2010 (3) TMI 1030 - HC - VAT and Sales Tax

Whether the Karnataka Appellate Tribunal was right in law in dismissing the appeals holding that the exemption granted to a 100 per cent EOU vide Notification No. FD 32 CSL 96 (V) dated November 15, 1996 is applicable only to the extent of goods purchased and used in the manufacture of goods which are physically exported out of the country and not applicable to extent of goods sold in the DTA? Held that - The Joint Commissioner of Commercial Taxes (Appeals) as well as the Tribunal have committed a serious error in reading the clause in isolation with clause (iii) on account of bifurcation of clauses (i) to (iii) separately, and an error has been committed by the authorities below in denying the relief to the assessee. According to us, if relaxation has been granted by the Government, the assessee is entitled to sell its products in the domestic tariff area. If the assessee had sold in excess of the permission granted by the Government of India, in the domestic tariff area, in such circumstances, the respondent would have been justified in denying the claim of the assessee. But, it is not the case of the Revenue that in excess of the relaxation permitted by the Government of India to the assessee to sell its products in the domestic tariff area, the assessee has sold the goods manufactured by it. Since there is no violation, we are of the view that the orders passed by the Karnataka Appellate Tribunal as well as by the Joint Commissioner of Commercial Taxes and so also by the Deputy Commissioner of Commercial Taxes are required to be set aside, answering the question of law in favour of the assessee and against the Revenue. Accordingly, this revision petition is allowed.

Summary

Issues:
Challenge to order passed by Joint Commissioner of Commercial Taxes and affirmed by Karnataka Appellate Tribunal regarding exemption granted to a 100% EOU under Notification No. FD 32 CSL 96 (V) dated November 15, 1996 for the assessment year 1997-98.

Detailed Analysis:
The revision petition was filed challenging the legality and correctness of the order passed by the Joint Commissioner of Commercial Taxes (Appeals) and affirmed by the Karnataka Appellate Tribunal regarding the exemption granted to a 100% EOU under Notification No. FD 32 CSL 96 (V) dated November 15, 1996. The substantial questions of law raised included the interpretation of various conditions of the notification, such as the extent of exemption for goods used in manufacturing for export, the nature of incentives provided, and the purpose of conditions for maintaining EOU status (i-iv).

The petitioner, a 100% export-oriented unit, purchased raw materials under the notification but faced denial of exemption due to selling a portion of finished products domestically, leading to the withdrawal of the granted exemption. The main contention was improper interpretation of the notification by the Department and appellate authorities, resulting in denial of relief to the assessee. The Government advocate argued that the denial was justified due to violation of notification clauses (i-iii), invoking clause (v) for non-compliance.

The key consideration was whether there was a violation of notification clauses by the assessee justifying the Revenue's denial of entitled relief. The notification outlined conditions for tax exemption on sales to 100% EOUs, including the use of goods in export manufacturing and export of entire production, subject to relaxation by the Government of India. The Tribunal and lower authorities erred in reading clauses in isolation, leading to denial of relief. The notification required a harmonious interpretation of clauses (i-iii), and the assessee's sale in the domestic market did not exceed permitted relaxation, justifying relief entitlement.

The High Court held that clauses (i-iii) of the notification should be read together, and the authorities erred in isolating clause (iii) to deny relief. As the assessee did not violate the conditions and sold within permitted relaxation, the denial of exemption was unjustified. The orders of the Tribunal and lower authorities were set aside, and the question of law was answered in favor of the assessee, allowing the revision petition.