1978 (12) TMI 181 - HC - VAT and Sales Tax

Court limits deduction under Rule 42 proviso, directs State to pay costs to assessee

The court ruled in favor of the assessee, stating that the deduction under the proviso to Rule 42 should be limited to the set-off related to the tax paid ... Proviso to rule 42 of the Gujarat Sales Tax Rules, 1970 - set-off, drawback or refund of tax for manufacturers - single point levy - bifurcation of manufactured goods for computing set-off - interpretation of 'aggregate of the amounts... calculated in accordance with clauses (A) and (B)' - deduction confined to tax on purchases used in manufacture of consigned goodsProviso to rule 42 of the Gujarat Sales Tax Rules, 1970 - interpretation of 'aggregate of the amounts... calculated in accordance with clauses (A) and (B)' - set-off, drawback or refund of tax for manufacturers - Whether the deduction mandated by the proviso to rule 42 must be made from the aggregate of amounts of tax paid only in respect of purchases used in the manufacture of goods sold on consignment basis, or from the aggregate of all amounts of set-off/drawback/refund admissible (including that relating to goods sold locally). - HELD THAT: - The Court held that the words 'the aggregate of the amounts... calculated in accordance with the clauses (A) and (B)' refer to the amounts of sales tax, general sales tax or purchase tax paid on the purchases of goods used in the manufacture of the goods sold on consignment basis. The proviso is attracted only where the manufactured goods (or a portion thereof) are transported outside the State for sale (the same contingency as the last part of the fourth condition), and the deduction required is 3% of the sale price of those consigned goods. Reading the proviso in the context of rule 42 and the Act (ex visceribus actus) and having regard to the purpose of single point levy and the remedial character of rule 42, the proper construction confines the deduction to the set-off/drawback/refund relatable to tax paid on purchases used in manufacture of the consigned portion. A contrary construction would permit the negative balance to be realised by reducing set-off attributable to goods sold locally, causing multi point taxation and defeating the statutory scheme. The Court further noted that the clause (A)/(B) amounts to be aggregated are the various taxes paid on purchases (or amounts computed by the formula), and the natural, contextual reading limits the aggregation to taxes on the consigned portion; any broader aggregation would improperly add language and distort the rule's object. The Court also relied on persuasive high court precedent reaching a similar result and emphasised that bifurcation implicit in the proviso must extend to the corresponding portion of the set-off.Deduction under the proviso to rule 42 must be confined to the set-off/drawback/refund relatable to tax paid on purchases used in the manufacture of goods sold on consignment basis; it cannot be realised by reducing set-off attributable to goods sold locally.Bifurcation of manufactured goods for computing set-off - deduction confined to tax on purchases used in manufacture of consigned goods - single point levy - Whether, where only a portion of manufactured goods is sold on consignment, the deduction (3% of sale price of consigned goods) may be taken from set-off relating to purchases used in manufacture of locally sold goods when the set-off attributable to the consigned portion is insufficient. - HELD THAT: - The Court accepted the parties' concession that bifurcation of the manufactured goods is permissible and that deduction should equal 3% of the sale price of the consigned portion. Applying the interpretative conclusion that the proviso's deduction must be matched to the set-off attributable to the consigned portion, the Court held that if the required deduction exceeds that attributable set-off, the excess cannot be projected onto or recovered from the set-off attributable to locally sold goods. This construction preserves the single point levy principle and the remedial purpose of rule 42, while ensuring recovery of tax legitimately due on the consigned portion without causing multi-point taxation of locally sold manufactured goods.Where only part of the manufactured goods are consigned, deduction is to be made only from the set-off/drawback/refund attributable to that consigned portion; any shortfall cannot be made good by reducing set-off attributable to goods sold locally.Final Conclusion: Questions (3) and (4) answered in favour of the assessee: the proviso to rule 42 requires the 3% deduction to be applied only against the set-off/drawback/refund attributable to tax paid on purchases used in the manufacture of the consigned goods (with permissible bifurcation); any excess deduction cannot be realised by reducing set-off attributable to goods sold locally. Questions (1) and (2) were not pressed. State ordered to pay costs. Issues Involved:1. Liability to pay purchase tax under Section 16 of the Gujarat Sales Tax Act, 1969.2. Liability to penalty under Section 45(1) of the Gujarat Sales Tax Act, 1969.3. Admissibility of set-off under Rule 42 of the Gujarat Sales Tax Rules, 1970.4. Calculation of set-off under the proviso to Rule 42 of the Gujarat Sales Tax Rules, 1970.Issue-Wise Detailed Analysis:1. Liability to Pay Purchase Tax Under Section 16 of the Gujarat Sales Tax Act, 1969:This issue was not pressed by the assessee during the hearing and thus was not considered by the court.2. Liability to Penalty Under Section 45(1) of the Gujarat Sales Tax Act, 1969:This issue was also not pressed by the assessee during the hearing and thus was not considered by the court.3. Admissibility of Set-off Under Rule 42 of the Gujarat Sales Tax Rules, 1970:The court examined whether the assessee was entitled to set-off under Rule 42 even when a portion of the manufactured goods was sold on a consignment basis outside the state. Rule 42 provides for a deduction from the aggregate of amounts calculated before a drawback, set-off, or refund of tax is granted. The court emphasized that the rule must be read in its entirety, considering the context and the legislative intent behind it.The assessee argued that the deduction should only apply to the portion of the set-off related to the tax paid on goods used in the manufacture of products sold on consignment basis. The revenue contended that the deduction should be made from the total set-off, including the tax paid on goods used in the manufacture of products sold locally.The court concluded that the deduction should be confined to the set-off related to the tax paid on goods used in the manufacture of products sold on consignment basis. The court emphasized that the legislative intent was to avoid multi-point taxation and to ensure that the cost of manufactured goods does not become unduly excessive due to multiple tax levies.4. Calculation of Set-off Under the Proviso to Rule 42 of the Gujarat Sales Tax Rules, 1970:The court examined the correct interpretation of the proviso to Rule 42, which requires a deduction of 3% of the sale price of goods sold on consignment basis from the aggregate set-off amount. The assessee contended that the deduction should only apply to the set-off related to the tax paid on goods used in the manufacture of products sold on consignment basis, and any excess deduction should not affect the set-off related to goods sold locally.The court agreed with the assessee's interpretation, stating that the proviso should be read in conjunction with the rule's overall purpose. The court emphasized that the deduction should not extend beyond the set-off related to consignment sales, as this would result in an unjust and unreasonable burden on the assessee.The court referred to the decision of the Bombay High Court in Commissioner of Sales Tax v. Jai Hind Oil Mills Co., which supported the view that the deduction should be confined to the set-off related to consignment sales.Conclusion:The court answered the remaining questions in favor of the assessee, stating that the deduction under the proviso to Rule 42 should be limited to the set-off related to the tax paid on goods used in the manufacture of products sold on consignment basis. The court held that any excess deduction should not affect the set-off related to goods sold locally. The State of Gujarat was ordered to pay the costs of the reference to the assessee.