TaxTMI 
TaxTMI 
2013 (10) TMI 1553
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....ct to the reassessment orders passed under Section 39(1) of the Act, dated 9th August, 2011 for the nineteen tax periods of September 2007 to March 2009 and for the twelve tax periods of April 2009 to March 2010, dated 23rd September, 2011 and the said reassessment orders are concluded by the Deputy Commissioner of Commercial Taxes (Audit-33), DVO-3, Bangalore (for short as 'AA'). Brief facts of the case.--The appellant is a Private Limited Company registered under the Companies Act, 1956 engaged in the business inter alia in Software Development and Information Technology Enabled Services (for short as 'ITES') having operational units at various places within the country and one such branch or profit center is located in Bangalore and the same has come before us as the appellant. The appellant's unit is located in Manyata Embassy Business Park, Special Economic Zone (SEZ), Rachenahalli, Near Nagavara Junction, Bangalore, Karnataka. The company has branches throughout India and the unit situated in SEZ at Bangalore is one of the profit centers or branches of the company. The appellant-unit has been recognized as SEZ Unit by the Development Commissioner, Manyata ....
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....ment of Special Economic Zones and the SEZ Units to be established therein. The appellant highlights the tax exemption accorded to all purchases excluding purchase of petroleum products by the SEZ Units located in the processing areas from domestic tariff area or SEZ area for its set up, operation or maintenance or for use in manufacture, trading, production, processing, assembling, repairing, reconditioning, re-engineering or packing with the exception that when the SEZ Units sell the goods in the DTA with or without value addition and when sold so applicable state taxes are applicable. Similarly, the State of Karnataka has carved out specific provisions under the KVAT Act, itself namely sub-section (2) of Section 20 of the Act which provides for complete exemption by way of refund to all purchases of inputs by a SEZ Unit in the State of Karnataka for its Authorized Operations. The appellant also highlights the clarification issued by the Commissioner of Commercial Taxes when sub-section (2) of Section 20 is inserted under the Act and emphasizes that the intention of the Government is to grant relief to SEZ Units by allowing refund of VAT paid by the SEZ Units on the purchase of i....
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....unsel of the company has submitted the compilation of profit and loss account of the SEZ Unit located in Karnataka along with Chartered Accountant Certificate pertaining to the said SEZ Unit and Financial of the Company as a whole, Annual Performance Report, Sample copies of Softex Forms issued to evidence exports during the impugned tax periods and also acknowledged copy of the replies to the show-cause notice issued by the AA and the extract of purchase register submitted before the lower authorities. The learned Counsel for the appellant has not relied on any case-laws under commodity taxation or service tax by citing any of the judgments but rather has focused entirely on Rule 130-A(1)(b) of KVAT Rules. Perused the lower Court records and it is seen that the appellant has submitted compilation of documents in a spiral book which had been produced before the FAA and AA. In response to the advancement of arguments of the appellant, the learned State Representative submitted that the appellant-unit is not entitled for refund of tax on all the inputs purchased as the appellant has failed to demonstrate that such inputs purchased by paying VAT are actually used in the authorized ope....
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....or (ii) manufacture or any other process of other goods for sale. Thus the said sub-section allows exception when the goods enumerated in the V Schedule are meant for resale or when put to use for manufacture or any other process of other goods for sale. Since, the said sub-section allows exception only in case of 'goods', whether the 'output' generated by the appellant-unit can be considered as 'goods'. The appellant-unit is engaged in Information Technology Enabled Services (ITES) and specifically Software Development/Software Application Management. Such being the case, the appellant-unit is engaged in 'Service Activity' i.e., processing of data and software application management services as evident from the 'Softex' Forms submitted by the appellant-unit, wherein it has been clearly mentioned that appellant is engaged in Software Development and Software Application Management as per the prescribed Reserve Bank of India Codes enumerated therein. Therefore, it is necessary to look into the Special Economic Zone Scheme and also necessary to analyze Section 20(2) of the Act. 8. Special Economic Zone (SEZ) Scheme was introduced by the Unio....
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.... to Section 3 of the Central Excise Act, 1944 (Central Act 1 of 1944). Explanation 2.--xxxxxxx (omitted by Act No. 6 of 2005)". It is to be noted that by Explanation 1, the expression "Special Economic Zone" has been assigned the meaning as per clause (iii) to Explanation 2 to the proviso to Section 3 of the Central Excise Act, 1944. Thus this is a legislation by reference. Section 3 of the Central Excise Act, 1944 is the charging section which reads as under.-- 3. Duties specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 to be levied.--(1) There shall be levied and collected in such manner as prescribed.-- (a) x x x x x (b) x x x x x: Provided................ Explanation 1.--x x x x Explanation 2.--In this proviso.-- (i) x x x x x (omitted by Finance Act 22 of 2007) (ii) x x x x x (iii) "Special Economic Zone" has the meaning assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005 (28 of 2005)". Thus, the Central Excise Act, 1944 once again assigns the meaning of Special E....
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....ited the sub-section (a)(2) instead of (a)(3) of Section 11 in the proposition notice and 'while concluding the reassessment orders, the AA has not at all raised this issue of Section 11(a)(3) but rather focuses on only V Schedule of the Act. In the light of above, the appellant-unit falls outside the ambit of Section 11 of the Act and that being so, the question of invoking Section 11(a)(3) does not arise at all. Irrespective of the same, because of Section 20(2) of the Act, Section 11 is not applicable in case of SEZ Units which are authorised by the authorities of the Central Government to carry on authorised operations in the processing areas of the SEZ. Hence both FAA and AA have erred in arriving at the conclusion that Section 20 is dependent on Section 11 and thereby invoking Section 11 of the Act-is not correct. In view of the same, the impugned order of the FAA and AA are liable to be set aside. Hence, the appellant-unit is entitled for the availment of benefit under sub-section (2) of Section 20 of the Act. Hence, we answer Point Nos. 1 and 2 in the affirmative. 11. Point No. 3.--Since, sub-section (2) of Section 20 refers to the prescribed rule, the relevant rule ....
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.... (c) of sub-rule (1) of Rule 130-A are "manufacture, trading, production, processing, assembling, repairing, reconditioning, re-engineering or packing in unit located in the processing area of any Special Economic Zone". It is necessary to analyse each expression mentioned in Rule 130-A(1)(c): Manufacture: This expression invariably is associated with goods. As held by the various decisions of the Hon'ble Apex Court manufacture means the commodity which emerges out of raw materials/inputs shall be distinct commercial commodity in trade parlance or common parlance. Therefore, the expression manufacture has restrictive meaning when compared to production or processing. This expression manufacture has been analyzed by the Apex Court as well as various High Courts in many cases. There are several decisions in this regard and the landmark decision is Ujagar Prints v. Union of India and Others, (1989)74 STC 401 (SC) rendered by the Constitutional Bench. In the said decision, it has been decided that the prevalent and generally accepted test to ascertain that there is "manufacture" is whether the change or the series of changes brought about by the processes take the co....
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...., even though the concept of manufacture has changed with the evolution of the concept of goods, but still it has a restrictive meaning. Whereas, the expressions production, processing, assembling has wider meaning when compared to the expression 'manufacture'. The other expressions are analysed infra. Production.--In case of production of tangible goods, the output commodity need not be distinct one as understood under manufacture. For example, the ores and minerals are processed and enriched minerals and ores are produced which is not different from the original input. Similarly when water is converted into steam, the expression production is used rather than manufacture. It is only the change in phase of water from fluid state to gaseous state. Another example is that of generation of electricity using hydel power. In this case, the water from the higher altitude is drawn towards the lower altitude by which the potential energy of water is converted into kinetic energy which is used to run the turbine which generates electrical power. It is to be seen that there is no input or raw materials at all in the traditional sense for the generation of electricity ....
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....with the process of manufacture wherein the steps involved may be innovated to have a superior mode of production or manufacture. Packing.--This expression is generally understood as packing of tangible goods. 13. In order to decide whether actually the appellant-unit is entitled for the benefit of refund under Rule 130-A(1)(c), we may also seek the aid of the rule of ejusdem generis, which is a facet of the principle of noscitur a sociis and has been applied by the Supreme Court in several cases, in interpreting particular words pertaining to a class, category and or genus followed by general words. In the "Interpretation of Statutes" by G.P. Singh, 12th Edition, pages 504 to 512, the rule is explained. The rule applies when the statute contains an enumeration of specific words; the subjects of enumeration constitute a class or category; that class or category is not exhausted by the enumeration, the general terms follow the enumeration; and there is no indication of a different legislative intent. The rule of ejusdem generis in interpreting the statute has been applied in taxation statute as well. In cases where the particular words can belong to a broad based g....
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....R 1960 SC 1080. A Constitution Bench of this Court in speaking through Justice Subba Rao (as His Lordship then was) at paragraph 50, at page 1103 of the report opined: 50.... The rule is that when general words follow particular and specific words of the same nature, the general words must be confined to the things of the same kind as those specified. But it is clearly laid down by decided cases that the specific words must form a distinct genus or category. It is not an inviolable rule of law, but is only permissible inference in the absence of an indication to the contrary. (emphasis supplied) 15. Thus the each of the expressions used in Rule 130-A(1)(c) has attained different shades and colour over the time of period with the advancement of science and technology and legal precedents. The expression processing has wider connotation which implies the generation of output from certain inputs. The output or the input need not necessarily be the goods as per the doctrine of ejusdem generis as explained by the Hon'ble Apex Court in the cases discussed above. In case of Information Technology Industry, tangible as well as intangible goods are involved an....
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....ntemplated different scenarios while framing the Rule 130-A to extend the benefit of refund of tax paid on inputs a Developer or an Operator or for maintenance of Special Economic Zone area and also for the units located in the SEZ area for setting up or operation or maintenance. Therefore, the appellant-unit satisfies the conditions prescribed under Rule 130-A(1)(b) of KVAT Rules and thereby satisfies the said Rule. 17. In view of the above discussion, the appellant-unit satisfies both clauses namely clause (b) and clause (c) of sub-rule (1) of Rule 130-A. Hence, we answer Point No. 3 in the affirmative. 18. Point No. 4.--The appellant-unit being a SEZ Unit as certified by the concerned Development Commissioner as such by letter of authority dated 1st May, 2007 and as the financials/annual reports relating to the profit center of the appellant-company pertaining to the appellant-unit reveals that the business income is derived exclusively from exports of Software Development and Software Application Management Services, the appellant-unit is entitled for refund of tax paid on inputs. It is also necessary to look into the definition of input under the Act. Clause (19) of Sect....
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.... proceedings before the AA or FAA. The appellant-unit ought to have given description of the commodity and the purpose for which it has been purchased that is to say how it has been used for the purpose of business of Software Development/Software Application Services. In the absence of the same, it is necessary to remand the case back to the AA for limited purpose to quantify only the amount of refund of tax paid on purchase of inputs as per Rule 130-A, since it has been categorically answered in the above points that the appellant-unit is eligible for refund claim as per Section 20(2) of the Act read with Rule 130-A. Therefore, the impugned orders of the FAA and AA are liable to be set aside and the matter has to be remitted to the AA for limited purpose to quantify the amount of tax paid on the purchase of inputs which are used in the business activity of the appellant-unit for the purpose of refund claim. However, we make it clear that if and only if there is any over statement of input tax as envisaged under Section 72(2) of the Act, the penal proceedings can be initiated by the AA in accordance with law. Therefore, we answer Point No. 5 in the affirmative. Point No. 6.--As al....