GSTR No. 63 of 1997 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. GSTR No. 63 of 1997 Date of decision 22.1.2009 M/s Shri Krishna Oil and General Mills ...Petitioner Versus State of Punjab ... Respondent CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE H.S. BHALLA Present: Mr.GR Sethi ,Advocate for the petitioner Mr. Piyush Kant Jain, Addl. AG Pb. 1. Whether Reporters of local papers may be allowed to see the judgement ? 2. To be referred to the Reporter or not ? 3. Whether the judgement should be reported in the Digest ? M.M.KUMAR, J. At the instance of the assessee- dealer an application under Section 22 of the Punjab General Sales Tax Act,1948 (for brevity 'the Act') was filed before the Sales Tax Tribunal, Punjab (for short 'the Tribunal') for referring two questions of law for the opinion of this Court. Accordingly the Tribunal accepted the application opining that substantive questions of law would emerge from the order dated 26.3.1996 passed by the Tribunal in Appeal No. 556 of 1994-95 in respect of assessment year 1991-92. Hence it has referred the following questions for the opinion of this Court: i) Whether in the facts and circumstances of the case, provisions of section 4B are attracted when a part of by product i.e. Oil cakes valuing Rs.48,30,399/- was sent outside the State of Punjab for sale on consignment basis and the entire oil and rest of the oil cakes (produced from cotton GSTR No. 63 of 1997 2 seeds purchased within the State of Punjab) were sold within the State of Punjab ? ii)In case the reply to question no.1 is in affirmative; Is tax under section 4B not leviable in respect of oil cakes valuing Rs.48,30,399/- sent for sale outside the State on the proportion between Rs. 48,30,399/- and rest of the sales or on the proportionate price of cotton seeds based on yield percentage of oil and oil cakes produced from cotton seeds instead of Rs.48,88,879/-? Brief facts of the case as set out in the order of reference dated 12.5.1997 are that the assessee- dealer is a registered dealer under the sales tax laws and is engaged in the business of procuring cotton seeds and extracting oil from it. A bye product namely oil cakes (khal) is also produced in the process of extracting oil from cotton seed. The assessee – dealer sold oil cakes amounting to Rs. 48,30,399/- on consignment basis i.e. oil cake was sent for sale to the dealers outside the State of Punjab. The dealer filed all his returns showing his gross turnover at Rs.4,99,90,886.77. The Assessing Authority expressed dissatisfaction with the returns and issued a notice in form ST XIV. After granting ample opportunity, the Assistant Excise and Taxation Commissioner (I)-cum-Assessing Authority, Hoshiarpur passed an order dated 27.5.1993 creating an additional demand of Rs. 1, 83,993/- by concluding that the dealer was liable to pay purchase tax under Section 4 B of the Act in respect of cotton seed that was used as raw material by the dealer for manufacturing the bye product -oil cakes. In other words the assessing Authority levied purchase tax under Section 4B on the purchase of cotton seed corresponding to oil-cake sold on GSTR No. 63 of 1997 3 consignment basis determined by her excluding the profit and expenses of Rs. 2,41,520/- out of the total consignment sales. The observations of the Assessing Authority reads thus: “ Total consignment amount to Rs.45,30,399.00. The dealer is engaged in the manufacturing of khal from the raw material of cotton seed. Thus taxable goods manufactured at Hoshiarpur are despatched to third parties for sale. Therefore, the dealer is also liable to pay tax u/s 4 B in respect of goods and raw material used by him for the manufacturing of taxable goods- which are later on sent to third parties situated out of the State of Punjab. Thus purchase tax u/s 4 B of the State Act will be leviable on the purchases of goods made within the State of Punjab that have been used in the manufacture of goods sent for sale on the consignment basis. During the course of assessment proceedings a show cause notice was issued on 24.3.93 for penal (penalty ?) and interest action u/s 10(6) and 11 of the Act as the dealer has not deposited tax involved u/s 4 B of the Act. In view of the Hon'ble Supreme Court of India ruling in the case of M/s Hotel Balaji and others v. State of Andhra Pradesh liability to pay tax u/s 4 B of the Punjab General Sales Tax Act, 1948 has been confirmed. The ld. Counsel has furnished written explanation which has been discussed at length and placed on the file.” The assessee-dealer challenged order of the Assessing Authority in appeal before the Deputy Excise and Taxation Commissioner. The appeal was dismissed on 12.2.1994. The operative part of the order dated GSTR No. 63 of 1997 4 12.2.1994 passed in appeal reads as under: “ I have given due consideration to the facts and circumstances of the case and arguments of both the sides. I find considerable force in the arguments of the departmental representative. For the determination of purchase for tax under section 4 B the ratio of consignment sales to total sales will not be the correct solution as there is quite difference in the rates of khal and oil. The Assessing authority has rightly determined these purchases by deducting the profit of the appellant taken from the account books of the appellant out of the total consignment sales. I am, therefore, satisfied to hold that there are no merits in the appeal.” Eventually an appeal was filed before the Tribunal which was dismissed on 26.3.1996. The Tribunal while dismissing the appeal has expressed its view which reads thus: “ 7. I have considered the above arguments tendered by the learned counsel and seen the record. I have seen the definition of 'dealer', 'good' and 'purchase' under section 2 of the Punjab General Sales Tax Act. The word 'by product' does not occur in any of the definitions. The purchase is of any good 'Goods' mean all kinds of moveable property. I have also seen the definition of term 'trade' and still I am not convinced why a sale of any good, may be in nature of main product or any by product be not included in the term purchase. Thus, whether it be molasses, bugasse or oil cakes, once its sale is made and subject to provisions of Sections of Section 4 and 5 of the Act, GSTR No. 63 of 1997 5 the manufacturer shall be liable to pay tax. The exemptions as provided in above mentioned sections shall, however, be applicable. In the present appeal before me, I do not find any illegality in the order of the Assessing Authority. He has correctly applied section 4B in the present case relying on the Balaji judgement of the Supreme Court. The counsel for the appellant has cited two judgements which are not applicable in the present case. 94 STC 98 only provides the scope of RC and dominant purpose of a Sugar Mill being Sugar and molasses and bugasse as by products. All are treated as part of same RC. This is not the issue in present appeal. Similar is the other citing 1982 STI 129. This is also not applicable. 8. The second contention is that tax on khal is applicable but it is excessive. The entire purchase of cotton seed should be proportionately applied to manufacture of oil and sale of khal. This issue has been dealt by Assessing Authority and DETC. Both have held that such proportionate applicable is not possible due to huge difference in the prices of the two commodities. Total consignment sale of khal has been to the extent of Rs. 48,30,399/-. The Assessing Authority reduced the profit of Rs.2,41,520/- as shown in books from such sale and taxed the remainder. The appellant contends that consignment sales are only about10% of total sales and total purchase of cotton seeds was worth Rs.3.65 crores and as such, if tax was leviable, it should be about 35 lacs and not Rs.46 lakhs as taken by Assessing Authority. This contention GSTR No. 63 of 1997 6 has been fully met by DETC who has referred to vast difference in prices of oil and khal and rejected above contention. This finding of the DETC is reasonable and I find no support to over-rule such reasons. I uphold the order of DETC in this regard. It is, therefore, held that tax has been correctly levied on the consignment sale of oil cakes and assessment made in the present case is held to be perfectly legal and reasonable.” Mr. G.R.Sethi, learned counsel for the petitioner has argued that cotton seed was purchased from within the State of Punjab. The whole oil extracted therefrom and some part of the bye product like oil cakes was sold within the State of Punjab. He has, however, argued that some part of oil cakes valuing Rs. 48,30,399/- was sent outside the State of Punjab for sale on consignment basis. According to the learned counsel in such a situation the provisions of Section 4 B of the Act would not be applicable. In that regard, learned counsel has placed reliance on a judgment of this Court rendered in the case of Jagraon Cooperative Sugar Mills Ltd. V. State of Punjab and others (1994) 94 STC 98 and argued that the main business of the petitioner is to extract oil from the cotton seeds. He has emphasized that if any bye product comes into existence by the manufacturing process then the same is not liable to any tax because the petitioner had paid tax on the sale of oil extracted from the cotton seed crushed by him. The argument seems to be that the State is not deprived of any tax and no purchase tax could be levied on the basis of bye product i.e. oil cakes especially when it is sold by way of consignment sale to the dealers of other States. Mr. Sethi has placed reliance on another judgement of this Court rendered in the case GSTR No. 63 of 1997 7 of Shri Ganesh Cotton Traders v. State of Haryana and others (2002) 127 STC 313. He has also placed reliance on another Division Bench judgement of the Bombay High Court in the case of Commissioner of Sales tax. V. Saravagi Industries (1985) 59 STC 259. On the second question, learned counsel has submitted that if answer to the first question is against the assessee in the sense that purchase tax is leviable on the oil cakes sold on consignment basis outside the State of Punjab then the tax is to be levied under Section 4 B of the Act on the purchase of cotton seed by applying the ratio of consignment sale and gross sales to the total purchase of cotton seed. According to the learned counsel the consignment sale in respect of oil cake is only 9.66 % of the total sale and therefore 9.66% of the total purchase of cotton seed (which are of value of Rs. 3,65,53,639/-) i.e. Purchase of Rs. 35,31,082/- should have been taken for tax purposes under Section 4 B of the Act. He has pleaded that at the time of purchase of cotton seed by deducting profit out of the total consignment of sale is not a correct method to determine the taxable purchase. Learned counsel has maintained that the reasoning adopted by the Deputy Excise and Taxation Commissioner in his order dated 12.2.1994 suffers from legal infirmity because the determination of purchase tax by taking the ratio of cotton seed used for producing oil cake on the basis of consignment sale vis-a-vis total sale can easily be worked out. Such a solution cannot be rejected on the ground that there is difference in the rates of oil cakes (khal) and oil – a rationale adopted by the Deputy Excise and Taxation Commissioner as well as the Tribunal. Re: Question No. 1 : In order to proceed to answer the questions of law, it would be GSTR No. 63 of 1997 8 necessary to read Section 4 B of the Act which deals with levy of purchase tax. The aforesaid provision is as under: “4-B. Levy of purchase tax on certain goods. - Where a dealer who is liable to pay tax under this Act purchases any goods other than those specified in Schedule B from any source and - i. )uses them within the State in the manufacture of goods specified in Schedule B, or ii. )uses them within the State in the manufacture of any goods, other than those specified in Schedule B, and sends the goods so manufactured outside the State in any manner other than by way of sale in the course of inter- State trade or commerce or in the course of export out of the territory of India, or iii.)uses such goods for a purpose other than that of resale within the State or sale in the course of inter-State trade or commerce or in the course of export out of the territory of India, or iv.)sends them out side the State other than by the way of sale in the course of inter-State trade or commerce or in the course of export out of the territory of India, and no tax is payable on the purchase of such goods under any other provision of this Act, there shall be levied a tax on the purchase of such goods at such rate not exceeding the rate specified under sub-section (1) of section 5 as the Central Government may direct". GSTR No. 63 of 1997 9 A close analysis of Section 4 B of the Act would show that it has following ingredients: (a) a dealer liable to pay tax under the Act when purchases goods (other than those specified in Schedule B) from any source in the State and (b) uses such goods in the State in the manufacture of any other goods and (c) either disposes of the manufactured goods in any manner otherwise than by way of sale in the State or despatches the manufactured goods to a place outside the State in any manner otherwise than by way of sale in the course of a inter-State trade or commerce or in the course of export outside the territory of India within the meaning of sub-section (1) of Section 5 of the Central Sales Tax, 1956. When all the aforesaid ingredients are specified then the dealer becomes liable to pay tax on the purchase of such goods at such rates, as specified by Section 5(1) of the Act. It is thus evident that Section 4 B applies only on those cases where (i) the goods are purchased like raw material by a dealer liable to pay tax under the Act in the State (ii) the goods so purchased cease to exist as such goods for the reason they are consumed in the manufacture of different commodities and (iii) such manufactured commodities are either disposed of within the State otherwise than by way of sale or despatched to a place outside the State otherwise than by way of an inter-State sale or export sale. In other words, if such manufactured goods are not sold within the State of Punjab, but yet disposed of within the State then no tax is payable on such disposition. Likewise where manufactured goods are despatched out of GSTR No. 63 of 1997 10 State as a result of an inter-State sale or export sale, no tax is payable on such sale. Again where such manufactured goods are taken out of street to manufacturers own depots or to the depots of his agents then no such tax is payable on such removals. The question which has arisen is whether purchase tax would be payable when the event of purchase tax place or at any later stage? In the present case, the cotton seed purchased by the dealer- petitioner were subjected to manufacturing process. It resulted into extraction of oil which was the primary product. However, it also brought into existence the oil cakes (khal). The undisputed facts are that the oil so extracted and a part of oil cakes were sold in the State of Punjab and on account of the provisions made in Section 5(2)(a)(ii) of the Act such sales were not to be included in taxable turnover. However, purchase tax on such purchase made by the dealer assessee is leviable under Section 4 B of the Act in respect of those transactions which are not to be included in taxable turnover under Section 5(2)(a)(ii) of the Act. The sale of oil cakes outside the State of Punjab is not covered by any of the clauses of Section 5(2)(a)(ii) of the Act. Therefore, the event of tax would come into existence on such purchases of the cotton seed to the extent the bye product oil cakes has been sold outside the State of Punjab. The aforesaid view is fully supported by the judgement of Hon'ble the Supreme Court in the case of Hotel Balaji v. State of Andhra Pradesh (1993) suppl (4) SCC 536. The Hon'ble Supreme Court was considering Section 9 of the Haryana General Sales Act, 1973 (as it stood then). The Hon'ble Supreme Court has also opined that provisions of Section 4 B of the Act are similar in material particulars to that of the provisions of Section 9 of the Haryana Act GSTR No. 63 of 1997 11 and therefore we are of the view that the views expressed in Hotel Balaji's case (supra) would apply to the provisions of Punjab Act as well. While over-ruling the view taken by it in the earlier judgement in the case of Good Year India Ltd. v. State of Haryana (1990)2 SCC 71, it has been held that taxable event is the purchase of raw material which is subjected to manufacturing process in the hands of the last purchaser. The aforesaid view is discernible in para 91 of the judgement and is extracted hereunder: “........Goodyear [supra] takes only the last eventuality and holds that the taxable event is the removal of goods from the State and since such removal is to dealers' own depots/agents outside the State, it is consignment, which cannot be taxed by the State legislature. With the greatest respect at our command, we beg to disagree. The levy created by the said provision is a levy on the purchase of raw material purchased within the State which is consumed in the manufacture of other goods within the State. If, however, the manufactured goods are sold within the State, no purchase tax is collected on the raw material, evidently because the State gets larger revenue by taxing the sale of such goods. (The value of manufactured goods is bound to be higher than the value of the raw material). The State legislature does not wish to - in the interest of trade and general public - tax both the raw material and the finished (manufactured) product.” The aforesaid reasoning has been found to be based on a sound policy in the filed of taxation. Explaining the policy, their Lordships have observed as under: GSTR No. 63 of 1997 12 “ ....................This is a well-known policy in the field of taxation. But where the manufactured goods are not sold within the State but are yet disposed of or where the manufactured goods are sent outside the State (otherwise than by way of inter-State sale or export sale) the tax has to be paid on the purchase value of the raw material. The reason is simple: if the manufactured goods are disposed of otherwise than by sale within the State or are sent out of State (i.e., consigned to dealers own depots or agents), the State does not get any revenue because no sale of manufactured goods has taken place within Haryana. In such a situation, the State says, it would retain the levy and collect it since there is no reason for waiving the purchase tax in these two situations. Now coming to inter- State sale and export sale, it may be noticed that in the case of inter-State sale, the State of Haryana does get the tax-revenue - may not be to the full extent. Though the Central Sales Tax is levied and collected by the Government of India, Article 269 of the Constitution provides for making over the tax collected to the States in accordance with certain principles.......... “ It is further appropriate to mention that the object of charging section is to tax the purchase of goods by the manufacturer. The observations completely answers the argument raised by the counsel for the petitioner that the disposal of oil cakes (khal) outside the State of Punjab on consignment basis would not attract the levy of purchase tax as it is a consignment sale. In that regard the observations made in para 91 are extracted in extenso which reads thus: GSTR No. 63 of 1997 13 “...........The object is to tax the purchase of goods by a manufacturer whose existence as such goods is put an end to by him by using them in the manufacture of different goods in certain circumstances. The tax is levied upon the purchase price of raw material, not upon the sale price - or consignment value - of manufactured goods. Would it be right to say that the levy is upon consignment of manufactured goods in such a case? True it is that the levy materialises only when the purchased goods (raw material) is consumed in the manufacture of different goods and those goods are disposed of within the State otherwise than by way of sale or are consigned to the manufacturing-dealer's depots) agents outside the State of Haryana. But does that change the nature and character of the levy? Does such postponement - if one can call it as such -convert what is avowedly a purchase tax what is on raw material (levied on the purchase price of such raw material) to a consignment tax on the manufactured goods? We think not. Saying otherwise would defeat the very object and purpose of Section 9 and amount to its nullification in effect. The most that can perhaps be said is that it is plausible (as pointed out by Ranganathan, J. in his separate opinion) to characterise the said tax both as purchase tax as well as consignment tax. But where two interpretations are possible, one which sustains the constitutionality and/or effectuates its purpose and intendment and the other which effectively nullifies the provision, the former must be preferred, according to all known canons of GSTR No. 63 of 1997 14 interpretation........................” The provisions of Section 4 B of the Act fell for consideration before a three Judge Bench of the Hon'ble Supreme Court in the case of Devi Dass Gopal Krishan Pvt. Ltd. And others v. State of Punjab and others 1994 Supp (2) SCC 59. After considering the provisions of various other Acts and noticing the judgement of the Hon'ble Supreme Court rendered in the case of Mukerian Papers Ltd. v. State of Punjab (1991) 2 SCC 580, the Hon'ble Supreme Court held that there was no conflict between Hotel Balaji case (supra) and Mukerian Papers Ltd. Case (supra). The view has been expressed in para 6 of the judgement which reads thus: “. Now coming to the merits of the contention, we are of the considered opinion that, there is no reason to take a view different from the one taken in Hotel Balaji ( 1991) 2 SCC 580). All the contentions urged now have been considered and dealt with in the said decision. In our opinion, the approach adopted in Goodyear (AIR 1990 SC 781) does not accord with the scheme, intendment and