Concessional input penalty turns on use in exempt manufacture, but no penalty applies where inputs lead to taxable final goods.

Penalty under section 5-A(2)(iii) of the Karnataka Sales Tax Act applies where industrial inputs purchased on Form 37 declaration are in fact used to manufacture exempt goods, because the penal provision must be read with the concessional input scheme in section 5-A(1) and is triggered when the declared purpose is defeated. The expression "makes use of" was held broad enough to cover use in the manufacture of HDPE fabrics, which are exempt textiles, even though HDPE tapes were an intermediate stage. However, HDPE sacks produced from the fabrics were taxable goods, so no penalty could be levied to the extent the inputs were used in the chain leading to the sacks. The penalty was therefore required to be reduced proportionately.

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Issues: Whether penalty under section 5-A(2)(iii) of the Karnataka Sales Tax Act, 1957 was attracted when industrial inputs purchased on declaration in Form 37 were used in the manufacture of HDPE fabrics and, to the extent of the fabrics converted into HDPE sacks, whether the turnover relatable to HDPE sacks could be included for penalty.

Analysis: Section 5-A(1) confers a concessional regime for industrial inputs purchased on the purchaser's declaration that they will be used as raw material or component part in the manufacture inside the State of other taxable goods intended for sale. Section 5-A(2)(iii) must therefore be read with section 5-A(1), because the penal consequence is attracted only when the declared purpose is defeated by using the inputs in the manufacture of goods exempted from tax. The Court held that the expression "makes use of" is wide enough to cover use of the inputs in the manufacture of HDPE fabrics, which are textiles and therefore exempted goods. The fact that HDPE tapes were an intermediate stage did not take the case out of the provision, because the declared object related to manufacture of the final salable product and the inputs were in truth used in the exempt manufacture. At the same time, the Court held that the HDPE sacks produced out of the fabrics were taxable goods, and to the extent the inputs were used in the chain of manufacture leading to the sacks, penalty under section 5-A(2)(iii) was not attracted.

Conclusion: Penalty was rightly attracted in respect of the inputs used for manufacturing exempted HDPE fabrics, but it was not liable to be imposed to the extent relatable to HDPE sacks; the penalty was therefore required to be reduced proportionately in favour of the assessee.

Ratio Decidendi: A penal provision tied to a concessional input scheme must be construed in the context of the enabling provision, and inputs used in the manufacture of exempt goods attract the penalty even if an intermediate taxable product is produced in the process; however, no penalty lies to the extent the inputs are ultimately used in manufacturing taxable goods intended for sale.

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