Full set-off for tax-paid manufacturing inputs upheld where a composite process yields taxable goods and by-products.

Tax-paid inputs used wholly in a composite manufacturing process qualify for full set-off when the process yields taxable goods for sale, even if it also produces another by-product or the principal product is sold by another person. The Bombay Sales Tax Act rules were applied on their plain terms, and no implied apportionment was read in to reduce relief by reference to turnover of the taxable end-product alone. Proportionate restriction was held permissible only where inputs are severable and can be linked to distinct taxable and non-taxable uses; on the facts described, that basis was absent and the full statutory set-off remained available.

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Issues: (i) Whether, under Section 42 and rules 41 and 41A of the Bombay Sales Tax Act, 1959, a dealer is entitled to full set-off of purchase tax on inputs used in a manufacturing process that yields taxable goods as well as a taxable by-product or goods sold by another person. (ii) Whether the set-off must be proportionately restricted on the basis of the turnover of the taxable end-product alone.

Issue (i): Whether, under Section 42 and rules 41 and 41A of the Bombay Sales Tax Act, 1959, a dealer is entitled to full set-off of purchase tax on inputs used in a manufacturing process that yields taxable goods as well as a taxable by-product or goods sold by another person.

Analysis: The rules granted relief where goods purchased on payment of tax were used in the manufacture of taxable goods for sale. The Court held that the relevant condition was satisfied once the purchased goods were used in a manufacturing process producing taxable goods, even if the same process also yielded another product, such as acid sludge or cotton waste. The fact that the principal manufactured goods were sold by another company, or that the assessee also manufactured other goods in the same process, did not exclude the statutory relief where the inputs had gone wholly into the composite manufacturing process and the taxable by-product was also sold and taxed.

Conclusion: Full set-off was admissible; the claim was not defeated because the same inputs also produced another commodity or because the main product was sold by another person.

Issue (ii): Whether the set-off must be proportionately restricted on the basis of the turnover of the taxable end-product alone.

Analysis: The Court rejected an implied apportionment rule. It held that proportional restriction would be justified only where the purchased goods were severable and could be correlated with distinct taxable and non-taxable uses. Where the input was used in a composite process and its entirety went into the manufacture of the taxable by-product as well as the principal product, no statutory basis existed for cutting down the relief by reference to turnover ratios. The language of the rules was applied according to its plain meaning and no additional limitation was read into it.

Conclusion: Proportionate restriction was not permissible on the facts of these appeals.

Final Conclusion: The appeals failed and the assessees retained the full statutory set-off claimed under the relevant sales tax rules.

Ratio Decidendi: Where tax-paid inputs are wholly used in a composite manufacturing process that results in taxable goods for sale, the statutory set-off cannot be reduced by an implied apportionment merely because the same process also yields another product or because the main product is marketed by another person.

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