the rule is that the goods purchased on payment of tax should have been used in
the manufacture of taxable goods for sale. Their concurrent user for the
manufacture of another item of goods which may or may not be taxable is
immaterial though we may point out that in the Bharat Petroleum case, the
kerosene was also taxable for nine months in the year and in the case of Phulgaon
Cotton Mills, yarn was also manufactured and it was subject to tax. Sri Dholakia
contends for an implicit principle of apportionment on the basis of turnovers
of various items of goods manufactured and restriction of the quantum of set
off to a proportion based on the turnover of taxable goods to the total
turnover. He cited certain decisions under the Income- tax and Sales Tax Acts
in support of this contention : Anglo-French Textiles v. C.I.T., (1954) 25
I.T.R. 27, S.C.; Tata Iron & Steel Co. v. State, A.I.R. 1963 S.C. 577 and
Best & Co. v. C.I.T.,(1966) 60 I.T.R. 11, S.C. We do not think these cases
are of assistance. The first two cases dealt with the question as to when
profits and gains can be said to accrue or arise in a manufacturing business
and the third held that when a receipt is a composite one of capital and
revenue nature, it is open to the Revenue to apportion the same and bring the
latter to tax. These are situation in which the taxable element is severable.
Under the rules presently under consideration also, situations are conceivable
where such severance is implicit. For instance, suppose the cotton purchased is
utilised partly for manufacture of cloth that is taxable and part for
manufacture of cloth that is not taxable or partly for the manufacture of yarn
which is taxable and is sold and partly for manufacture of cloth which is not
taxable. In these instances, it is clear that only some of the cotton is utilised
for the first purpose and some for the second purpose and so only the purchase
tax paid in respect of the quantity utilised for the first purpose will be
eligible for set off. But the type of user with which we are concerned is a
composite one in which it is not possible to correlate any part of the
purchased goods as having gone in for the purpose of manufacture of taxable
goods. The position is picturesquely brought out in 822 the case of Bharat
Petroleum. The entire sulphuric acid purchased has no doubt been used in the
manufacture of kerosene though perhaps not a drop of acid clings to the
kerosene manufactured. Equally, the entire sulphuric acid has gone into the
composition of the acid sludge. The 3048.760 M.T. of acid have dissolved the
impurities in the crude oil and conglomerated with them to constitute 3541.485
M.T. of acid sludge. Having regard to the nature of the interactions here, it
is incontrovertible that the entire sulphuric acid purchased has gone into the
manufacture of the sludge. The rules do not require that the purchased goods
must have been used only for the manufacture of taxable goods for sale. In this
situation, it is not possible to cut down the quantum of relief clearly
outlined in the rule on the basis of some general principle claimed to underlie
the provision. As Sri Bobde rightly pointed out, the basis for the relief
provided is not very clear cut.
Various
reliefs have been provided in a group of rules which come in for application in
various situations. The relief may be based on the principle that the
manufactured product is taxed either in the hands of the same assessee or in
someone else's hands, or that the manufactured goods are exported which may
yield no tax but earn foreign exchange, or even that the purchases are utilised
for manufacture of goods in the State thus contributing to the industrial
development of the State. It is, therefore, difficult to read into the
provision a quantitative correlation of the goods resulting in a taxable
turnover and the purchases of raw materials on which tax has been paid. In this
background, the straight forward answer to the question raised lies in the
literal interpretation of the language of the rules without straining to
discover some doubtful principle for denying relief.
For
the above reasons, we agree with the view taken by the High Court and followed
by the Tribunal and dismiss these appeals. We, however, make no order regarding
costs.
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