2018 (2) TMI 1482 - HC - VAT and Sales Tax

Set off of purchase tax - Whether the applicant is entitled to set off under Rule 41A of the Bombay Sales Tax Rules, 1959 in respect of the purchase tax paid under Section 13 of the Bombay Sales Tax Act while purchasing unginned cotton from the unregistered dealer? - Held that - It is not in dispute that unginned cotton was purchased by the applicant from unregistered dealers by paying purchase tax under Section 13 of the Bombay Sales Tax Act. The cotton so purchased was processed to take out ginned cotton, yarn and ultimate product of cloth, which is a taxfree product. In the process, two products came out namely, (1) cotton waste and (2) cotton yarn waste, which are the commodities at serial no. 22 in Schedule C and made taxable. The applicant was entitled to claim set off under Rule 41A in respect of the tax paid by the applicant under Section 13 while purchasing unginned cotton from the unregistered dealer - application allowed.

Summary

Issues:
Entitlement to set off under Rule 41A of the Bombay Sales Tax Rules, 1959 for purchase tax paid under Section 13 of the Bombay Sales Tax Act when purchasing unginned cotton from unregistered dealers.

Analysis:
The judgment by the Bombay High Court addressed the issue of whether the applicant was entitled to set off under Rule 41A of the Bombay Sales Tax Rules, 1959 for the purchase tax paid under Section 13 of the Bombay Sales Tax Act when purchasing unginned cotton from unregistered dealers. The Court noted that the controversy had already been settled by the Apex Court in the case of State of Maharashtra Vs. Pulgaon Cotton Mills Ltd. and a previous decision of the Bombay High Court in the case of Commissioner of Sales Tax Vs. Burmah Shell Refineries Limited. The Court highlighted that the unginned cotton purchased by the applicant from unregistered dealers was processed to produce ginned cotton, yarn, and ultimately cloth, which was a tax-free product. However, during the process, two taxable products emerged, namely cotton waste and cotton yarn waste.

The Court referred to the Apex Court decision, which established that cotton mills could be considered to manufacture "cotton waste" and were entitled to a set-off of the entire tax paid on the purchase of raw cotton. The Court emphasized that Rule 41 did not require any apportionment of the purchase tax paid or the amount collected from a dealer when a manufacturing process resulted in the production of two commodities simultaneously. It was clarified that the rule-making authority stipulated that the goods purchased must be used by the manufacturing dealer in the production of taxable goods for sale. The Court held that if the manufacturing process resulted in the production of at least one taxable article intended for sale, the condition of rule 41 was satisfied, even if other articles produced in the process were not taxable.

Consequently, the Bombay High Court concluded that the applicant was indeed entitled to claim a set off under Rule 41A for the tax paid under Section 13 while purchasing unginned cotton from unregistered dealers. The references were disposed of accordingly, and the authorities were granted the liberty to modify orders based on this decision.