2010 (1) TMI 1124 - HC - VAT and Sales Tax

Whether in view of the finding of fact recorded by the assessing authority which has been confirmed by the Tribunal that entire basmati rice manufactured by the applicant, for which recognition certificate was granted, have been sold in the course of export and rice so manufactured has not been sold otherwise, the Tribunal was not justified in confirming imposition of tax on the purchase of paddy alleged to have been used in obtaining broken rice during process of manufacture of rice sold within the State of U.P. in the course of inter-State sale? Whether in view of the facts that entire rice manufactured out of paddy having admittedly been sold in the course of export, no tax can be legally imposed on the purchase merely because some waste product and by-products obtained during the process of manufacture of rice, have been sold either in the State of U.P. or in the inter-State trade and commerce? Whether no rice mill is established for manufacture of by-products which included broken rice, etc., and the recognition certificate having also not been granted for manufacture of by-products, namely, broken rice, the Tribunal was not justified in confirming imposition of tax on the alleged purchases of paddy which is said have been sold in connection of the broken rice obtained during manufacturing process of rice? Held that - while it is open to the tax Department to tax the assessee on the sale of broken rice either in U.P. or outside U.P. the intention under the notification is clear. The exemption has been granted, the raw materials used and therefore, in this case the imposition of tax on the purchase of paddy to the extent of 4.75 per cent is bad and not justified and it is set aside by this court. The questions referred to are answered in favour of the assessee and against the Department. While it is open to the tax Department to tax the assessee on the sale of broken rice either in U.P. or outside U.P. the intention under the notification is clear. The exemption has been granted, the raw materials used and therefore, in this case the imposition of tax on the purchase of paddy to the extent of 4.75 per cent is bad and not justified and it is set aside by this court. The questions referred to are answered in favour of the assessee and against the Department.

Summary

Issues:
1. Tax imposition on purchase of paddy for manufacturing broken rice during export of basmati rice.
2. Legality of tax imposition on purchase of paddy due to sale of waste products during manufacturing.
3. Justification of tax imposition on alleged purchase of paddy for manufacturing by-products without establishment of a separate unit.

Analysis:
1. The revision was filed under section 11 of the U.P. Trade Tax Act, 1948, challenging the Tribunal's order for the assessment year 2002-03. The key issue was whether tax could be imposed on the purchase of paddy used in obtaining broken rice during the manufacturing process of basmati rice sold in inter-State trade. The Tribunal upheld the tax imposition, but the court found that the exemption under Notification No. 289 dated February 12, 1999, applied to raw materials used for manufacturing notified goods exported outside India. The court held that the tax on paddy purchase for broken rice was unjustified as the intention was to exempt raw materials used for notified goods, not by-products.

2. The assessing authority concluded that 4.75% of the rice manufactured by the assessee emerged as broken rice and was not exported, leading to tax liability on the paddy used for broken rice. The court, however, emphasized that the assessee's primary focus was manufacturing rice, not by-products like broken rice. The court noted that the exemption under the notification was specifically for raw materials used in manufacturing notified goods for export. As the paddy was used for manufacturing rice, not broken rice, the tax imposition on paddy purchase for broken rice production was deemed unjustified.

3. The court considered the argument that the assessee had obtained a recognition certificate for manufacturing rice, not by-products like broken rice. The notification granting exemption focused on raw materials for manufacturing notified goods for export. The court found that the intention was to exempt raw materials used for notified goods, not by-products like broken rice. Therefore, the tax imposition on the purchase of paddy for manufacturing broken rice was deemed unwarranted, and the revision was allowed in favor of the assessee.

In conclusion, the court ruled in favor of the assessee, setting aside the tax imposition on the purchase of paddy for broken rice production during the export of basmati rice. The judgment highlighted the importance of interpreting tax laws in line with the intended exemptions and clarified that the focus of the exemption was on raw materials used for manufacturing notified goods for export, not by-products like broken rice.