Set-off under Rule 41-D cannot be denied by excluding scrap from exports or by treating consumables as capital assets.

Rule 41-D of the Bombay Sales Tax Rules, 1959 allows set-off to a registered manufacturer subject to limited reductions, and it cannot be denied merely because locally sold scrap is excluded from the export ratio. The proviso applies only where the turnover of manufactured goods consists principally of waste or scrap goods; scrap generated in manufacture is not treated as exported goods for recalculating the export percentage. A 4% reduction under Rule 41-D(3)(b) applies only where the purchased items are shown to be capital assets, or parts, components and accessories of such assets. Where the record does not establish that character, consumables used in manufacture cannot be reclassified for a higher set-off reduction.

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Issues: (i) Whether set-off under Rule 41-D of the Bombay Sales Tax Rules, 1959 could be denied by treating the locally sold scrap as reducing the export ratio; (ii) Whether the reduction of set-off at 4% could be sustained on the footing that the goods purchased were capital assets or parts and components of capital assets.

Issue (i): Whether set-off under Rule 41-D of the Bombay Sales Tax Rules, 1959 could be denied by treating the locally sold scrap as reducing the export ratio.

Analysis: Rule 41-D grants drawback or set-off to a registered dealer manufacturing goods for sale or export, subject to specified reductions. The proviso disentitles the dealer only where the turnover of the manufactured goods consists principally of sales of waste or scrap goods. The exported goods were finished goods manufactured from the purchases made by the dealer, and the record did not show that the turnover of the manufactured goods consisted principally of waste or scrap goods. Scrap generated in manufacture could not be treated as exported goods for working out the export percentage in the manner adopted by the revisional authority and the Tribunal.

Conclusion: The disallowance based on recalculating exports after excluding scrap was unsustainable and is decided in favour of the assessee.

Issue (ii): Whether the reduction of set-off at 4% could be sustained on the footing that the goods purchased were capital assets or parts and components of capital assets.

Analysis: Rule 41-D(3)(b) authorises a 4% reduction only for goods treated as capital assets by the dealer and parts, components and accessories of such capital assets. The authorities did not identify with clarity which items were capital assets or why the dealer's treatment of them as consumables was untenable. In the absence of contrary material, the dealer's stand that the items were consumables used in manufacture could not be disregarded, and the higher reduction was not justified.

Conclusion: The reduction of set-off on this footing was incorrect and is decided in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue, and the assessee was held entitled to the claimed set-off relief on both questions.

Ratio Decidendi: Under Rule 41-D, set-off cannot be denied unless the manufactured goods sold consist principally of waste or scrap goods, and a higher reduction for capital assets applies only where the goods are shown to be capital assets or parts and components of such assets.

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