2009 (1) TMI 807 - HC - VAT and Sales Tax

Whether, in the facts and circumstances of the case, provisions of section 4B are attracted when a part of by-product, i.e., oil-cakes valuing ₹ 48,30,399 was sent outside the State of Punjab for sale on consignment basis and the entire oil and rest of the oil-cakes (produced from cotton seeds purchased within the State of Punjab) were sold within the State of Punjab? Whether tax under section 4B not leviable in respect of oil-cakes valuing ₹ 48,30,399 sent for sale outside the State on the proportion between ₹ 48,30,399 and rest of the sales or on the proportionate price of cotton seeds based on yield percentage of oil and oil-cakes produced from cotton seeds instead of ₹ 48,88,879? Held that - The argument that the levy created by the purchase tax levied by section 4B (or any other similar section in respect of other States) has really been on manufacture of goods and therefore not a tax referable to entry 54 of List II of the Seventh Schedule to the Constitution was rejected and the contrary argument that such provision merely levies pure and simple purchase tax on the raw material, like cotton seed in the present case, was accepted.Therefore, the legislative competence of the State Legislature to levy purchase tax under section 4B of the Act has been upheld. Once the aforesaid position is clear from the various judgments of the honourable Supreme Court then the first question of law deserves to be answered against the dealer-assessee and in favour of the Revenue especially when taxable event is the purchase of cotton seed which in the hands of oil-mill is the last stage of purchase.Question No. 1 is decided against dealer-assessee. If section 4B of the Act is to operate within the parameters of legislative competence postulated by article 246 and various Lists then it has to conform to the State taxes alone which could be achieved by assessing the tax on the purchases. Therefore, it has been rightly submitted by Mr. Sethi that the consignment sale in respect of oil-cake (khal) is only 9.66 per cent. of the total sale and, therefore, 9.66 per cent. of the total purchase of cotton seed should have been taken for tax purpose under section 4B of the Act. Accordingly, the answer of the question No. 2 would go in favour of the dealer-assessee and against the Revenue

Summary

Issues Involved:
1. Applicability of Section 4B of the Punjab General Sales Tax Act, 1948 to by-products sent outside the state for sale.
2. Calculation method for tax under Section 4B when by-products are sent for sale outside the state.

Issue-Wise Detailed Analysis:

Issue 1: Applicability of Section 4B
Facts and Arguments:
- The assessee-dealer, engaged in extracting oil from cotton seeds, produced oil-cakes as a by-product. A portion of these oil-cakes, valued at Rs. 48,30,399, was sent outside Punjab for consignment sale.
- The Assessing Authority levied purchase tax under Section 4B on the cotton seeds used to produce these oil-cakes, which was contested by the dealer.
- The dealer argued that since the primary product (oil) was sold within Punjab, Section 4B should not apply to the by-product (oil-cakes) sent outside the state.

Legal Analysis:
- Section 4B imposes a purchase tax on goods used in manufacturing if the manufactured goods are disposed of outside the state otherwise than by inter-State trade or export.
- The court highlighted that Section 4B applies when:
- Goods are purchased within the state.
- These goods are used in manufacturing.
- The manufactured goods are disposed of outside the state in a manner other than inter-State trade or export.
- The court referenced the Supreme Court's decision in Hotel Balaji v. State of Andhra Pradesh, which upheld the levy of purchase tax on raw materials used in manufacturing goods that are sent outside the state.
- The court concluded that the sale of oil-cakes outside Punjab triggers the tax event under Section 4B, making the dealer liable for purchase tax on the cotton seeds used to produce the oil-cakes.

Conclusion:
- The court decided that Section 4B is applicable to the by-product (oil-cakes) sent outside Punjab for consignment sale. Therefore, the first question was answered against the dealer-assessee and in favor of the Revenue.

Issue 2: Calculation Method for Tax
Facts and Arguments:
- The dealer contended that if Section 4B applies, the tax should be calculated proportionately based on the ratio of consignment sales to total sales.
- The Assessing Authority had deducted the profit from the total consignment sales to determine the taxable amount, which the dealer argued was incorrect.

Legal Analysis:
- The court agreed with the dealer's argument that the tax should be proportionate to the percentage of oil-cakes sent outside the state.
- It was emphasized that the tax should be levied on the raw material (cotton seeds) used to produce the oil-cakes, not on the end-product.
- The court found merit in calculating the tax based on the proportion of consignment sales (9.66%) to the total sales, as this method aligns with the legislative competence under Article 246 and the relevant lists in the Seventh Schedule of the Constitution.

Conclusion:
- The court decided that the purchase tax should be calculated proportionately based on the consignment sale ratio. Thus, the second question was answered in favor of the dealer-assessee and against the Revenue.

Final Decision:
- Question 1: Decided against the dealer-assessee.
- Question 2: Decided in favor of the dealer-assessee.