2008 (8) TMI 834 - HC - VAT and Sales Tax

Whether the sale of packing material can be said to be of goods connected with manufacture of soap? Held that - So far as the dealer is concerned, it fulfils the conditions as prescribed in column 3 of the Notification No. 7037. None of the authorities below has found that the dealer has failed to furnish the requisite form in the requisite manner. This being so, the dealer-applicant is entitled to get exemption from tax on the sale of packing paper in question. It was open to the Department to proceed against the purchasing dealer if the purchasing dealer has wrongly utilised the facility which was not otherwise available to it under the aforestated Notification No. 7037, dated January 31, 1985. In any view of the matter, thus, the levy of tax on the sale of packing paper on the amount of ₹ 2,72,326 is not taxable at the hands of the applicant. It is held that the Tribunal was not legally justified in sustaining the order of the assessing authority in disallowing the claim of exemption on the amount of ₹ 3,72,326 and in dismissing the second appeal filed by the dealer before it. In the result the revision succeeds and is allowed. The order under revision dated May 30, 1996 is hereby set aside and the Second Appeal No. 261 of 1994 for the assessment year 1989-90 filed before the Tribunal stands allowed.

Summary

Issues Involved:
1. Interpretation of Notification No. 7037, dated January 31, 1985.
2. Eligibility for exemption from purchase tax on packing material used by the purchaser.

Issue-wise Detailed Analysis:

1. Interpretation of Notification No. 7037, dated January 31, 1985:
The core issue revolves around the interpretation of the relevant entry in Notification No. 7037, dated January 31, 1985. The notification provides exemptions for purchases connected with the manufacture of products by institutions certified by the All India Khadi and Village Industries Commission or the U.P. Khadi and Village Industries Board. Specifically, the question is whether the sale of packing material (paper) for wrapping soap can be considered as "connected with" the manufacture of soap.

The court noted that the term "connected with" should not be interpreted narrowly to include only raw materials directly used in the manufacturing process. Instead, it should be understood in a broader sense to encompass materials that are essential for making the product marketable. The court emphasized that packing material like wrapper paper plays a crucial role in preserving the product's quality and enhancing its marketability. Therefore, the packing paper is intimately connected with the manufacture of soap, as it is necessary to make the soap saleable and commercially viable.

2. Eligibility for exemption from purchase tax on packing material used by the purchaser:
The dealer sold packing paper to an institution holding a certificate for exemption, and the certificate's genuineness was not questioned by the Department. The court observed that the dealer had fulfilled all conditions for the grant of exemption as provided in the third column of the notification. The court held that the dealer should not be penalized if the purchasing dealer used the packing material for purposes not directly related to the production of soap. The dealer had acted in good faith by relying on the certificate.

The court also referenced several precedents to support its view that a liberal and positive approach should be taken in interpreting exemption notifications. It cited decisions such as Mangalore Chemicals & Fertilizers Limited v. Deputy Commissioner of Commercial Taxes and Amit Plastic Industry v. Divisional Level Committee, which advocate for not denying exemption on hyper-technical or narrow grounds.

The court concluded that the words "connected with" in the notification were intended to include materials like packing paper, which are essential for making the product marketable. The court emphasized that the intention of the Legislature was to promote village industries by providing exemptions, and a restrictive interpretation would defeat this purpose.

Conclusion:
The court held that the Tribunal was not legally justified in sustaining the order of the assessing authority, which disallowed the claim of exemption on the sale of packing paper. The revision was allowed, and the order dated May 30, 1996, was set aside. The Second Appeal No. 261 of 1994 for the assessment year 1989-90 was allowed, and the applicant was also awarded costs of Rs. 2,000.