1999 (9) TMI 916 - AT - VAT and Sales Tax

Summary

Issues Involved:
1. Legality of the addition of 1% to the sales turnover for defects.
2. Legality of the levy of purchase tax on empty bottles under Section 7-A of the Tamil Nadu General Sales Tax Act, 1959.

Issue-Wise Detailed Analysis:

1. Addition of 1% to the Sales Turnover for Defects:
The petitioner/assessee, a dealer in "I.V." fluids, reported a total and taxable turnover of Rs. 15,75,129.11 for the year 1986-87. The assessing authority found a high gross profit of about 32.62% and noted the absence of a production-cum-stock account for medicine manufacture. The dealers purchased empty bottles from unregistered dealers, which were used in the manufacture of medicines. Due to these defects, the assessing authority proposed to reject the accounts as incorrect and incomplete, adding 1% to the sales turnover of harmless medicines and multi-point goods. The Appellate Assistant Commissioner reduced this addition to a round sum of Rs. 5,000 taxable at 8% and Rs. 100 taxable at 5%. The Sales Tax Appellate Tribunal confirmed this addition, finding grounds to sustain the addition of Rs. 5,100 on the taxable turnover.

2. Levy of Purchase Tax on Empty Bottles under Section 7-A:
The primary contention revolved around the purchase tax levied on empty bottles purchased from unregistered dealers, used for packing I.V. fluids. The Appellate Assistant Commissioner upheld the levy under Section 7-A(1)(b) of the Tamil Nadu General Sales Tax Act, 1959, reducing the turnover from Rs. 1,20,528 to Rs. 50,701. The Sales Tax Appellate Tribunal, relying on the Supreme Court's judgment in J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Sales Tax Officer, Kanpur [1965] 16 STC 563, held that the bottles used in the packing process were integrally connected with the manufacturing activity and liable to tax under Section 7-A from January 1, 1987.

The assessee argued that the empty bottles were not used in the manufacture of I.V. fluids and that Section 7-A(1) did not apply. They contended that Section 3(7) of the Tamil Nadu General Sales Tax Act, 1959, which levies tax on containers or packing materials at the same rate as the goods themselves, precluded the levy of purchase tax under Section 7-A. The Tribunal, however, found that the conditions for invoking Section 7-A were satisfied, emphasizing that the purchase tax could be levied if the goods were taxable but had not suffered tax under Sections 3, 4, or 5 due to particular circumstances.

The Tribunal referred to the Supreme Court's decision in State of Tamil Nadu v. M.K. Kandaswami [1975] 36 STC 191, which outlined the ingredients for invoking Section 7-A, including that the goods purchased are taxable and that no tax was payable at the time of purchase. The Tribunal also noted the Supreme Court's interpretation in Premier Breweries v. State of Kerala [1998] 108 STC 598, which clarified that Section 3(7) imposes a tax on the goods themselves, including the containers. Consequently, the purchase of empty bottles could not escape tax at the purchase point, despite being taxed along with the I.V. fluids at the sale point.

The Tribunal further examined the legislative intent behind the amendments to Section 7-A(1)(a), which included the word "uses" to cover situations where the identity of the goods purchased was not lost in the manufacturing process. They concluded that the empty bottles were used in the manufacture of I.V. fluids, satisfying the conditions of Section 7-A(1)(a).

In conclusion, the Tribunal confirmed the order of the Sales Tax Appellate Tribunal, holding that the levy of purchase tax on empty bottles was valid from January 1, 1987, and dismissed the tax revision case. The Tribunal emphasized that the order should be observed and executed by all concerned, issuing the final order on September 8, 1999. The petition was dismissed.