2016 (5) TMI 1037 - HC - VAT and Sales Tax

Liability of purchase tax - Inter-state stock transfer made to their own branches located in other States effected from the warehouse located in the Special Economic Zone - Appellant contended that they have an exemption by virtue of Section 12(1)(a) of TNSEZ Act, 2005. Such exemption as every developer or entrepreneur is entitled to exemption from the levy of taxes both on the sale as well as the purchase of goods, if such goods are meant to carry on the authorized operations. Held that - it is clear from the Letter of Approval that the appellant was obliged primarily to export the goods procured for trading and services. But, since the appellant was obliged to achieve positive net foreign exchange, only over a period of time, the Letter of Approval specifically permits the appellant to supply/sell goods or services in the DTA. Condition Nos.(i) and (v), if read harmoniously, would show that an export obligation is imposed upon the appellant, not with the idea of making the appellant a 100% export oriented unit. The appellant is entitled to apportion their exports and domestic sales in such a manner that they achieve a positive net foreign exchange within the stipulated period. Therefore, the inter state stock transfer made by the appellant to its own branches located outside the State, is very clearly authorised by Condition No.(v) of the Letter of Approval. Hence, the Department as well as the learned Judge were in error in thinking that an inter-state stock transfer would not come within the purview of the expression authorised operations. Whether the right conferred upon a developer or entrepreneur under Section 12(1) is circumscribed by the provisions of Section 15(a) of the TNSEZ Act, 2005 - removal of goods from the SEZ to the Domestic Tariff Area - Held that - a direct export from a unit located in a SEZ to a foreign country cannot take place without the goods being removed from the SEZ to the Domestic Tariff Area, unless an airport or seaport is also located within the SEZ. Similarly, a direct sale to a local purchaser within the State cannot also take place without the goods being removed from the SEZ to the DTA. Likewise, an inter-state sales in terms of the Central Sales Tax Act cannot also take place without the goods being removed from the SEZ to the DTA of the State, within which, the SEZ is located. The expression removed from a SEZ to a DTA appearing in Section 15(a) has to be correlated to a taxable event. This is made clear by the rider contained in the last part of Section 15(a). This rider reads as where applicable as leviable on such goods when imported . The fallacy in the interpretation given by the respondents to Section 15(a) could be understood very easily by looking at it from another angle. The respondents agree that if an export takes place from a unit located in SEZ to a foreign country, Section 15(a) does not get attracted even if the goods are removed from the SEZ to a DTA. The respondents also agree that even in cases where an inter-state sales takes place from a unit located in a SEZ, Section 15(a) does not have any application, despite the goods being removed from the SEZ to a DTA. Whenever a direct sale takes place from a unit located in SEZ to a local purchaser within the State, the chargeability of tax arises not because of the removal from SEZ to DTA, but because of the taxable event namely sale. Therefore, if the expression removed has to be understood in one particular manner in respect of three contingencies namely (i) export (ii) direct sales and (iii) inter-state sales, it cannot be understood differently in the context of inter-state stock transfer alone. Therefore, Section 15(a) does not actually circumscribe Section 12(1)(a) of the Act. We have already indicated four possible scenarios. At least in two out of those four scenarios, namely in the case of export and in the case of inter-state sales, the State, in which, SEZ is located is deprived of its revenue. - Decided in favour of appellant

Summary

Issues Involved:
1. Whether the inter-state stock transfer effected by the unit located in SEZ would come within the purview of the expression "authorized operations"?
2. Whether the right conferred upon a Developer or Entrepreneur under Section 12(1) is circumscribed by the provisions of Section 15(a) of the TNSEZ Act, 2005?

Issue-Wise Detailed Analysis:

1. Whether the inter-state stock transfer effected by the unit located in SEZ would come within the purview of the expression "authorized operations"?

The appellant, a company located in a Special Economic Zone (SEZ), was issued a Letter of Approval for "Trading and Warehousing Services for Mobile Phone Hand Sets, Mobile Phone Parts and Accessories." The appellant purchased mobile phones from Nokia India Private Limited within the same SEZ and either sold them in the Domestic Tariff Area or transferred them to branches in other states. The appellant was issued notices for purchase tax on goods transferred to other states. The appellant contended that under Section 12(1)(a) of the TNSEZ Act, 2005, they were entitled to exemption from taxes for goods meant for authorized operations, which included inter-state stock transfer as per their Letter of Approval. The respondents argued that under Section 15(a) of the TNSEZ Act, 2005, goods removed from SEZ to Domestic Tariff Area are chargeable to sales tax.

The court analyzed the scheme of the Special Economic Zones Act (Central Enactment) and the TNSEZ Act, 2005, noting that the Letter of Approval issued by the Development Commissioner authorized the appellant's operations, including inter-state stock transfers. The court concluded that the inter-state stock transfer was indeed an authorized operation as per the Letter of Approval and the definitions provided in the Central and State Enactments. Thus, the first issue was resolved in favor of the appellant.

2. Whether the right conferred upon a Developer or Entrepreneur under Section 12(1) is circumscribed by the provisions of Section 15(a) of the TNSEZ Act, 2005?

Section 12 of the TNSEZ Act, 2005, provides exemptions to developers or entrepreneurs from various taxes, including sales and purchase taxes, for goods meant for authorized operations. Section 15(a) states that goods removed from SEZ to Domestic Tariff Area are chargeable to sales tax and additional sales tax. The court noted that Section 15(a) of the State Enactment uses the same language as Section 30 of the Central Enactment, which deals with customs duties. However, the taxable event for customs duties is the arrival of goods into the Domestic Tariff Area, whereas for sales tax, it is the sale or purchase of goods within the territory.

The court identified four scenarios for goods removed from SEZ: export to a foreign country, sale to a local purchaser within the state, sale to a purchaser in another state, and transfer to branches in other states. The court concluded that Section 15(a) should be interpreted in the context of taxable events. The removal of goods from SEZ to Domestic Tariff Area for inter-state stock transfer does not constitute a taxable event under the TNVAT Act, 2006. The court also emphasized the overriding effect of Section 28 of the TNSEZ Act, 2005, which states that the provisions of the Act shall prevail over any inconsistent state laws.

The court referenced the Gujarat High Court's decision in Torrent Energy Limited, which held that SEZ Act provisions have an overriding effect over state VAT laws. The court found that the learned Single Judge erred in distinguishing this case and concluded that Section 12(1) of the TNSEZ Act, 2005, read with Section 28, overrides Section 12 of the TNVAT Act, 2006. Thus, the second issue was also resolved in favor of the appellant.

Conclusion:
The appeals were allowed, the common order of the learned Judge was set aside, and the writ petitions were allowed. The appellant was entitled to exemption from purchase tax on inter-state stock transfers as per Section 12(1)(a) of the TNSEZ Act, 2005, and the provisions of Section 15(a) did not circumscribe this right.