By TIOL News Service

NEW DELHI, OCT 31 2016: THE respondent, a dealer registered under Section 8-A of the U.P . Trade Tax Act, 1948 is a holder of a recognition certificate as per provisions contained in Section 4-B of the Act. The respondent used to make purchases of raw material at the concessional rate of tax against Form III-B obtained by it from the office of the Trade Tax Officer. As per conditions prescribed under Section 4- B( 2) of the Act, the notified goods manufactured out of the raw material produced at the concessional rate of tax against Form III-B is required to be sold by such manufacturer

1. in the State or

2. in the course of inter-State trade and commerce or

3. in the course of export out of India.

It is also provided in the said Section that if a recognition certificate holder sells goods manufactured by it out of the raw material purchased at the concessional rate of tax against Form III-B in a manner otherwise than prescribed under Section 4- B( 2), the said dealer shall be liable to penal action equal to three times of the tax, thus saved by the said dealer on purchase made against Form III-B.

At the time of scrutiny, the assessing authority noticed that the respondent had made purchases of natural gas against Form III-B at the concessional rate of tax, and after manufacture of the notified goods, that is, fertilizers, out of the said purchases of natural gas purchased against Form III-B, some of the finished goods were transferred outside the State of Uttar Pradesh.

The Revenue issued show cause notice to the respondent for the assessment year 2005-06 and after considering the explanation offered, imposed penalty of Rs.10,46,98,335 /- vide order dated 28.03.2009. The case reached the High Court after two appellate stages.

The question of law for consideration before the High Court was:-

"Whether under the facts and circumstances of the case, the Commercial Tax Tribunal were legally justified in granting the exemption on purchase of raw material against Form III-B whereas the dealer has made a stock transfer of finished goods which is not permissible under law?"

The High Court held that the assessee had purchased the material and used it in manufacture and there was no violation of Section 3-B of the Act and accordingly concurred with the view of the tribunal as a result of which the Revenue appeal stood dismissed.

The matter is before the Supreme Court in SLP by the State of UP.

The Supreme Court referred to the findings recorded by the assessing officer. It has been held by him that under Section 3-B and 4- B( 2) of the Act, the finished product manufactured from the raw material purchased at a concessional rate can only be sold in U.P . or in the course of inter-State trade and commerce or can be exported out of country, but stock transfer is not permissible. According to the assessing officer, the trader had purchased natural gas at a concessional rate against Form III-B i.e. 20% minus 15% = 5%, availing the benefit at the rate of 15% and paying tax at the rate of 5%. The production of urea has been done by using the natural gas obtained at a concessional rate and the manufactured product, that is, urea has been sent by way of stock transfer outside the State in clear violation of Section 3-B and 4- B( 2) of the Act. It has been further opined by him that the assessee had acted contrary to the provision of law by purchasing raw material at a concessional rate and thereafter sending the finished goods as stock transfer outside the State which does not come under the term 'sale' and no revenue is generated by the State.

The appellate authority has expressed the view that the assessee, after availing the benefit at the concessional rate, has violated the provisions contained in Section 4 B ( 2) of the Act and has been making stock transfers quite often.

The opinion of the tribunal, is that the trader was authorized to purchase the natural gas for the manufacture of urea and it is undisputed that it had manufactured urea by utilizing the natural gas purchased against the issue of Form III-B. He has proceeded to state that no action can be taken under Section 3-B on the ground that the products utilizing the natural gas purchased against the issue of Form III-B were sent through stock transfer without selling those directly, because Section 4-B of the Act cannot be extended to determine the responsibility under Section 3-B.

The Supreme Court analysed the issue as:

Section 4- B( 2) is applicable to the dealer who manufactures notified goods in the State or engaged in packaging of such notified goods manufactured or processed by him. The said dealer can apply to the assessing authority in such form, manner and within the time prescribed for grant of the recognition certificate. The assessing authority can grant the recognition certificate to the dealer in respect of goods used in the manufacture of the notified goods or packing of the notified Goods. Explanation to the sub-section defines the word "Goods" which means raw materials, processing material, machinery, spare parts and also fuels. The expression "Notified Goods" means such goods as notified by the State government from time to time.

Sub-section (2) to Section 4-B also requires that the notified goods should be "intended" to be sold by the dealer within the State or in the course of inter-State trade or commerce or in the course of exports out of India. The expression "intended" is significant and important. It refers to the intention of the dealer after the goods are manufactured and packed. The expression "in the course inter-State trade or commerce" is quite broad and wide. An issue may arise as to whether the stock transfer outside the State in terms of directions issued by the Central Government can be considered as sale or transaction in the course of inter-State trade or commerce. In the case at hand, we would not decide the said issue or question, for it was not raised or argued before the authorities and can be examined in an appropriate case when raised and considered. Be it noted, sub-section (6) is a specific provision which deals with the case of the dealer who has been issued the recognition certificate and has purchased goods without payment of tax or at concessional rates, but has sold the manufactured goods or packaged goods otherwise than by way of sale in the State, or in the course of inter-State trade or commerce or export out of India. The provision specifically deals with cases where the dealer manufactures or packs the notified goods and has taken benefit of lower/concessional or nil rate of tax on the raw material but is unable to fulfill the intendment, i.e., he has not been able to sell the notified goods by way of sale within the State or in course of inter-State state or commerce or by way of export. In such cases, the dealer is liable to pay the amount of difference on the amount of sale or purchase of such goods on which concession or nil rate of tax was paid on account of issue of the requirement certificate and the amount of tax calculated @ 4%. The sub-section is a particular and a specific section which deals with and specifies the consequences when the dealer is unable to meet and comply with intendment. The sub-section (6) would, thus, be applicable.

Section 3-B undoubtedly commences with a non-obstante clause, but the provision has to be read harmoniously with sub-section (6) to Section 4-B. Any other interpretation would make sub-section (6) a dead letter, for if we accept the plea of the Revenue whenever there is violation or failure to abide with the "intendment", Section 3-B would be invoked and applied, not sub- section( 6) to Section 4-B. Section 3-B would apply when a false and wrong certificate or declaration is made. Sub-section (6) on the other hand, deals with cases where the dealer is unable to comply with the intendment, i.e., for some reason he is unable to sell the goods within the State, export them or sell them in the course of inter-State trade or commerce. Intendment of the said nature has not been treated as false or wrong declaration as consequences have been prescribed in sub-section (6). It is essential to be stated that consistency and certainty in tax matters is necessary. In cases relating to "Indirect Taxation", this principle is even more important. Clarity in this regard is a necessity and the interpretative vision should be same.

In view of the aforesaid analysis, the Supreme Court found the view expressed by the tribunal which has been concurred by the High Court is absolutely defensible and does not warrant any interference. Resultantly, the appeal, being devoid of merit, stands dismissed.

(See 2016-TIOL-184-SC-CT)