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TMI Blog1970 (11) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... c motors, drills, switches, fusements, iron plates, angles, springs, etc., used during the process of manufacturing of goods on which the assessee has rendered itself liable to pay a tax under section 8 of the Act. The taxing authorities rejected this claim of set-off put forward by the assessee holding that these goods did not amount to "raw materials or processing materials" used in the manufacturing of goods, and since proviso (a) attached to sub-rule (1A) of rule 11 of the Rules contemplates a set-off only if the goods are used as "raw materials or processing materials, etc.", the assessee is not entitled to the set-off in question. 3.. The assessee's other contention was that the above-referred proviso (a) to rule 11(1A) is ultra vires the provisions of section 18B(2) of the Act under which the said rule is framed. This contention of the assessee was based on the fact that sub-section (2) of section 18B of the Act is amended by Bombay Act 16 of 1957 as from 1st July, 1957, and the effect of that amendment is to take away from the State Government a power to restrict the scope of the set-off contemplated by the main provisions of sub-section (2) of section 18B of the Act. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the validity and applicability of proviso (a) attached to sub-rule (1A) of rule 11 of the Rules. This rule 11 provides for grant of drawback, set-off, or refund of sales tax or general tax or purchase tax in certain cases. Sub-rule (1) is in the following terms: "(1) In assessing the amount of sales tax payable by a registered dealer who manufactures or processes any goods for sale in respect of any period, the Collector shall grant him a drawback, set-off or refund, as the case may be, of the excess, if any, of the amount mentioned in clause (I) below over the amount mentioned in clause (II) below: (1) The aggregate of the sums- (i) recovered from the dealer by other registered dealers by way of- (a) general sales tax on the purchase of goods specified in entries 1 to 18 (both inclusive) of Schedule B to the Act, and (b) sales tax on the purchase of goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act; (ii) recovered from the dealer by other registered dealers or licensed dealers during the period from the 1st November, 1952, to the 31st March, 1954, by way of general tax or special tax or both on his purchases of these goods which have remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule B to the Act, one quarter per cent. of the sale price of the goods which have been so manufactured or processed by him where the sale of the goods takes place at any place in India outside the State of Bombay, the goods having been transported to such place on or after the 1st day of July, 1957: Provided that: (a) such goods have been used as raw materials, processing materials, fuel, lubricants, containers or packing materials in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale; (b) and the goods so manufactured or processed are not the goods on the sale of which no sales tax is payable under rule 5 or clause (i) of rule 7." It is further found by reference to rule 18, which was inserted ill the Rules by the above-referred notification and which also came into effect from 1st July, 1957, that sub-rule (1) of rule 11 has limited application. This rule 18 is in the following terms: "18. Sub-rules (1) and (2B) of rule 11 not to apply to certain sales.The provisions of sub-rules (1) and (2B) of rule 11 shall not be applicable to sale of goods made on and after the 1st day of July, 1957." It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of any specified class of sales or purchases; (b) a drawback, set-off or refund of the whole or part of the tax leviable on any class of sales or purchases under section 8, 9, 10 or 10A shall be granted to the purchasing dealer in such circumstances and subject to such conditions as may be specified; (c) the sale price or purchase price shall in the case of any class of sales or purchases be reduced for the purpose of levy of tax under section 8, 9, 10 or 10A to such extent and in such manner as may be specified." The section also contains sub-section (2), which is the subject-matter of contention between the parties in this reference. But sub-section (2), which is at present found in the section is in terms which are different from the terms of original sub-section (2), which has been replaced. For the sake of convenience, we shall first quote the original sub-section (2) of this section which was in the following terms: "(2) Any rules made under subsection (1) shall provide that in the case of a registered dealer who manufactures or processes any goods for sale there shall be set-off against the sales tax payable by him under section 8, the excess, if any, of the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawback, set-off and refund. These are the specific powers granted to the State Government on the subject of the grant of drawback, set-off and refund. Rule 11, to which reference is already made above, is found to have been made by the State Government not only under the general powers vested in it under section 45 of the Act, but also under the above-referred provisions of section 18B. It should also be noted here that clause (b) of sub-section (1) of section 18B clothes the State Government with a general power to provide for drawback, set-off or refund either wholly or in part under certain circumstances and subject to certain conditions, as may be specified in the Rules. But if a reference is made to sub-section (2) of section 18B, it will be found that it makes specific provisions about the set-off claimed by the manufacturers or purchasers under certain circumstances. The point to be noted at this stage is that both the sub-sections of section 18B clothes the State Government with powers to make rules suitable and consistent with the provisions of this section. 9.. Now, the contention of the assessee is that proviso (a), which is attached to sub-rule (1A) of rule 11, to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in question was entitled to only that amount of set-off by which the sum calculated in accordance with clause (i) exceeded the sum calculated in accordance with clause (ii). Now, while calculating the sum in accordance with clause (i) of this old sub-section (2), the following proviso was to be taken into account: "Provided that such goods have been used in the prescribed manner in the manufacture or processing of any goods specified in entries 19 to 22 (both inclusive) and 25 to 80 (both inclusive) of Schedule B for sale." Thus, it is apparent that the above-quoted proviso, which was attached to clause (i) of sub-section (2) of section 18B, as it stood before 1st July, 1957, contemplated the use in the prescribed manner of the goods in question in the manufacture or processing of the goods specified in the proviso. In other words, the sub-section itself empowered the State Government to frame rules prescribing the manner in which the goods in question should have been used during the manufacturing process. It was, therefore, by virtue of this power given by the proviso that rule 11 prescribed for the manner in which the goods should be found to have been used in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he question is whether sub-rule (1A) of rule 11, which prescribes the manner in which the goods should be found to have been used in the process of manufacturing, has any justification in view of the deletion of the above-referred proviso from sub-section (2). 12.. While considering the question it may not be forgotten that the rule-making powers are derived by the State Government from the statute and, therefore, it would not be open to the State Government to frame any rule, which is in excess of the power, which is specifically vested in the State by the Legislature. Therefore, the point is what are the powers vested in the State Government by the statute itself for the purpose of framing rules regarding grant of drawback, set-off and refund? 13.. It is undoubtedly true that section 45 of the Act and clause (b) of sub-section (1) of section 18B clothe the State Government with general powers of framing rules for the purpose of giving drawback, set-off and refund. It is also true that while exercising this general power it is open to the State Government to prescribe the conditions and the circumstances under which the drawback, refund or set-off would be given. But these gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, even though under the general provisions of law, as contained in section 45 and sub-section (1) of section 18B, the State Government is empowered to impose conditions as to the grant of drawback, set-off and refund, the rule of harmonious construction requires that in order to give effect to the specific mandate contained in sub-section (2) of section 18B, it must be held that whenever the State Government prefers to make rules for granting drawback, set-off or refund, these rules must provide that in case of a registered dealer, who manufactures any goods for sale, the set-off of the aggregate sum as mentioned in clauses (i) and (ii) of sub-section (2) should be given against the sales tax payable by such a dealer under section 8 of the Act. In other words, it is not open to the State Government to frame any rules, which would encroach upon the right of the dealer or manufacturer to obtain a set-off as contemplated by sub-section (2) of section 18B. 14.. Shri Shah, who appeared on behalf of the department, specifically drew our attention to the above-quoted clause (da) of sub-section (2) of section 45, and contended that in spite of the amendment introduced by Bombay Act 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (2) contemplates neither a drawback nor a refund but only a "set-off" and, therefore, these provisions can be invoked only for the purpose of claiming a "set-off". He argued that the fact that the sub-section is confined only to the claims of "set-off" is suggestive of the underlying principle that the goods regarding which the claim is made should have been used for manufacturing the articles, the sale of which attracts the payment of sales tax under section 8 of the Act. In amplification of this argument it was contended that the purpose for providing the manner in which the goods concerned should be found to have been used in the manufacture, is to avoid the subjection of the goods concerned to sales tax at two points. In case of raw materials, which are used for the purpose of manufacturing a finished article, sales tax would have already been paid at the time of their purchase. It was pointed out that if these very goods are again used in manufacturing a particular article, and if this article is again subjected to sales tax, it would amount to taxing the same raw materials over again and, therefore, it was with a view to avoid tax at two points that the impugned proviso (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered. While considering the meaning of this expression, the Supreme Court has observed that this expression should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. It is further observed that the expression "in the manufacture of goods" takes within its ambit, all processes which are directly related to the actual production and, therefore, even drawing and photographic materials falling within the description of goods intended for use as "equipment" in the process of designing, which is directly related to the actual production of goods and without which commercial production would be inexpedient, must be regarded as goods intended for use "in the manufacture of goods". Referring to "electrical equipment", the Supreme Court has held that if, having regard to normal conditions prevalent in the industry, production of the finished goods would be difficult without the use of electrical equipment, the equipment would be regarded as intended for use in the manufacture of goods for sale. These observations, therefore, are clear enough to show that machinery or its spare parts, which are used for bringing out a finishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods, which plays some role in the process of manufacture and without which manufacture would not be possible, would be goods used in the manufacture of finished goods. This, in our opinion, is the true interpretation of the words used in the section." 17.. It is thus clear that even the machinery and its spare parts, which are used for manufacture of the goods for sale, are the goods which have been helpful in bringing about the finished articles regarding which sales tax becomes payable under section 8 of the Act. In this view of the matter, the contention raised by Shri Shah on this point, would not survive. 18.. From the above discussion, it follows that the impugned proviso, in so far as it is inconsistent with the provisions of sub-section (2) of section 18B, as it is found after the amendment, would be ultra vires the powers vested in the State Government by the said sub-section. It is, therefore, necessary to consider how far and to what extent this proviso goes beyond the powers vested in the State Government to make rules within the framework of sub-section (2) of section 18B. We have also noted above that the said sub-section makes a mandatory provision for the set-of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eof contemplates sales tax on the purchase of goods specified in entries 19 to 22 and 25 to 80 of Schedule B. In other words, in the aggregate amount of set-off, which is contemplated by sub-section (2), sales tax paid on the purchase of the goods specified in the above-referred entries of Schedule B is to be taken into account. These are the same goods which, according to the second condition of the impugned proviso, should be found to have been used in the manufacture for sale. The scheme of sub-section (2) is to give encouragement to the manufacturers or processors by way of a set-off against the sales tax payable by them on the goods "manufactured or processed" by them. In other words, the set-off is contemplated only on the materials which have been helpful in bringing about the manufactured or processed goods in the finished form. Under the circumstances, even though sub-section (2) does not specifically say in so many words that the set-off, which is contemplated by it, should be controlled by a condition that the goods in question should have been used for the manufacture of goods for sale, looking to the scheme of the sub-section, we have no doubt in our mind that the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods which are specified in entries 19 to 22 and 25 to 80 of Schedule B would have its justification only if these goods are found to have been used in the process of manufacture as contemplated by the impugned proviso (a) attached to sub-rule (1A) of rule 11. 21. Shri Kaji, who appeared on behalf of the assessee, contended that looking to the specific provisions contained in sub-section (2) of section 18B, no part of the impugned proviso (a) would be saved because the sub-section does not admit of any condition, which can be imposed upon the grant of set-off contemplated by that sub-section. In support of this contention, he relied upon some of the observations made by this court in the decision given in Saraswati Oil Mills v. State of Gujarat'. If a reference is made to this decision, it will be found that even there, the vires of the impugned proviso (a) attached to sub-rule (1A) of rule 11 were challenged on the same grounds on which they are challenged in this matter. But the court did not decide this question of vires because it found in that case that the concerned assessee was not entitled to any set-off in view of the fact that he was not liable to pay sales tax on the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke of clarification, we would like to mention that it is only proviso (a) which is in dispute and, therefore, though the question is widely framed, we have taken it to be referring only to proviso (a). (2) On the second question, our answer is that by reason of the deletion of the proviso to section 18B(2) of the Sales Tax Act, 1953, right to set-off was extended not to all classes of goods but only to those goods which are used in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale. (3) On the third question, our answer is that the items which are referred to in this question are neither "processing materials" nor "raw materials" within the meaning of those expressions found in proviso (a) to rule 11(1A). (4) On the fourth question, our answer is in the affirmative, if the items mentioned in this question are found used in the manufacture or processing of any goods specified in entries 19 to 80 (both inclusive) of Schedule B to the Act for sale. We, therefore, dispose of this reference accordingly. The opponent shall bear the costs of the applicant. Reference answered accordingly. - - TaxTMI - T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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