2008 (11) TMI 621 - HC - VAT and Sales Tax

Whether on the facts and in the circumstances of the case stock transfer of manufactured products to other State prepared out of raw materials purchased on the strength of form IV could attract the mischief of the provisions contained in fifth proviso to section 5(1) of the Orissa Sales Tax Act? Whether on the facts and circumstances of the case the Tribunal was justified in treating a sum of 6, 05, 803 being the amount of subsidy paid in running the canteen as receipt of sale price or valuable consideration for the alleged sale of food stuffs to the workers? Held that - In the present case even though the raw materials purchased on the strength of form IV at concessional rate were used in manufacturing the finished product the same were not sold either inside the State of Orissa or in course of inter-State trade from Orissa. The substantive condition for availing of concessional rate of tax thus stands violated and consequently the mischief of fifth proviso to section 5 is attracted. The dealer in such fact-situation is liable for payment of differential tax payable on value of raw materials purchased at concessional rate by furnishing form IV. So far as second question is concerned in the present case the learned Tribunal is not correct to hold that the subsidy amount will form part of the sale price and the dealer-petitioner is liable to pay sales tax on such subsidy amount. Question No. 1 is answered in affirmative in favour of the Revenue and question No. 2 in negative i.e. in favour of the dealer.

Summary

Issues Involved:
1. Applicability of the fifth proviso to section 5(1) of the Orissa Sales Tax Act, 1947 on stock transfer of manufactured products.
2. Treatment of subsidy paid for running a canteen as part of the sale price for tax purposes.

Issue-wise Detailed Analysis:

Issue 1: Applicability of the fifth proviso to section 5(1) of the OST Act on stock transfer of manufactured products:

The core question was whether the stock transfer of manufactured products to another state, prepared from raw materials purchased at a concessional rate using form IV, attracts the provisions of the fifth proviso to section 5(1) of the OST Act. The petitioner argued that since the raw materials were used for manufacturing within Orissa, the fifth proviso should not apply, even though the finished products were sent outside Orissa. The Tribunal and the assessing officer had previously held that the petitioner contravened the declaration conditions by sending finished goods outside Orissa, thereby attracting differential tax.

The court referred to previous judgments, including Orissa Cement Ltd. and ICI India Ltd., to interpret the fifth proviso. It emphasized that the proviso mandates that raw materials purchased at a concessional rate must be used within Orissa for manufacturing goods intended for sale. If the finished goods are transferred rather than sold, it constitutes a violation of the declaration terms. Consequently, the court upheld the Tribunal's decision, confirming that the petitioner was liable for differential tax as the finished goods were transferred outside Orissa, thus violating the substantive conditions for availing the concessional rate.

Issue 2: Treatment of subsidy paid for running a canteen as part of the sale price for tax purposes:

The second issue questioned whether the subsidy amount received for running a canteen should be considered part of the sale price, thereby attracting sales tax. The petitioner operated a canteen providing subsidized meals to employees and received a subsidy to cover the deficit between the cost and the sale price of food items. The assessing officer included the subsidy in the sale price, but the ACST deleted this levy, citing the Labour Welfare Regulations. The Tribunal, however, confirmed the assessment, treating the subsidy as part of the sale price.

The court referred to the Supreme Court's decision in TISCO General Office Recreation Club, which held that subsidies provided to cover deficits in canteen operations do not constitute valuable consideration for the sale of food items. The subsidy was not directly related to any specific item sold but was meant to cover overall operational costs. Thus, the court concluded that the subsidy should not be included in the sale price for tax purposes.

Conclusion:

The court answered the first question in the affirmative, favoring the Revenue, confirming that the petitioner violated the fifth proviso to section 5(1) of the OST Act by transferring finished goods outside Orissa, thereby attracting differential tax. The second question was answered in the negative, favoring the dealer, ruling that the subsidy amount for running the canteen should not be considered part of the sale price for tax purposes.

Judgment:

The tax revision was allowed to the extent that the court upheld the differential tax imposition under the fifth proviso to section 5(1) but ruled against including the canteen subsidy in the sale price for tax purposes. No costs were awarded.