Sales tax exemption nexus requires direct use in manufacture; diverted electricity loses exemption, while intra-State branch transfer cannot reduce the ceiling.

Naphtha purchased under a sales tax exemption scheme retained exemption only to the extent it was used in generating electricity consumed in the manufacture of caustic soda; the portion linked to electricity sold to GEB/UPL and other concerns lost the required manufacturing nexus, so tax under section 50(1) was upheld for that part. The authority also erred in reducing the exemption ceiling on the basis of branch transfers to the Vapi unit, because condition 19(iii) concerned goods transported outside Gujarat, not transfers within the State. The exemption reduction on that footing was therefore unsustainable and that issue was decided in favour of the assessee.

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Issues: (i) Whether naphtha purchased under the sales tax exemption scheme remained entitled to exemption when part of the electricity generated from it was sold to GEB/UPL and not used in the manufacture of caustic soda; (ii) whether branch transfer of goods to the petitioner's Vapi unit justified reduction of the exemption ceiling under condition 19(iii) of the scheme.

Issue (i): Whether naphtha purchased under the sales tax exemption scheme remained entitled to exemption when part of the electricity generated from it was sold to GEB/UPL and not used in the manufacture of caustic soda.

Analysis: The exemption under entry 255 applied only where raw materials or consumable stores purchased by an eligible unit were actually used in the manufacture of goods for sale within or outside Gujarat. Naphtha used for generating electricity that went into manufacture of caustic soda retained the benefit, but the portion of electricity diverted to GEB/UPL and group concerns broke the required manufacturing nexus. To that extent, the purchase of naphtha was not covered by the exemption scheme and breach of the condition attracting section 50 was established.

Conclusion: The petitioner was liable to tax under section 50(1) of the Gujarat Sales Tax Act, 1969 to the extent naphtha was used for generating electricity not consumed in manufacture, and this part of the order stood against the assessee.

Issue (ii): Whether branch transfer of goods to the petitioner's Vapi unit justified reduction of the exemption ceiling under condition 19(iii) of the scheme.

Analysis: The scheme treated as relevant either sales within Gujarat or transportation of goods to a place outside Gujarat for sale there. Transfer to a branch within Gujarat did not answer condition 19(iii), which was concerned with goods transported outside the State. The alleged breach, if any, related to the basic eligibility condition governing use of goods in manufacture of goods for sale, not to condition 19(iii). The authority therefore erred in reducing the exemption ceiling on the footing of condition 19(iii), and that part of the order lacked jurisdiction.

Conclusion: The reduction of the exemption ceiling based on sales effected to the Vapi unit was unsustainable and this issue was decided in favour of the assessee.

Final Conclusion: The purchase tax demand was sustained only to the extent linked with diverted electricity, while the reduction in exemption limit on account of the branch transfer was quashed and the matter on that aspect was remitted for fresh decision.

Ratio Decidendi: Exemption under a conditional sales tax scheme is available only to the extent the purchased goods retain a direct nexus with the manufacture of goods for sale, and a taxing authority cannot reduce an exemption ceiling on the basis of a condition that does not govern the relevant transaction.

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