2008 (5) TMI 627 - HC - VAT and Sales Tax

Deferment of sales tax - Held that - Writ application is allowed; Explanatory Note appended to rule 3 of the Rules is declared repugnant to the Industrial Policy Resolution,1989. Resultantly the order dated February 3, 2000 of the State Level Committee holding that the petitioner shall be entitled for the incentive of deferment on the incremental production above the installed capacity is set aside.

Summary

Issues Involved:
1. Validity of the Explanatory Note appended to Rule 3 of the Bihar Sales Tax Supplementary (Deferment of Tax) Rules, 1990.
2. Interpretation of "incremental production" in the context of the Sales Tax Incentive Scheme, 1989.
3. Whether the Explanatory Note is repugnant to the Industrial Policy Resolution, 1989.
4. Applicability of deferment of sales tax on incremental production based on installed capacity versus actual production capacity.

Detailed Analysis:

1. Validity of the Explanatory Note appended to Rule 3 of the Bihar Sales Tax Supplementary (Deferment of Tax) Rules, 1990:
The petitioner challenged the Explanatory Note appended to Rule 3 of the Bihar Sales Tax Supplementary (Deferment of Tax) Rules, 1990, arguing that it was ultra vires and inconsistent with the Bihar Finance Act, 1981, and the Industrial Policy Resolution, 1989. The Explanatory Note defined "incremental production" as production over and above the installed capacity, which the petitioner contended was contrary to the policy.

2. Interpretation of "incremental production" in the context of the Sales Tax Incentive Scheme, 1989:
The Sales Tax Incentive Scheme, 1989, aimed to promote rapid industrialization and provided incentives for existing industrial units undertaking expansion. The primary issue was whether "incremental production" should be interpreted based on installed capacity or actual production capacity. The petitioner argued that the term should refer to production over and above the actual production capacity, aligning with the industrial world's understanding.

3. Whether the Explanatory Note is repugnant to the Industrial Policy Resolution, 1989:
The court examined whether the Explanatory Note was repugnant to the Industrial Policy Resolution, 1989. The policy intended to provide incentives for industrial expansion, and the Explanatory Note's definition of "incremental production" was found to be inconsistent with this objective. The court emphasized that the industrial policy should be interpreted based on the understanding of the industrial world, which recognized incremental production as production beyond actual production capacity.

4. Applicability of deferment of sales tax on incremental production based on installed capacity versus actual production capacity:
The court considered the Supreme Court's observation that there is a conceptual difference between "installed capacity" and "actual production capacity." The policy aimed to incentivize production beyond the actual production capacity. The court concluded that the Explanatory Note's definition was repugnant to the industrial policy and declared it illegal. Consequently, the deferment of tax should be limited to incremental production over and above the actual production capacity.

Conclusion:
The court allowed the writ application, declaring the Explanatory Note appended to Rule 3 of the Rules repugnant to the Industrial Policy Resolution, 1989. The order dated February 3, 2000, of the State Level Committee, which held that the petitioner was entitled to the incentive of deferment on the incremental production above the installed capacity, was set aside. The respondents were directed to process the petitioner's claim for deferment of sales tax based on the court's observations. No order as to costs was made.