2016 (7) TMI 1376 - HC - VAT and Sales Tax

Exemption from sales tax - eligibility certificate - purchases of the raw material without payment of sales tax was the benefit provided to appellant vide various notifications - The VAT Act was activated with effect from 01.04.2006 and with that the State Government rescinded all exemption notifications issued under the Sales Tax Act. On 18.08.2006 the State Government issued a fresh exemption notification under the VAT Act concerning certain specified industries which did not include the industry in which the appellant was engaged - interpretation of the terms of the exemption notification dated 27.02.2009. Held that - This notification envisages grant of refund to the certified manufacturer amount of tax separately charged by a registered dealer from whom he has purchased the goods subject to certain conditions. Para 1 refers to the eligibility and provides that a registered dealer who is manufacturer of a specified goods and who has obtained eligibility certificate prior to 01.04.2006 from Khadi Commissioner or Khadi Board and the exemption certificate from the Commissioner under the provisions of the earlier law would be eligible. Thus the basic eligibility required a registered dealer to be a manufacturer of specified goods and should have obtained eligibility certificate from Khadi Commissioner or Khadi Board as the case may be and exemption certificate from the Commissioner under the provisions of the earlier law prior to 01.04.2006. Paragraph No.2 of the notification provides the procedure for claiming such refund. Clause1 thereof requires the eligible dealer to apply in prescribed format within 30 days from the date of issue of the notification. Upon receipt of such application the Commissioner would issue entitlement certificate provided the conditions of the notification were fulfilled. Paragraph 3 pertains to general conditions. Clause 3 thereof provides that the refund would be granted with effect from 01.04.2006 for the period specified in the eligibility certificate issued by the appropriate authority or till the manufacturer of the goods does not exceed the quantity approved by the appropriate authority as specified in the eligibility certificate whichever occurs earlier. As per Clause4 of paragraph 3 the refund would be granted only for the purchases used in manufacturing of specified goods sold within the time limit mentioned in clause3. Retrospective withdrawal of exemption certificates - Held that - The withdrawal of exemption benefits already granted for the period of extended eligibility certificates issued by the appropriate authority on the basis of which the Commissioners had also granted exemption certificates. Though we have held that the notification dated 27.02.2009 did not envisage grant of exemptions after expiry of the initial period of eligibility either in original or under renewal as per the eligibility certificate which a dealer would be enjoying as on 01.04.2006 the question of withdrawing such benefits once granted even if under erroneous belief would stand on a different footing - For various reasons it would not be open for the department to withdraw the same. First and foremost we have serious doubt about the very power of the authority to suomotu recall such exemption certificates. The notification itself makes no such reference. Para No.8 of the notification envisages cancellation of the certificate issued by the Commissioner if the certified manufacturer contravenes any of the conditions of the notification and/or any of the provisions of the Act or the Rules made in this behalf. This condition essentially would apply in a case where manufacturer contravenes the provisions of the Act or the Rules or conditions of the notification and has no reference to recalling a certificate already granted on erroneous application of the notification. Contravention of the conditions of the notification and error on part of the authority to grant a certificate are two entirely different concepts. In some of the cases we notice that the withdrawal of the certificate of exemption has been done by the same authority and in some cases though the same was approved by the higher authority during audit assessments. This would be additional grounds to hold that the retrospective withdrawal of the exemption certificates were bad in law. Quite apart from this we cannot lose sight of the fact that the tax in question being an indirect tax if it is otherwise not exempt it is always open for the dealer to pass on the same to the successive dealer or the consumer as the case may be. Having granted such exemption it would cause enormous financial hardship to the dealer if the same were to be withdrawn that too for no fault on his part - wherever despite the notification dated 27.02.2009 the benefit of exemption was granted on the basis of eligibility certificate renewed by the Khadi Commissioner or Khadi Board and on the basis of which certificate of exemption was also granted by the Commissioner such benefits cannot be withdrawn. Appeal allowed in part.

Summary

Issues Involved:
1. Validity of the renewal of the certificate of entitlement by the Commercial Tax Officer.
2. Justification for the cancellation of the certificate of entitlement with retrospective effect.
3. Authority to cancel the certificate of entitlement under the Gujarat Sales Tax Act.

Detailed Analysis:

1. Validity of the Renewal of the Certificate of Entitlement:
The appellant, a manufacturer of oil, was granted an eligibility certificate by the Gujarat Khadi Gramodhyog Board, which was valid from 17.06.2005 to 16.06.2008. With the introduction of the VAT Act on 01.04.2006, the State Government rescinded all exemption notifications under the Sales Tax Act but issued a fresh exemption notification on 18.08.2006. The appellant challenged the withdrawal of exemptions, and the High Court in Kishorkumar Prabhudas Tanna v. State of Gujarat held that exemptions could not be withdrawn during the validity period of the eligibility certificate. The State Government issued a notification on 27.02.2009, authorizing the Commissioner to grant refunds to certified manufacturers who had obtained eligibility certificates prior to 01.04.2006. The appellant's eligibility certificate was extended, and the Commercial Tax Department granted entitlement certificates up to 16.06.2014. However, the Assistant Commissioner later issued a show cause notice, stating that exemptions were only valid until 16.06.2008, leading to the cancellation of the entitlement certificate post-17.06.2008. The Tribunal upheld this decision, but the appellant argued that the notification did not limit exemptions to the initial eligibility period.

2. Justification for the Cancellation of the Certificate of Entitlement with Retrospective Effect:
The appellant contended that the notification dated 27.02.2009 did not specify that exemptions would cease after the initial eligibility period. The appellant argued that the VAT department's understanding and issuance of entitlement certificates should not be retrospectively withdrawn. The High Court noted that the notification aimed to implement the judgment in Kishorkumar Prabhudas Tanna, ensuring uniform exemption procedures for those with eligibility certificates as of 01.04.2006. The Court held that the notification did not intend to perpetuate exemptions upon mere renewal of eligibility certificates. However, the retrospective withdrawal of exemptions granted based on renewed eligibility certificates was deemed improper. The Court emphasized that the tax being an indirect tax could be passed on to consumers, and withdrawing exemptions retrospectively would cause undue financial hardship to dealers.

3. Authority to Cancel the Certificate of Entitlement under the Gujarat Sales Tax Act:
The Court examined the notification dated 27.02.2009, which did not explicitly provide for the cancellation of certificates already granted. The notification's para 8 allowed cancellation only if the manufacturer contravened the notification's conditions or the Act's provisions. The Court distinguished between contravention of conditions and errors in granting certificates, concluding that the latter did not justify retrospective withdrawal. The Court also noted that the power to determine disputed questions under section 80 of the VAT Act included avoiding retrospective effects, reinforcing the principle against retrospective cancellation of benefits.

Conclusion:
The High Court concluded that the notification dated 27.02.2009 did not intend to extend exemptions beyond the initial eligibility period. However, the retrospective withdrawal of exemptions granted based on renewed eligibility certificates was not permissible. The Court answered the first question against the assessee and in favor of the department, while the second and third questions were answered in favor of the assessee, setting aside the orders contrary to these declarations.