Set-off for prohibited goods used in manufacture was allowed where Schedule-IIA conditions and sale requirements were satisfied.

Rule 42 of the Gujarat Sales Tax Rules allowed set-off to a manufacturer where the purchased goods were used in producing goods covered by Schedule-IIA, and the proviso removed the prohibition on otherwise prohibited goods for entries 26, 39 and 43. Spare parts and accessories of electric motors, though treated as prohibited goods, qualified for set-off because they were used in manufacturing electric motors falling within entry 26. The separate condition requiring sale of the manufactured goods in the State or in inter-State trade operated independently and was satisfied. Use of the motors in pump sets did not defeat the claim. The dealer was therefore entitled to set-off, and the Revenue's challenge failed.

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Issues: Whether the dealer was entitled to set-off under Rule 42 of the Gujarat Sales Tax Rules, 1970 on purchase of spare parts and accessories of electric motors, being goods described as prohibited goods under Section 2(21) of the Gujarat Sales Tax Act, 1969, when the goods were used in the manufacture of electric motors fitted in pump sets.

Analysis: Rule 42 grants drawback, set-off or refund to a manufacturer subject to specified conditions. The second condition excludes purchases of prohibited goods, but the proviso removes that exclusion for goods covered by entries 26, 39 and 43 of Schedule-IIA when such goods are used in the manufacture of goods described in those entries. Once the purchased goods fall within entry 26 and are used to manufacture a product also falling within that entry, the prohibition under condition No. 2 does not apply. The fourth condition operates independently and requires that the manufactured goods be sold in the State or in inter-State trade. The fact that the raw material was used in making electric motors which were fitted into pump sets did not defeat the claim, because the relevant requirement was satisfied once the manufactured product was sold.

Conclusion: The dealer was entitled to set-off under Rule 42, and the Revenue's challenge failed.

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