Full Judgment Text
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PETITIONER:
COMMISSIONER OF SALES TAX, BOMBAY ETC.ETC.
Vs.
RESPONDENT:
BHARAT PETROLEUM CORPORATION LTD. ETC.ETC.
DATE OF JUDGMENT18/02/1992
BENCH:
RANGNATHAN, S.
BENCH:
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.
HEADNOTE:
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
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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,
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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
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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
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commodity with a market but an item of waste.
JUDGMENT:
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
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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 :-
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(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;
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(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.
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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
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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
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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
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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
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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.
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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
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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
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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.
N.P.V. Appeals dismissed
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