Validity of Levy of purchase tax u/s 4 - agriculture products - whether in the nature of levy on farmers

In the case of M/s. K.G.F. Cottons (P) Ltd. Versus The Assistant Commissioner (CT) LTU, O/o The Dy. Commissioner (CT) , - 2015 (5) TMI 804 - ANDHRA PRADESH HIGH COURT has held that:-

The contention that a farmer/agriculturist is indirectly being subjected to tax does not merit acceptance.

While upholding the levy, Hon'ble High Court has summarized its decision as:

(i). Section 4(4) of the VAT Act is the charging section and its main object is to plug leakage of revenue, and prevent evasion of tax. In interpreting such a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to the one which would render it otiose or sterile.

(ii). The policy underlying Section 4(4) is to tax every transaction either at the point of sale or purchase. Where the seller is not taxed or cannot be taxed, the purchaser is taxed. By the same reasoning, when the seller is taxed, the purchases is not taxed. If the goods are not available in the State for subsequent taxation, by reason of the circumstances mentioned in clauses (i) to (iii) of Section 4(4), then the purchaser is made liable to tax under Section 4(4).

(iii). The goods purchased are referred to in Section 4(4) as taxable goods, and such purchases are in circumstances in which no tax is payable by the seller. The expression 'taxable goods', as used in Section 4(4), can be defined as goods, the sale of which is, liable to tax under the Act. The word "taxable qualifies the term 'goods' and excludes, by necessary implication, goods the sale of which is exempt from tax under the Act. The goods so exempt - not being 'taxable goods' are not brought to charge under Section 4(4) of the Act.

(iv). It is only because the goods listed in the first schedule to the Act are exempt from tax, the branch transfer or stock transfer of goods by a VAT dealer to his consignee/agent is not taxable under the Act, and such transactions attract the ingredients of clauses (i) to (iii) of Section 4(4), is the input of such goods subjected to tax under Section 4(4) of the VAT Act.

(v). A farmer or an agriculturist would be a person as defined under Section 2(22) of the AP General Clauses Act and consequently, as the context does not otherwise provide, under Section 4(4) of the VAT Act also.

(vi). The tax levied under Section 4(4) is not on the sale of goods by a farmer/agriculturist, but on the VAT dealer who purchases goods (agricultural produce) from the farmer.

(vii). It is not every purchase of taxable goods but only such goods, which fall within the ambit of clauses (i) to (iii) of Section 4(4) and its proviso, which attracts levy of tax at the stage of its purchase. The farmer/agriculturist is not even, indirectly, subjected to tax under section 4(4) of the Act.

(viii). Where a farmer grows raw cotton, paddy, raw dhal and soyabean seed in his land, and sells these agricultural produce to others, he is not liable to pay tax on the sale of such goods, as he is not a dealer under Section 2(10) of the Act. Purchase of such agricultural produce by a VAT dealer is in circumstances in which no tax is payable by the seller. In such circumstances tax, at 4%/5% of the purchase value of such goods, is liable to be paid by the VAT dealer who purchases the aforesaid goods i.e., agricultural produce.

(ix). Where goods, liable to tax under the VAT Act, are purchased by a VAT dealer from other dealers who are not registered under the Act, and the goods have not suffered value added tax, a liability is imposed on the purchasing VAT dealer to the extent the goods purchased by him are used/disposed of as specified in clauses (i) to (iii) of Section 4(4) of the Act.

(x). Tax, under Section 4(4), is not levied on goods which are exempt from tax. It is only because the goods listed in the first schedule to the VAT Act are exempt from payment of VAT under the Act is purchase tax levied, under Section 4(4)(i) of the VAT Act, on goods which are used as inputs for those goods which are exempt from tax under the Act.

(xi). Section 4(4)(i) & (ii) require that the manufactured/produced goods should have been transferred to some person otherwise than by way of sale. If the manufactured goods are not sold within the State, but are yet disposed of within the State, then no tax is payable on such disposition. Again where such manufactured goods are taken out of the State, to the manufacturers own depots or to the depots of his agents, then no such tax is payable on such removal.

(xii). Each transaction of purchase of goods, which is used or disposed of in the manner contemplated under clauses (i) to (iii) of Section 4(4), is distinct and is neither capable of being construed as overlapping or as redundant.

(xiii). The use of the word input, in clauses (i) and (ii) of Section 4(4), brings within its ambit every item which is a raw material in the widest sense, made wider by using the expression input. The purpose is to broaden the meaning of raw material by including in it even those items which could be placed in the goods to make it marketable as such.

(xiv). The first proviso to Section 4(4) is not independent of the main Section, and is attracted where a common input is used to produce one or more outputs. By the use of the word common, the legislative intent is to tax the proportionate value of the common input to the extent one or more of the outputs attract the ingredients of clauses (i) to (iii) of Section 4(4).

(xv). The first proviso to Section 4(4) requires the input to be common to one or more outputs. Paddy, as an input, is common both to rice and husk; soyabean seed, as an input, is common both to soyabean oil and soyabean deoiled cake; and cotton seed, as an input, is common both to cotton seed oil and cotton seed deoiled cake.

(xvi). The first proviso to Section 4(4) is attracted when a common input is used to produce more than one goods, and when the output, or one of the outputs, cannot be subjected to tax as they attract the ingredients of clauses (i) to (iii) of Section 4(4). In such cases tax is levied on the value of the input proportionate to the value of such output/outputs.

(xvii). The first proviso to Section 4(4) prescribes the manner of computation of tax on goods which are charged to tax under Section 4(4), and cannot be so construed as to render Section 4(4) itself redundant.

(xviii). The goods used as input/inputs are distinct and different from the goods which constitute the output/outputs. If cotton seed hull or cotton seed oil or cotton seed de-oiled cake attract the ingredients of clauses (i) to (iii) of Section 4(4) of the Act, and if cotton seed is purchased by a VAT dealer from a person who is not a dealer, then the proportionate purchase value of cotton seed can be subjected to tax under Section 4(4).

(xix). The tax is imposed on the raw material purchased by the dealer (ie cotton seed) for, if purchase tax is levied on the value of the end product (ie oil cake), it would then be a tax imposed on the manufacture of goods which would be beyond the competence of the State Legislature.

(xx). That would, however, not justify raw-cotton, which is a commodity distinct from cotton seed, being subjected to tax under the proviso to Section 4(4), as raw-cotton is not the common input for cotton seed hull, cotton seed oil and cotton seed de-oiled cake.

(xxi). The use of the words used or disposed of in the manner as prescribed under this section, in the proviso to Section 4(4), make it clear that the common input, of the outputs which are used or disposed of in the manner prescribed in clauses (i) to (iii) of Section 4(4), can alone be subjected to tax.

(xxii). The proviso to Section 4(4) cannot be so extended as to bring within its ambit goods whose derivatives are common inputs for other goods (outputs) which attract the ingredients of clauses (i) to (iii) of Section 4(4) of the Act.

(xxiii). Where one of the outputs is dealt with in the manner specified in clauses (i) to (iii) of Section 4(4), and the other output is not, it is only the output which is dealt with in the manner specified in clauses (i) to (iii) of Section 4(4) which falls within the ambit of Section 4(4) of the Act.

(xxiv). The proviso to Section 4(4) enables tax to be levied not on the goods which constitute the output, but on the proportionate value of the purchased goods which are used as inputs for producing other goods (outputs) where one of the goods so produced attracts the ingredients of clauses (i) to (iii) of Section 4(4) of the Act.

(xxv). It is neither possible nor is it required, for the application of the proviso to Section 4(4), that a specific formula be uniformly prescribed for arriving at the proportionate value of goods under Section 4(4) of the Act. As the first proviso would apply to different goods, the proportionate value of which may vary from one to another, no uniform formula can or need be prescribed.

(xxvi). The mere fact that no uniform formula is prescribed does not disable the assessing authority from giving effect to the first proviso to Section 4(4) of the Act, and in subjecting the proportionate value of the purchase price of taxable goods to tax.

(xxvii). The proviso, which enables the liability under Section 4(4) to be quantified and, when quantified, to be enforced against the subject, is a machinery provision as it relates to the mode and manner in which the taxable turnover, under Section 4(4) of the Act, should be determined where a common input is used to produce goods. Courts construe machinery provisions in such a manner that a charge to tax is not defeated.

(xxviii). When a provision sets out the method or formula for determining the taxable turnover, it can only be considered to be procedural and not substantive. Procedural law is applicable to pending cases as no suitor can be said to have a vested right in procedure.

(xxix). The CST Act firstly specifies the declared goods and, secondly, imposes conditions and restrictions subject to which the State government can impose tax on the internal trade in these goods.

(xxx). Section 14 of the CST Act declares certain goods to be of special importance in inter-state trade or commerce. Such goods are commonly known as declared goods.

(xxxi). The goods in this batch of Writ Petitions on which purchase tax under Section 4(4) of the Act has been levied, i.e., paddy, dhal, raw cotton and soyabean seed, are all declared goods under Section 14 of the CST Act.

(xxxii). Section 15 of the CST Act places restrictions and imposes conditions which are essential to the validity of an impost by the State on such goods. If the conditions prescribed therein are not satisfied, the impost will be invalid.

(xxxiii). The intention of Article 286(3) of the Constitution is not to destroy all charging sections in the sales tax acts of the States, which are discrepant with Section 15 of the CST Act, but to modify them in accordance with Section 15. The law of the State is declared to be subject to the restrictions and conditions contained in the law made by Parliament, and the provisions of the State Act would pro-tanto stand modified.

(xxxiv). Where the turnover, of declared goods under Section 14 of the CST Act, are subjected to tax under the sales tax law of a State, Section 15(a) of the CST Act prescribes the maximum rate at which such tax may be imposed so as to ensure that inter-state trade or commerce in such goods is not hampered by heavy taxation within the State occasioned by an excessive rate of tax.

(xxxv). As a result of Article 286 (3) of the Constitution, and Section 15(a) of the CST Act, the rate of tax under Section 4(4) of the VAT Act, as in the case of sale or purchase of declared goods, is limited to the rate of four/five per cent.

(xxxvi). The whole idea, underlying Section 15(a) of the CST Act, is that declared goods should not, in the aggregate, suffer tax at more than four/five per cent both in intra-state and inter-state trade.

(xxxvii). Cotton, whether ginned or unginned, is treated as a single commodity or a single species of declared goods for the purpose of Section 15(a) of the CST Act. To put a commodity in such a state, that it can be more readily used for manufacture, is almost the same thing as making a commodity marketable; the commodity remains the same and does not alter its character in any respect. Selling unginned cotton and ginned cotton are two transactions dealing with the same commodity.

(xxxviii). After the amendment of Section 15(a), by Act 20 of 2002 with effect from 13.05.2002, tax under the State sales tax law can be imposed at more than one stage. Consequently, tax can be levied both on the sale or purchase of cotton i.e., tax can be imposed both on the purchase of raw cotton (kapas) and again on the sale of ginned cotton i.e., cotton lint.

(xxxix). The restriction under Section 15(a) of the CST Act is now limited only to the rate of tax which before 08.04.2011 was 4%, and is 5% thereafter. In view of Section 15(a) of the CST Act the rate of tax, both on the purchase and sale of cotton, cannot together exceed 4%/5%.

(xl). If VAT is levied on cotton lint at 4%/5%, then purchase tax under Section 4(4) cannot be imposed on that quantity of raw cotton which, after being ginned, is sold as cotton lint, for it would then result in tax, exceeding 4%/5%, being levied on the sale and purchase of the very same goods.

(xli). Section 14(vi-a) of the CST Act relates to pulses (dhal). Section 15(d) of the CST Act stipulates that each of the pulses referred to in Section 14(vi-a), whether whole or separated and with or without husk, shall be treated as a single commodity for the purpose of levy of tax under the VAT Act. Consequently the VAT Act has, in its IV Schedule, listed under a common entry i.e., Entry 82 all kinds of pulses and dhals.

(xlii). In view of both Section 15(d) of the CST Act, and Entry 82 of the IV Schedule to the Act, raw dhal (whole dhal) must be held to be the same commodity as finished dhal even after it is dehusked. Section 15(a) of the CST Act is attracted and, consequently, purchase tax on the purchase of raw dhal and tax of the sale of the resultant quantity of finished dhal together cannot exceed 4%/5%.

(xliii). The restriction under Section 15(a) of the CST Act would apply only to goods falling under one item or entry under Section 14 of the CST Act, and the IV Schedule to the Act. Commodities, other than those specified, cannot be introduced into the relevant provisions/schedules on the ground that they are derived from the primary commodities.

(xliv). Cotton kapas, in its unginned or unmanufactured state, contain cotton-seed. But it is by a manufacturing process that cotton and seed are separated, and the seed so separated is neither cotton nor part of cotton. They are two distinct commercial goods though, before the manufacturing process, the seed might have been a part of cotton itself.

(xlv). The restriction under Section 15(a), of the maximum rate of 4%/5% tax being imposed, would not disable tax at 4%/5% being levied on purchase of raw cotton and tax again being levied at 4%/5% on the sale of cotton seed as both Parliament and the State Legislature have treated them as two different and distinct goods.

(xlvi). When paddy is dehusked, and rice is produced, there is a change in the identity of the goods, and paddy does not continue to be paddy thereafter. Rice and paddy, in ordinary parlance, are two distinct and different commodities. However, in view of Section 15(c) of the CST Act, the tax levied on the sale of rice must be reduced by the amount of purchase tax levied, under Section 4(4) of the Act, on paddy.

(xlvii). Taxable goods, sold in the course of inter-state trade or commerce under Section 3 of the CST Act, are zero rated sales under Section 8 of the VAT Act and, consequently, no tax is levied under the VAT Act on taxable goods sold in the course of inter-state trade or commerce.

(xlviii). In addition, such inter-state sales are also eligible for input tax credit under the VAT Act. The tax paid by a VAT dealer, on the purchase of goods from another VAT dealer, can be claimed as input-tax credit when the said taxable goods are sold by him in the course of inter- state trade or commerce.

(xlix). While Section 15(b) of the CST Act is applicable only where declared goods are sold in the course of inter-state trade or commerce, Section 4(4) of the VAT Act is attracted on the purchase of taxable goods used or disposed of otherwise than by way of sale in the course of inter- State trade or commerce.

(l). Tax, under Section 4(4)(i) and (ii) of the Act and its proviso, can be imposed only where the goods, which constitute the input, is different from the goods which constitute the output. While raw cotton can be treated as the input for cotton seed and cotton yarn, it cannot be treated as the input for cotton lint as both raw cotton and cotton lint are treated as the same commodity both under the CST Act and the VAT Act.

(li). Likewise if finished dhal is sold in the course of inter-State trade or commerce, then Section 15(b) of the CST Act would require purchase tax, levied under Section 4(4) of the Act on raw dhal, to be reimbursed to the person selling finished dhal in the course of inter-state trade and commerce.

(lii). As a tax period is one month, and the return is required to be filed on or before the 20th of the succeeding month, the four year period of limitation, stipulated under Section 21(3), would commence from the last date of filing the return for a particular month, and would end four years thereafter.

(liii). As Rule 23(6)(a) of the Rules enables a VAT dealer to submit an application in Form VAT 213, within a period of six months from the end of the relevant tax period, the limitation for making assessment under Section 21(3), in such cases, would be four years from the date of filing the said return.

(liv). The period of limitation of four years must be computed for each tax period i.e., for each month and, unlike the APGST Act, not for an assessment year.

(lv). The prescribed authority gets jurisdiction to assess the VAT dealer to tax, within the extended period of limitation of six years under Section 21(5) of the VAT Act, only if the said dealer has committed wilful evasion of tax.

(lvi). As the assessment order is required, under Rule 25(5) of the Rules, to be preceded by a notice in Form VAT 305-A, it would not suffice for the assessing authority to state, for the first time in the assessment order, that the assessee has committed wilful evasion of tax. The show cause notice should contain factual details to show the basis on which the assessing authority has arrived at the tentative conclusion that the VAT dealer has committed wilful evasion of tax. (lvii). It is mandatory that the show-cause notice must contain allegations against the assessee falling within the four corners of Section 21(5). Unless the assessee is put to notice, he would have no opportunity to meet the case of the department. In the absence of any such allegations in the show-cause notice, the Revenue cannot sustain the notice or the order passed under Section 21(5) of the Act.

(lviii). If the allegations in the show-cause notice, accepted as true, show that the dealer had committed wilful evasion of tax, and the findings recorded in the assessment order establish that the assessee had wilfully evaded tax, it would suffice to extend the period of limitation in terms of Section 21(5) of the Act notwithstanding that the show-cause notice does not explicitly refer to Section 21(5) and does not specifically use the words wilful evasion of tax.

(lix). As the fact of commission of wilful evasion is a jurisdictional fact, the dealer is entitled to satisfy the prescribed authority, on being given the opportunity to show cause, that such jurisdictional facts are non- existent, and jurisdiction under Section 21(5) of the Act should not be exercised. It is necessary, therefore, for the prescribed authority to detail these jurisdictional facts in the show-cause notice proposing to assess the dealer to tax under Section 21(5) of the Act.

(lx). Levy of purchase tax under Section 4(4) of the Vat Act, and the restriction of input-tax credit under Section 13 thereof and Rule 20 of the Rules, are two different and independent acts.

(lxi). The question, whether computation of input-tax credit in terms of Rule 20 is in violation of Sections 14 and 15 of the CST Act, must be answered on the facts and circumstances of each case. It is for the assessee to satisfy the assessing authority that computation of the eligible input-tax credit, in terms of Rule 20, is in violation of Sections 14 and 15 of the CST Act.

 

See:- M/s. K.G.F. Cottons (P) Ltd. Versus The Assistant Commissioner (CT) LTU, O/o The Dy. Commissioner (CT) , - 2015 (5) TMI 804 - ANDHRA PRADESH HIGH COURT