IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 15.07.2011 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice M.JAICHANDREN T.C.(R) Nos. 717 of 2006, 1604, 1690 and 1866 of 2008 TC(R). No. 717 of 2006 The State of Tamil Nadu rep. By the Deputy Commissioner (CT) Chennai (North) Division Greams Road, Chennai 600 006. ... Petitioner -vs- Garware Wall Ropes No. 3, Jaffer Sarang Street Chennai – 600 001 ... Respondent T.C.(R). Nos. 1604, 1690 and 1866 of 2008 Garware Wall Ropes No. 3, Jaffer Sarang Street Chennai 600 001. ... Petitioner in all these revisions - vs - The State of Tamil Nadu rep. By the Commercial Tax Officer Harbour I, Assessment Circle Chennai. ... Respondent in all these revisions Tax Case Revisions to revise the order of the Tamil Nadu Sales Tax Appellate Tribunal (Main Bench), Chennai 104 dated 31.3.1997 in T.A.No. 673/94, 770/94 and 769/94.(Common Order in T.A.Nos. 769/94, 770/94, 673/94 and 978/94). and against the Order the Appellate Assistant Commissioner(CT) Chennai made in A.P.333/92, 334/92 and 335/92 dated 30.11.93 for the Assessment Year 1988-89, 89-90 and 87-88 respectively. https://hcservices.ecourts.gov.in/hcservices/ For Petitioner in T.C.No.717/06 and for Respondent in T.C.1866, 1604, 169-/08 : Mr.R.Sivaraman, Special Government Pleader (Taxes) for Revenue For Respondents in T.C.717/06 and for petitioners in T.C.1866, 1604, 1690/08 : Mr.N.Prasad ORDER (Order of the Court was made by CHITRA VENKATARAMAN,J) The assessee is on revision before this Court as against the order of the Tribunal in TC(R).Nos.1604, 1690 and 1866 of 2008 and the Revenue is on revision in TC.(R). No. 717 of 2006. All these revisions arise for consideration out of the common order of the Sales Tax Appellate Tribunal dated 31.3.1997. The assessments in question relate to the assessment years 1987-88 to 1990-91. The Revenue's appeal relates to cancellation of levy of penalty. 2. The following substantial question of law arises for consideration in TC(R). No.717 of 2006:- "Whether, on the facts and in the circumstances of the case, the Tribunal is correct in deleting the entire penalty levied under Section 16(2) of the Tamil Nadu General Sales Tax Act?. " 3. The following substantial question of law arises for consideration in TC(R).Nos.1604, 1690 and 1866 of 2008:- "Whether the Sales Tax Appellate Tribunal committed an error of law in including the drawback received by the petitioners under Rule 3 of the Customs and Central Excise Duties Drawback Rules, 1971 from the Central Government as part of the turnover of the petitioners under Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959, having come to the factual conclusion that the petitioners did not collect any amount representing duty from the buyers and when the drawback itself was received only as incentive from the Central Government? 4. The assessee herein is a dealer in nylon ropes. The Enforcement Wing of the Commercial Taxes Department conducted an inspection in the place of business of the assessee's firm on https://hcservices.ecourts.gov.in/hcservices/ 30.8.1990. This led to the recovery of certain records. The seized records revealed that the assessee was manufacturing ropes and twines at their factory at Pune and stock transferred the goods to various branches in India. The assessee sold their products to the coastal ships as well as ships calling at Madras Harbour. Admittedly, the assessee sold different types of ropes to coastal vessels and to the foreign going vessels. It is seen from the facts herein that the assessee imported the raw materials, namely, the plastic granules and paid customs duty thereon. These raw materials were utilised in the manufacture of wire ropes and twines at the Pune Factory. Admittedly, the assessee had also paid the necessary Central Excise Duty applicable thereon, on the intermediary products manufactured. It is stated that ropes falling under Sub Heading 56.07 is exempt from payment of excise duty, by reason of the notification in Notification No.61/87 dated 01.03.1987. In the scheme of duty drawback framed as per Section 75 of the Customs Act, 1962 and in accordance with the Customs & Central Excise Duties Drawback Rules, 1971, in respect of ropes sold to the foreign going vessels treated as 'export' within the meaning of the Duty Drawback Rules, the assessee made the appropriate claim for duty drawback. Going by the definition of 'export' as found in Rule 2(c) of the Customs and Central Excise Duties Drawback Rules, 1971, as the assessee satisfied the conditions of the Section and the Rules on drawback, the assessee got the necessary duty drawback from the Central Government. The Assessing Officer viewed that the duty drawback received by the petitioner/assessee formed part of the taxable turnover of the petitioner and hence, the drawback receipts were liable to be included in the assessment relating to the above-said assessment years. The Assessing Officer pointed out that as the drawback is relatable to the sales to the foreign going ships, they are liable to be assessed as part of the taxable turnover under the provisions of the Tamil Nadu General Sales Tax Act. Rejecting the contention of the assessee that the duty drawback received from the Central Government had nothing to do with the sale and hence, could not be included in the turnover, the assessment was finalised under Section 16 of the Tamil Nadu General Sales Tax Act. The assessee was also charged with penalty at 150% of the tax due. 5. Aggrieved by the same, the assessee went on appeal before the Appellate Assistant Commissioner, who, by a common order, agreed with the view of the Assessing Officer. The Appellate Authority pointed out that the definition of 'sale price' as available under the Central Sales Tax Act would clearly show that the sale price would include the amount received, deferred payment and other valuable consideration. The Appellate Authority further pointed out that since the assessee had sold the ropes to the foreign going ships and the Indian coastal region at different prices and that the assessee had received the duty drawback, the said receipt would fall under the definition of sale price; hence, assessable under the provisions of the Act. Thus, while confirming the assessment, he also upheld the https://hcservices.ecourts.gov.in/hcservices/ penalty levied. 6. Aggrieved by the said order, the assessee went on appeal before the Sales Tax Appellate Tribunal. On a perusal of the invoices, the Tribunal pointed out that the sale price charged in respect of the foreign ship did not include Central Excise Duty element. Since the same formed part of the turnover, the Central Excise Duty leviable on the turnover relating to foreign going vessel necessarily had to be included in the taxable turnover. Since specific details were not available, the Tribunal held that the proportionate duty drawback given was to be deemed as the Excise Duty includable in the sales effected to the foreign going vessel. Thus, the Tribunal dismissed the appeals filed by the assessee. Although the Tribunal's line of reasoning is different from the lower authorities, in the context of the includability of the duty drawback in the sales turnover, the Tribunal affirmed the view of the Assessing Officer as well as the Appellate Assistant Commissioner. 7. As regards penalty, the Tribunal pointed out that since the issue was an arguable one and there was no lack of bona fides as regards the claim made by the assessee, the assessee was not liable to be visited with penalty. Consequently, the levy of penalty under Section 16(2) of the Act for the assessment years 1987-88 and 1989- 90, and under Section 12(5)(iii) for the assessment year 1990-91, was set aside. The Revenue has preferred the Tax Case as against the cancellation of levy of penalty and the assessee is on revision as against the quantum assessment. 8. Learned counsel for the assessee drew our attention to the provisions of the Customs Act, particularly to Section 75 of the Act as well as to the Customs and Central Excise Duties Drawback Rules, 1971, and in particular to the definition of 'export' and Rule 7 of the Customs and Central Excise Duties Drawback Rules, 1971, under which the duty drawback was determined and granted. He submitted that contrary to the assertion of the authorities below, excise duty is payable only on the intermediary product and not on the final product. Given the fact that excise duty levy need not always be passed on to the buyer and it is always open to the manufacturer to meet the said liability on his own, the Tribunal committed a serious error in law in holding that the sale price should always include the excise duty element payable under the Central Excise Rules. He further pointed out that the duty drawback received by the petitioner has nothing to do with the sale. Going by the definition of 'export' in the Customs and Central Excise Duties Drawback Rules, 1971, the assessee had the benefit of duty drawback in respect of customs duty suffered on the imported raw materials used in the manufacture of goods exported. In the circumstances, placing reliance on the decisions reported in 124 STC 586 – NEYVELI LIGNITE CORPORATION LTD v. CTO, 128 STC 446 - INDIAN POTASH LTD v. ASSISTANT COMMR., 57 STC 277 – MCDOWELL & CO., LTD. v. COMMERCIAL TAX OFFICER, 126 STC 547 – https://hcservices.ecourts.gov.in/hcservices/ TISCO GL. OFFICE RECREATION CLUB v. STATE OF BIHAR, as well as 115 STC 161 – INDIAN ALUMINIUM CABLES LTD., v. COMMISSIONER OF SALES TAX, affirmed by Apex Court in 115 STC 172 – COMMISSIONER OF SALES TAX v. INDIAN ALUMINIUM CABLES LTD., he submitted that going by the definition of 'turnover' as available under the Tamil Nadu General Sales Tax Act, the price charged by the assessee alone would constitute the turnover to attract the liability under the provisions of the Tamil Nadu General Sales Tax Act. The payment of duty drawback as per the scheme of the Central Government has nothing to do with the local sales, including the price paid by the buyer. He further pointed out that passing on of the liability under the Central Excise Act is a matter of contract between the parties and there is nothing on record to show that the assessee had passed on the excise duty liability to the purchasers to have the same included in the sale price to form part of the turnover. He pointed out that the Department did not deny as a matter of fact that when the assessee effected the sales, it did not pass on the excise duty liability on the goods to the purchaser. It is also not the case of the Revenue that the buyer had agreed to pay the Central Excise duty. Going by the definition of 'turnover', the duty drawback received on the export effected is a post sale event and has nothing to do with the sale. Consequently, the same could not be brought within the meaning of 'turnover' to attract the charging provisions of the Tamil Nadu General Sales Tax Act. 9. Per contra, learned Special Government Pleader (Taxes) appearing for the Revenue, supported the order of the Tribunal. He pointed out that when the duty drawback is directly relatable to the sale effected locally, rightly, the Tribunal held that the duty drawback was liable to be included in the turnover. He further pointed out that the assessee charged different prices for the self same goods, one with reference to coastal vessel and the other one related to foreign going vessel. Thus, going by the said fact also, the excise duty payment received by way of duty drawback has to be treated as part of the turnover. 10. Heard the learned counsel for the assessee as well as the learned Special Government Pleader (Taxes) for the Revenue. 11. There is no dispute as regards the facts, particularly as regards the duty drawback gained by the assessee in respect of its export activity in terms of the Customs and Central Excise Duties Drawback Rules, 1971. Section 75 of the Customs Act states that where an assessee uses the duty paid raw materials in the manufacture of goods and the same are exported, he would be entitled to claim drawback on the customs duties chargeable on the imported raw materials. Section 75(2) enjoins on the Government to make Rules on the scheme of duty drawback. In consonance with the above-said provisions as well as Section 37 of the Central Excise and Salt Act, the Government of India formulated the Customs and Central Excise https://hcservices.ecourts.gov.in/hcservices/ Duties Drawback Rules, 1971. The said Rules define 'drawback' and 'export' in Rule 2(a) and 2(c) of the said Rules respectively, which read as follows:- " 2(a) 'drawback' in relation to any goods manufactured in India and exported means – the rebate of duty chargeable on any imported materials or excisable materials used in the manufacture of such goods in India; 2(c) 'export' with its grammatical variations and cognate expressions, means taking out of India to a place outside India and includes loading of provisions or store or equipment for use on board a vessel or aircraft proceeding to a foreign port. 12. Rule 3 specifies that subject to the provisions of (a) the Customs Act, 1962, (52 of 1962) and the Rules made thereunder, (b) the Central Excises and Salt Act, 1944 (1 of 1944) and the Rules made thereunder, and (c) these Rules, a drawback may be allowed on the export of goods specified in the Schedule at such amount, or at such rates, as may be determined by the Central Government. The Rules provide for the manner of determination of the drawback. 13. Thus, the above Rules and Section 75 of the Customs Act, make it clear that the duty drawback claim rests on the fact of the export made of the goods manufactured from and out of the duty suffered imported raw materials. Going by the scheme given under the Rules and the provisions of the Act, the duty drawback has nothing to do with the local sales effected or has any relevance to be linked to the price charged on sales therein, or to the sale. On the other hand, the same is linked to 'export' of the goods manufactured from out of the duty suffered imported raw materials. 14. The question as to whether the duty drawback received as per the provisions of the Excise and Customs Act and the Rules made thereunder could be treated as part of sale consideration to fall under 'turnover' needs to be seen in the context of what the Tamil Nadu General Sales Tax Act proposes to deal with and the meaning given to the terms "turnover", "total turnover", "taxable turnover" and "sales" under the Tamil Nadu General Sales Tax Act. The preamble to the Tamil Nadu General Sales Tax Act states that the Act is essentially an Act relating to the levy of general tax on the sale or purchase of goods in the State of Tamil Nadu. As per the charging provision under Section 3, tax is levied on all taxable sale of goods by the dealer at the rate specified in the schedule, subject to certain exceptions given therein. Section 3 casts the liability for tax on all dealers whose total turnover for the financial year exceeds the limit specified therein. "turnover", "total turnover" and "taxable turnover" are defined under Sections 2(r), 2(q) and 2(p) https://hcservices.ecourts.gov.in/hcservices/ respectively. "Turnover" is defined under Section 2(r) as the aggregate amount for which the goods are bought or sold or delivered or supplied by a dealer for cash or for deferred payment or valuable consideration. The definition excludes certain receipts as well as sales with reference to certain goods. Thus, the sale price of agricultural produce, horticultural produce, other than tea and rubber grown into the State by the dealer himself or any land in which he has an interest in whatever capacity shall be excluded from the turnover. Explanation (1A) appended therein states that the tax charged by the dealer separately without including it in the price of the goods sold or bought, shall not be included in the turnover. Apart from this, Explanation 2 contains further exclusion from turnover, subject to certain conditions prescribed. Explanation 2 (ii) requires that any amount charged by the dealer for anything done by him to the goods before their sale at the time of or before the delivery, shall be included in the turnover. Thus when the said explanation emphasizes amounts paid at the time of or before the delivery as forming part of the turnover, one gets the clue as to the non includability of amounts received post sale that any amount received not having any relevance to the sale cannot be treated as part of the "sale" so as to have the receipt included in the sale consideration. Thus while receipts having an inextricable connection to the sale of goods alone are includable in the turnover, amounts not having any connection with the sale, are not included in the turnover for the purpose of assessment. 'Total turnover' is defined in Section 2(q) to cover all the sales of the dealer during the given period, irrespective of the liability of any portion of the turnover. 'Taxable turnover' is defined to mean the turnover on which the dealer shall be liable to pay tax. Thus, taxable turnover is computed after making deduction from the total turnover in the manner as provided under the Act and the Rules. Apart from what is provided for in the Act as by way of deduction, Rule 6 of the Tamil Nadu General Sales Tax Rules also provides for deduction of turnover from the total turnover, to arrive at the taxable turnover. Section 2(n) defines 'sale' as transfer of property in goods other than by way of mortgage, hypothecation, charge or pledge by one person to another for cash, deferred payment or other valuable consideration. 'Sale price' is defined in the Central Sales Tax Act, 1956 under Section 2(h) in an inclusive way to mean as, consideration for sale of any goods inclusive of any sum charged for anything due in respect of the goods at the time of or before the delivery thereof. The Section recognises the exclusion of cost of freight or delivery or the cost of installation from the sale price, provided, such cost is separately charged. Thus on a reading of the definition of 'sale price', 'turnover', Explanation 2 to Section 2(r) and 'sale' in Section 2(n), it is clear that sale being a bilateral transaction, all expenses incurred by the dealer to put the goods in a deliverable state alone form part and parcel of the selling price. Post sale expenses incurred like freight and cost of installation, separately charged for after the sale of the goods, are excluded from https://hcservices.ecourts.gov.in/hcservices/ price. The levy of tax thus being on the sale of goods and the turnover being the aggregate amount for which goods are brought or sold, the Act seeks to take note of only such of those receipts received by the vendor from the purchasers in connection with the sale and nothing beyond. This means, any amount received by an assessee from any other party, not connected with the sale, cannot be brought within the definition of 'turnover' for assessing the same under the provisions of the Act. The question as to whether the payments received by way of subsidy from the Government are liable to be included in the turnover came up for consideration before the Apex Court. In the decision reported in 124 STC 586 – NEYVELI LIGNITE CORPORATION LTD v. CTO,. Referring to the definition of 'turnover' and 'sale' under the Tamil Nadu General Sales Tax Act, the Apex Court pointed out: "It appears to us that it is that sale consideration, whether in cash or otherwise, which is receivable in respect of sales made by a dealer which can possibly form part of the turnover of a dealer. It is that sum which can be legitimately regarded as forming part of the aggregate amount for which the goods have been bought or sold. The sum has to be paid either by the purchaser or on his behalf by some other person. .............................. ............................. The payment which is so made by the Government to a manufacturer cannot be regarded as a discharge of any liability or obligation by the Government towards the purchaser of fertiliser. The two payments received by the manufacturer, namely, the subsidy and the price fixed under the Fertiliser (Control) Order are independent of each other. Subsidy does not form part of the bargain between the manufacturer and the purchaser of fertiliser. " 15. In so holding, the Apex Court distinguished the case in the decision of the Apex Court reported in 117 STC 457 - E.I.D. PARRY (I) LIMITED v. ASSISTANT COMMISSIONER OF COMMERCIAL TAXES and pointed out that the decision reported in 117 STC 457 was concerned with the plantation subsidy paid by the assessee as part of the sale consideration for the supply of sugarcane pursuant to the agreement between the assessee, purchaser of sugarcane and the cane grower. In terms of the agreement between the vendor and the purchaser, the Apex Court held that the subsidy was a deferred payment to be included in the taxable turnover. Thus when the subsidy payment was pursuant to the agreement between the parties to the sale, the same was held as part of the sale consideration to be included in the taxable turnover. However, in the decision reported in 124 STC 586 – NEYVELI LIGNITE CORPORATION LTD v. CTO, the Apex Court pointed out that https://hcservices.ecourts.gov.in/hcservices/ subsidy received from the Government did not form part of the bargain between the assessee and the purchaser and it had nothing to do with the sale to the purchaser or with the purchaser in connection with the sale. Thus the Apex Court pointed out that the question as to whether a particular payment received by the dealer is part of sale consideration or not, has to be considered with reference to the terms of the contract between the parties, indicating how the parties to the contract treated the said payment. 16. In the decision reported in 126 STC 547 – TISCO GL. OFFICE RECREATION CLUB v. STATE OF BIHAR, the Apex court once again considered the question of includability of subsidy in the turnover. Distinguishing the decision of cane subsidy reported in 117 STC 457 - E.I.D. PARRY (I) LIMITED v. ASSISTANT COMMISSIONER OF COMMERCIAL TAXES, the Apex Court pointed out that when the company gave subsidy to the staff canteen run for the benefit of officers and employees, the said subsidy given not directly relatable to sale of any item of food article, could not be included as part of the sale price in respect of sale or supply of goods. The Apex Court pointed out that the price fixed was no doubt less than the cost price. Yet, there was no statutory obligation on the part of the company to pay any amount to the dealer. Thus, the lumpsum subsidies made ex gratia could not be regarded as valuable consideration in respect of the sale or supply of goods and were not part of the sale price and consequently, did not form part of the gross turnover. 17. In the decision reported in 128 STC 446 – INDIAN POTASH LIMITED v. ASSISTANT COMMISSIONER (CT)., this Court applied the decision reported in 12 STC 476 – GEORGE OAKES (PRIVATE) LIMITED v. STATE OF MADRAS, in considering the question as to whether the subsidy received from the Government under an administrated scheme as concession under the scheme could be treated as forming part of the turnover. The facts therein related to an assessee who was a manufacturer of fertilizer. Potash was not subject to Fertiliser (Control) order, 1985. The assessee therein sold the goods in terms of an administered scheme framed by the Central Government, which provided for payment of an amount described as a 'concession', subject to the manufacturer agreeing to