Export manufacturing exemption survives incidental by-product emergence; proportionate purchase tax on raw material was unjustified.

Exemption on purchase tax for raw material used in manufacturing notified goods for export could not be denied merely because an incidental by-product, broken rice, emerged during production. The assessee purchased paddy only for making exported basmati rice, and no separate raw material was bought for broken rice. The court held that separate taxation of the by-product did not justify a proportionate levy on the paddy used for the main exported product. The purchase tax demand to the extent attributable to broken rice was therefore unjustified and was set aside, while the separate tax treatment of broken rice remained undisturbed.

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Issues: Whether tax could be levied on the purchase of paddy to the extent attributable to broken rice emerging incidentally during the manufacture of exported basmati rice, despite the exemption notification for notified goods exported outside India.

Analysis: The notification granted exemption on the purchase of raw material used for manufacture of notified goods intended for export. The assessee had purchased paddy only for manufacturing rice, and no separate raw material was purchased for broken rice. Broken rice arose only as an incidental by-product or waste product during the manufacturing process. The fact that broken rice was separately taxed did not justify a proportionate levy on the raw material used for the manufacture of the main notified product. The exemption had to be applied to the raw material used in the manufacture of the exported notified goods, and not denied merely because a small percentage emerged as broken rice.

Conclusion: The levy of tax on the purchase of paddy to the extent of 4.75 per cent was unjustified and was set aside. The question was answered in favour of the assessee and against the Department.

Final Conclusion: The revision succeeded, and the assessee obtained relief from the proportionate purchase tax demand while the separate tax treatment of broken rice was not disturbed.

Ratio Decidendi: Where raw material is purchased for manufacturing a notified export product, exemption cannot be denied merely because an incidental by-product emerges during manufacture; the tax benefit follows the use of raw material for the main notified goods.

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