2011 (4) TMI 1253 - HC - VAT and Sales Tax

Whether the petitioner has committed breach of sub-section (1) of section 50 of the Act and is, there fore, liable to pay tax on its purchases of naphtha to the extent the same has been used for generating electricity which was sold to GEB/UPL? Held that - Petition partly allowed. The impugned order to the extent the same holds that that the petitioner has committed breach of section 50(1) and is, therefore, liable to pay tax on its purchases of naphtha to the extent the same has been used for generating electricity which was sold to GEB/UPL is confirmed. However, to the extent the same reduces the ceiling of tax exemption considering the sale price of sales effected at Vapi unit is hereby quashed and set aside. The matter is remitted to the first respondent to decide the second issue afresh after giving an opportunity to the petitioner to produce evidence in support of its case and after affording an opportunity of hearing as stated hereinabove

Issues Involved:
1. Levy of purchase tax on naphtha used for generating electricity.
2. Treatment of branch transfer of goods within the State of Gujarat and reduction of exemption limit.

Detailed Analysis:

1. Levy of Purchase Tax on Naphtha Used for Generating Electricity:
The petitioner challenged the assessment orders levying purchase tax on naphtha used in its captive power plant, arguing that the naphtha was used as a raw material for generating electricity, which in turn was used in the manufacture of caustic soda, a product eligible for tax exemption under entry 255 of the Gujarat Sales Tax Act, 1969. The petitioner contended that the surplus electricity sold to the Gujarat Electricity Board (GEB) and group companies should not disqualify them from the tax exemption.

The court examined the provisions of the Act and the scheme, noting that under entry 255, an eligible unit is entitled to exemption if the raw materials are used in the manufacture of goods for sale within or outside Gujarat. The court found that while the naphtha used for generating electricity for the manufacture of caustic soda was eligible for exemption, the portion of naphtha used to generate electricity sold to GEB or group companies was not. Therefore, the respondent was justified in levying purchase tax on the naphtha used for generating electricity sold outside the manufacturing process.

The court referenced the decision in AMI Pigments Pvt. Ltd. v. State of Gujarat [2010] 32 VST 97 (Guj), which held that fuels used to generate electricity for manufacturing are considered raw materials, but excess electricity sold for other purposes does not meet the criteria for tax exemption.

2. Treatment of Branch Transfer of Goods and Reduction of Exemption Limit:
The petitioner also challenged the reduction of the exemption limit due to the branch transfer of goods within Gujarat. The respondent had treated the branch transfer to Vapi as a deemed sale, reducing the tax exemption limit by four percent of the value of goods transferred.

The court clarified that under entry 255, the exemption applies to goods manufactured for sale within or outside Gujarat. The transfer of goods to a branch within Gujarat does not constitute a sale and therefore does not qualify for the exemption. However, the court found that the first respondent had misinterpreted condition No. 19(iii), which pertains to the calculation of the tax exemption limit, not the eligibility for exemption itself.

The court held that the respondent had no authority to reduce the ceiling limit of exemption based on the branch transfer and should have assessed the tax liability based on the breach of the exemption conditions under section 50 of the Act. The court remitted the issue back to the first respondent to reassess the tax liability, allowing the petitioner to provide evidence on how the goods transferred to the branch were dealt with subsequently.

Conclusion:
The court confirmed the levy of purchase tax on naphtha used for generating electricity sold to GEB/group companies but quashed the reduction of the exemption limit due to branch transfer. The matter was remitted to the first respondent for reassessment in accordance with the law, allowing the petitioner to present additional evidence. The petition was partly allowed with no order as to costs.

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