2008 (1) TMI 851 - HC - VAT and Sales Tax

Denial of concessional rate of tax as provided under sub-section (3) of section 5 of the KGST Act, 1963 - whether coating epoxy powder on the material supplied, there is a transfer of epoxy powder from assessee/respondent to customers? Held that - It is only when the raw material or component part is actually used by the purchaser for the purpose of manufacturing of a finished product that the question of applying the concessional rate arises. Admittedly, the manufacturer only makes use of the cabinet to which the paint has been applied by the assessee. We would think that the law contemplates that the manufacturer himself uses the raw materials or the component parts as the case may be, for production of the finished product. When there is only a works contract by the assessee in the course of which the assessee uses the paint for electro-coating the cabinet, it could not be said that there is use of industrial raw material or component part, within the meaning of the provision. In this view of the matter, we would think that there is no merit in the contention of the petitioner/assessee that the denial of concessional rate is illegal. Decided against assessee.

Issues Involved:
1. Eligibility for concessional rate of tax under Section 5(3) of the KGST Act based on Form 18 declarations.
2. Applicability of concessional rate to deemed sales in works contracts.
3. Parity between sales and deemed sales for concessional rate benefits.
4. Consistency of Tribunal's decisions across different assessment years.
5. Justification for denial of concessional rate despite Form 18 declarations.
6. Legislative intent and interpretation of Section 5(3) of the KGST Act.
7. Transfer of goods in execution of works contracts and eligibility for concessional rate.

Detailed Analysis:

1. Eligibility for Concessional Rate of Tax under Section 5(3) of the KGST Act Based on Form 18 Declarations:
The assessee, a works contractor engaged in powder coating, argued that the epoxy powder used in coating metal cabinets constituted a transfer of raw materials, qualifying for a concessional tax rate under Section 5(3) of the KGST Act. The assessing officer denied this benefit, deeming the activity a pure works contract and not a sale of raw materials. The appellate authority initially sided with the assessee, but the Tribunal reversed this, emphasizing that mere production of Form 18 declarations does not entitle the assessee to concessional rates if the goods are not used as component parts or raw materials by the purchasing dealer.

2. Applicability of Concessional Rate to Deemed Sales in Works Contracts:
The assessee contended that the transfer of epoxy powder in the execution of the works contract should be treated as a deemed sale, making it eligible for concessional rates. However, the Tribunal found no evidence that the epoxy powder was used by the customers as raw materials or component parts in manufacturing new products, thus denying the concessional rate.

3. Parity Between Sales and Deemed Sales for Concessional Rate Benefits:
The assessee argued that privileges and concessional rates applicable to normal sales should also apply to deemed sales in works contracts. The Tribunal, however, maintained that the assessee's activity did not qualify as a sale of industrial raw materials to industrial units for the production of finished products, as required under Section 5(3).

4. Consistency of Tribunal's Decisions Across Different Assessment Years:
The assessee pointed out that the Tribunal had previously allowed concessional rates for the year 1996-97 but denied them for subsequent years without new facts or reasons. The Tribunal's inconsistency was challenged, but the court upheld the Tribunal's latest decision, reinforcing that the earlier decision did not set a binding precedent for subsequent years.

5. Justification for Denial of Concessional Rate Despite Form 18 Declarations:
The court held that the mere submission of Form 18 declarations does not automatically grant the benefit of concessional rates. The declarations must be substantiated by evidence that the goods were used as raw materials or component parts in manufacturing finished products. The assessee failed to provide such evidence, leading to the denial of the concessional rate.

6. Legislative Intent and Interpretation of Section 5(3) of the KGST Act:
The court analyzed the legislative history of Section 5(3) and its amendments, concluding that the provision aims to promote manufacturing within Kerala. The court noted that the provision requires the sale of industrial raw materials to industrial units for producing finished products, which was not satisfied in the assessee's case.

7. Transfer of Goods in Execution of Works Contracts and Eligibility for Concessional Rate:
The court determined that the assessee's activity of powder coating did not constitute a sale of industrial raw materials. The epoxy powder used in the works contract did not meet the criteria for concessional rates under Section 5(3), as it was not used by the customers in manufacturing finished products.

Conclusion:
The court upheld the Tribunal's decision denying the concessional rate to the assessee for the assessment years in question. It reversed the Tribunal's decision for the year 1996-97, aligning with the consistent interpretation of Section 5(3). The court dismissed the revisions filed by the assessee and allowed the revision filed by the State of Kerala, reinforcing that the assessee's activities did not qualify for the concessional tax rate under the KGST Act.

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