2021 (6) TMI 338 - HC - VAT and Sales Tax

Levy of Entry Tax - cutting tools were used by it for roughing, drilling and boring of semi finished goods and for cutting and shaping of metals and other materials - benefit of exemption as contained in Explanation I to the Notification dated 30.03.2002 issued by the Government of Karnataka - Section 3(1) of Karnataka Tax On Entry Of Goods Act, 1979 - HELD THAT - If goods specified in the table are bought by the dealer into the local area for 'consumption' or 'use' as raw materials, component parts and inputs in the manufacture of an intermediate or finished product, such goods are exempted from levy of tax. A constitution bench of the Supreme Court examined the correctness of the ratio laid down by three judge bench in SUN EXPORT CORPORATION VERSUS COLLECTOR OF CUSTOMS, BOMBAY 1997 (7) TMI 117 - SUPREME COURT , in which it was held that an ambiguity in a tax exemption provision or Notification must be interpreted so as to favour the assessee claiming the benefit of such exemption - from the said case, it is evident that an exemption Notification should be strictly interpreted and the burden of proving its applicability is on the assessee to show how his comes within purview of exemption Notification. The revisional authority without assigning any reasons has concluded that cutting tools are not used as raw materials, component, parts and inputs in the manufacture of intermediate of finished product. The revisional authority is required to record the findings on the factual aspect viz., whether goods viz., drill bits, millers and inserts have been consumed as inputs in the process of manufacture of finished goods viz., textile machinery and auto parts. However, no finding has been recorded by the revisional authority. In the absence of the aforesaid finding on the factual aspect of the matter, we are unable to adjudicate the question of applicability of Notification in case of the appellant - the order passed by the revisional authority requires to be set aside. The matter is remitted to decide the matter afresh after affording an opportunity of hearing to the parties - Appeal allowed by way of remand.

Summary

Issues:
1. Interpretation of exemption under Explanation I to the Notification dated 30.03.2002.
2. Whether cutting tools used by the appellant are considered as component parts of inputs in the manufacture of finished products.
3. Validity of the order passed by the revisional authority.

Issue 1: Interpretation of exemption under Explanation I to the Notification dated 30.03.2002

The case involved a dispute regarding the interpretation of the exemption under Explanation I to the Notification dated 30.03.2002 issued by the Government of Karnataka under Section 3(1) of the Karnataka Tax On Entry Of Goods Act, 1979. The Notification exempted certain goods from levy of tax when brought into a local area for consumption or use as raw materials, component parts, and inputs in the manufacture of an intermediate or finished product. The High Court emphasized that the exemption notification should be strictly interpreted, and the burden of proving its applicability lies on the assessee. The appellant claimed exemption for cutting tools used in the manufacturing process of textile machinery and auto parts, asserting that the tools were consumed as inputs in the manufacturing activity.

Issue 2: Whether cutting tools used by the appellant are considered as component parts of inputs in the manufacture of finished products

The appellant, engaged in the manufacture of textile machinery and auto parts, purchased cutting tools such as twist drills, reamers, cutters, and tapes for the manufacturing process. The first Appellate Authority initially allowed the appellant's claim for exemption, considering the cutting tools as inputs consumed in the manufacturing activity. However, the revisional authority set aside this decision, stating that the cutting tools were not used as raw materials, component parts, or inputs in the manufacture of the final products. The High Court noted the discrepancy in the findings and lack of reasoning by the revisional authority. The Court highlighted the importance of establishing whether the cutting tools were indeed consumed as inputs in the manufacturing process before determining the applicability of the exemption.

Issue 3: Validity of the order passed by the revisional authority

The High Court scrutinized the order passed by the revisional authority, which overturned the decision of the first Appellate Authority without providing detailed reasons or factual findings. The Court emphasized the necessity of recording findings on whether the cutting tools were used as inputs in the manufacturing process before making a conclusive determination on the exemption claim. Due to the absence of such findings, the High Court set aside the order of the revisional authority and remitted the matter for a fresh decision in accordance with the law. The Court clarified that it did not express any opinion on the appellant's claim, leaving it to be decided by the competent authority after affording an opportunity for both parties to present their arguments.

In conclusion, the High Court set aside the order of the revisional authority and remitted the matter for a fresh decision, emphasizing the importance of establishing whether the cutting tools were consumed as inputs in the manufacturing process to determine the applicability of the exemption under Explanation I to the Notification dated 30.03.2002.