1993 (4) TMI 285 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Applicability of penalty under Section 5-A(2)(iii) of the Karnataka Sales Tax Act, 1957 for the use of HDPE granules in manufacturing HDPE fabrics and HDPE sacks.
2. Determination of whether HDPE tapes are taxable goods.
3. Examination of whether HDPE sacks are exempt from tax under the Act.

Detailed Analysis:

1. Applicability of Penalty under Section 5-A(2)(iii):
The primary issue revolves around whether the petitioner misused the benefit under Section 5-A(1) by using HDPE granules to manufacture goods that are exempt from tax, thereby attracting the penalty under Section 5-A(2)(iii). The court noted that Section 5-A(1) allows a reduced tax rate for industrial inputs used in manufacturing taxable goods for sale within the state. However, if these inputs are used to manufacture exempt goods, Section 5-A(2)(iii) imposes a penalty. The court emphasized that the intention behind purchasing the inputs, as declared in Form No. 37, is crucial. The petitioner had declared the intention to use the granules for manufacturing taxable goods but ended up using them for exempt goods (HDPE fabrics), thus attracting the penalty.

2. Determination of Whether HDPE Tapes are Taxable Goods:
The petitioner argued that HDPE tapes, an intermediate product, are taxable under Entry 110 of the Second Schedule, which covers "Plastic sheets and all articles made of plastic, polythene or poly-vinyl chloride material." The court acknowledged that HDPE tapes are intermediate products in the manufacturing process of HDPE fabrics and sacks. However, it clarified that the mere manufacture of intermediate products does not exempt the petitioner from penalties if the final products are exempt from tax. The court held that the transformation of granules into tapes is part of the process of manufacturing the final exempt product (HDPE fabrics), thus attracting the penalty under Section 5-A(2)(iii).

3. Examination of Whether HDPE Sacks are Exempt from Tax:
The court examined the tax status of HDPE sacks and found that they are taxable under Entry 118 of the Second Schedule. The petitioner manufactured HDPE sacks using HDPE fabrics, which are exempt under Entry 8-A of the Fifth Schedule. The court concluded that the penalty under Section 5-A(2)(iii) should not apply to the extent of the turnover related to HDPE sacks, as they are taxable goods. Therefore, the penalty imposed on the petitioner must be reduced proportionately to exclude the turnover related to HDPE sacks.

Conclusion:
The court modified the penalty imposed on the petitioner by excluding the turnover related to HDPE sacks, which are taxable. The penalty was upheld for the turnover related to HDPE fabrics, which are exempt from tax. The court directed the assessing authority to issue a revised demand notice reflecting this adjustment. The petition was partly allowed, providing relief to the petitioner concerning the taxable HDPE sacks.