STATE OF PUNJAB & OTHERS ETC.ETCversusM/S. PERFECT SYNTHETICS ETC ETC.

                                                                      \   )

                          (2008] 4 S.C.R. 582


A           STATE OF PUNJAB & OTHERS ETC.ETC.
                                  v
             M/S. PERFECT SYNTHETICS ETC ETC.
                  (Civil Appeal No.1072 of 2008)

                          MARCH 7, 2008
B
       [S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]

          Punjab General Sa/es Tax Rules, 1949 - r. 29(xii) -
    Deduction form taxable turnover- Denial of- On the ground
c   that raw material purchased were not subjected to tax by virtue
    of exemption- Propriety of - Held: Assessee is entitled to the
    benefit of deduction from taxable turnover - Punjab General
    Sa/es Tax Act, 1948 - ss.5(1-A) and 5(2) - Notification No.
    SO 38/PA. 46148 S-5190 dated 25.07.1990.
D      Respondent-assessee is a company registered
  under Punjab General Sales Tax Act, 1948. It used to
  manufacture yarn which used to be sold in intra-State sale
  and tax on finished goods were paid. Some of the units
  from whom it purchased raw-material were exempted
E from payment of tax under Punjab General Sales Tax
  (Department and Exemption) Rules, 1991.
       Appellant-Revenue denied deduction to the
  assessee wr.29(xii) of Punjab General Sales Tax Act, 1949
  on taxable gross turnover on the ground that the
F purchase of raw-material which the assessee bought from                 .
  the exempted units, was not subjected to tax at first stage
  of sale. Assessee took recourse to litigation. Decision of
  the High Court was in favour of the assessee. Hence the
  present appeal.
G
       Dismissing the appeal, the Court
        HELD: 1.1 It cannot be said that the words
    "subjected to tax' in Rule 29(xii) of Punjab General Sales
    Tax Rules, 1949, would mean g.::ods which had suffered
H                                 582
       STATE OF PUN~AB & OTHERS ETC. ETC. v. MIS.             583
             PERFEC-.- SYNTHETICS ETC. ETC.

     the tax under Section 5(1-A) of the Punjab General Sales A
     Tax Act, 1948. The 1948 Act refers to single point levy of
     tax on the first sale. The Notification No. SO 38/P.A. 46/48
     S-5/90 dated 25. 7 .1990 specifically incorporates the
     provisions of Rule 9 of Punjab General Sales Tax
     (Deferment and Exemption) Rules, 1991 whereby B
     exemption is only qua payability and not in respect of
     assessment. Under the scheme of the 1948 Act, the
     calculated tax gets appropriated towards the scheme
     entitlement. Taking this linkage into account, the words
     "subjected to tax" cannot be equated to the words "having
     suffered tax." [Paras 13 and 14] [588-D, F, G, H; 589-B, C]
                                                                     c
          1.2 Since Rule 29(xii) refers to the purchase value of
     the goods which stood subjected to tax it becomes clear
     that under the scheme of 1948 Act even the eligible unit
     has to be assessed to tax. In the present case, the Court D
     is concerned with Section 5(1-A) of 1948 Act which, refers
     to the stage at which the tax has to be levied, namely, first
     stage of sale. Rule 29(xii) does not say the goods should
     have suffered tax or the tax should have been paid or that
     the goods had been subjected to tax under Section 4 or
                                                                   E
     under the said Act. [Paras 14 and 16] [589-F; 592-F, G;
     593-A]
          Mis. Gannon Dunkerley 1r d Co. and Ors. vs. State Jf
     Rajasthan and Ors. 1993 (1) SCC 364; State of M.P and 01s
     vs Indore Iron and Steel Mtfl.., Pvt. ~2d. 1998 (6) SCC 416 -
..   distinguished.
                                                                     F

"        CIVIL APPELLATE JURISDICTION: Civil Appeal No.
     1072 of 2008.
          From the final Judgment and Order dated 4.07.2006 of G
     the High Court of Punjab and Haryana at Chandigarh in Civil
     Writ Nos. 2272 of 2006, 10527 of 2005, 10528 of 2005, 10786
     of 2005. 16432 of 2005. 301 of 2006. 2477 of 2006, 3452 of
~-
     2006, 375~ of 2006. 3771 of 2006 and 4456 of 2006.
          Marabir S~ngh, Ajay Pai. Nikhil Jain, S.P. Singh Chauhan   H
    584       SUPREME COURT REPORTS                   [2008] 4 S C.R.


A and Sanjay Jain for the Appellants.                                    ...
        S. Ganesh, Dalip Singh Brar, Ashok Kumar Singh,
    Surender Dutt Sharma, Naresh Kr. Gaur, S. B. Meitei, Seeraj
    Bagga. S. Bagga and M.P. Devanath for the Respondents.
B         The Judgment of the Court was delivered by
          KAPADIA, J. This civil appeal filed by the State of Punjab
    is directed against judgment and order dated 4.7.06 passed
    by Punjab and Haryana High Court in CWP No.2271 of 2006
    by which it has been held that the assessee was entitled to
c   deduction under Rule 29(xii) of the Punjab General Sales Tax
    Rules, 1949 (for short, "1949 Rules").
        2. Respondent-assessee M/s. Perfect Synthetics is a
  partnership firm engaged in the business of purchase, sale and
D manufacturing of yarn. In this civil appeal we are concerned with
  assessment year 2001-02. Assessee is registered under Punjab
  General Sales Tax Act, 1948 (for short, "1948 Act"). Assessee
  claims that after purchasing raw-material from exempted units
  within the State it has used the same in the manufacture of yarn,
  majority of yarn being sold in the course of intra-state sales and
E
  tax on finished goods being paid. Some of the units from whom
  the assessee purchased raw-material stood exempted from
  payment of tax under Punjab General Sales Tax (Deferment and
  Exemption) Rules, 1991 (for short, "1991 Rules").
F       3. It is the grievance of the assessee that in calculating its
  taxable turnover, in terms of Rule 29(xii) of the 1949 Rules,
                                                                         ~

                                                                          .,
  deduction is not being allowed by the Department on the ground
  that the goods purchased by the assessee are liable to tax at
  the first stage of sale and since no tax on purchase of raw-
G material from exempted units has been paid the assessee is
  not entitled to deduction under Rule 29(xii) of the 1949 ~ules.
       4. Therefore, the short controversy which arises for              ..,_
  determination in this appeal is : "Whether the assessee is entitled
  to deduction, from gross turnover, the purchase value of the raw-
H material which the assessee bought from exempted units?"
  STATE OF PUN~AB & OTHERS ETC. E"'."C. v M/S                   585
   PERFEC: SYNTHETICS ETC ETC. [KAPADIA, J.]

      5. According to apoellant. the assessee is not entitled to       A
such deduction as the said pt;rcnase value is not subjected to
tax at the f'rst stage of sale as the raw-material is purchased
from the exempted units. According to appellant, only the
purchase value whch stood subjected to tax at first stage of
sale urder Section 5(1-A) of the 1948 Act is entitled to deduction     B
under R... le 29(x11) of the 1949 R:...les.

      Scheme of the Act

      6 Section 4 of the 1948 Act is the charging section which
provides for ievy of tax. Sec!1on 5( 1-A) of the 1948 Act enables      c
the State Government to specify certain goods, tax on which is
leviable at the first stage of sale thereof. Under Section 5(1-A)
the State Government iS empowered to issue notification
specifymg the goods on which the tax 1..nder sub-section (1) had
to be levied at the first stage of sale ther(i!of. Such notification   D
was issued in the present case on 25.7.90 which is reproduced
herein below:

                "Notification dated 25.7.1990
                       Punjab Government
                                                                       E
           Notification No. SO 38/P.A. 46/48 S-5/90
                       dated 25.07 1990

      Published in Punjab Goverrment Gazette ordinary.
                       Dated 25.07 1990.
                                                                     F
     ln exercise of the powers conferred by sub-Section (1-A)
     of Section 5 of the Punjab General Sales Tax Act, 1948
     (Punjab Act No 46 of 1948) the President of India is
     pleased to direct that with effect from the date of publication
     of this Notification in the Official Gazette. the tax under G
     sub-section (1) of the said Section shall be levied at the
     first stage of the sale of goods other than declared goods
     rnanufactc;red and sold by a dealer who has been allowed
     the benef!t of deferment of or exemption from the liability
     to pay tax under Punjab Ger.era! Sales Tax (Deferment H
    586          SUPREME COURT REPORTS                    [2008] 4 S.C.R


A         and Exemption) Rules, 1991 and which stage in his case
          shall be the stage of sale when such dealer sells the goods
          from the premises of his manufacturing industrial unit for
          the first time in the State of Punjab."

          7. Section 5(2) of the 1948 Act provides for definition of
8 the word "taxable turnover" to mean part of the dealer's gross
    turnover which remains after deducting therefrom the dealer's
    turnover during the relevant period on such other sales or
    purchases as may be prescribed.

c         8. We quote hereinbelow Section 5(2)(a)(vii) which reads
    as follow:

          "5. Rate of tax:-
          (2) In this Act the expression "taxable turnover" means that
          part of a dealer's gross turnover during any period, which
D
          remain after detecting therefrom -
          (a) his turnover during that period on -

          (vii) such other sales or purchases as may be prescribed;"
E         9. We quote hereinbelow Rule 29(xii) of the 1949 Rules

          which reads as under:
          "RULE-29: IN CALCULATING HIS TAXABLE
          TURNOVER A REGISTERED DEALER MAY DEDUCT
F         FROM HIS GROSS TURNOVER
                                                                            .
                                                                            y
        (xii) The purchase value of goods which have already been
  subjected to tax under section 5(1-A) or section 5(3), as the
  case may be used or consumed by him in manufacture in Punjab
  of goods other than goods declared tax free under section 6 for
G sale:
                 (i)   in Punjab;
                 (ii) in the course of inter-State trade or commerce;       -,._
                 (iii) In the course of export out of territory of India;
H
\    ,
           STATE:. OF PUN~AB & OTHERS ETC ETC. v. M/S.                587
            PERFE=CT SYN,-HET:cs ETC. ETC. [KAPADIA, J]

              Prov~ded that the dealer produces copies of cash memos        A
              or bills prescribed under ruie-55A at the time of
              assessment or when called upon to do so, by notice, by
              the competent authority under the Act."
               10. Section 30-A of the 1948 Act enables the State
         Government to exempt any ciass of industries from payment of B
         tax subject to such conditions as may be prescribed. In exercise
         of powers conferred under Section 30-A, the State Government
         has framed the 1991 Rules providing for var:ous benefits of
         exemption from payment of tax and the conditions thereof. In
         this connection, it is important to note that exemption is given to C
         the dealers and not to the goods. The quantum of exemption to
         the unit is based on three factors. namely, capital invested, area
         in which the unit was located and the nature of industry. Rule 5
         of the 1991 Rules provides for a mode of availing benefit of
         exemption                                                           D
              11. We quote hereinbelow Rule 9(1 ), (2) and (3) of the
         1991 Rules which read as under:
              "RULE 9: RETURN, ASSESMENT ETC.
              (1) The unit holding deferment or exemption certificate       E
              shall continue to file the return in the manner specified
              under the Act and the rules made thereunder.
              (2) Notwithstanding anything contained in these rules, the
,,            unit holding deferment or exemption certificate issued F
..            under these rules, shall attach an attested copy of deferment
              or exemption certificate, as the case may be, in lieu of
              proof of payment of tax alongwith the return till the deferred
              or exempted amount of tax is fully availed of or the period
              of deferment or exemption expires under these rules, G
              whichever is earlier.
              (3) The assessment of an eligible unit in respect of which
              deferment or exemption certificate has been granted shall
              be made n accordance with the provisions of the Act and
              the ruies made thereunder as early as possible and shall      H
                                                                         ( J

    588       SUPREME COURT REPORTS                   ;2008] 4 S C.R


A         be completed by the 31st day of December in respect of
          the assessment year immediately preceding there to and
          the additional demand so determined, if any, shall be paid
          as per the provisions of the Act and the rules made
          thereunder."
B         ISSUE
        12. The question which arises for determination in this civil
    appeal is:                                                            •

          "What is the meaning of the words "the purchase value of
c         the goods which have been subjected to tax under Section
          5(1-A) in Rule 29(xii)?

          FINDINGS
        13. According to the Department, the words "subjected to
D tax" in Rule 29(xii), quoted above, would mean goods which
  had suffered the tax under that section. In that connection the
  Department has placed reliance on the judgment of the
  Constitution Bench of this Court in the case of Mis. Gannon
  Dunkerley and Co. and ors. v. State of Rajasthan and ors.
E (1993) 1 SCC 364 in which Rule 29(2) of Rajasthan Sales Tax
  Rules came to be interpreted.

         14. We find no merit in the said argument of the
  Department. In this connection, we have to construe the scheme
  of the 1948 Act. As stated above, Section 4 is the charging
F section whereas Section 5(1-A) indicates the point at which the
  levy takes place. The said "1948 Act" refers to single point levy
  of tax on the first sale. The Notification dated 25.7.1990
  specifically incorporates the provisions of Rule 9 of the 1991
  Rules which requires the unit holding exemption certificate to
G file the return under the Act and for the assessment of an eligible
  unit in respect of which exemption certificate has been granted.
  The said notification read in entirety thus indicates the exemption
  given to the eligible unit under the Act is only qua the payability.
  The said exemption to the eligible unit is not in the matter of
H assessment. The reason is obvious. The exemption is granted
'
  ,
        STATE OF PUNJAB & OTHERS ETC. ETC. v. MIS.                   589
        PERFECT SYNTHETICS ETC. ETC. [KAPADIA. J ]

      to the unit for 10 years or till the exemption entitlement gets        A
      exhausted, whichever 1s ear:ier. Therefore under the '"'Otification.
      exemption 1s only qua payab1lity and not in respect of
      assessment. That is the reasor for incorporating Rule 9 into
      Notification dated 25.7.1990 which requires the eiigible unit to
      file its returns in the manner specified under the Act. to attach      B
      requisite documents ard for assessment in accordance with
      tre provisions of the Act. Even with regard to payability :t may
      be noted that. under the scheme of the 1948 Act. tr.e calculated
      tax gets appropriated towards the scheme entitlement. Taking
      this linkage into account, we are of the view that the words           c
      "subjected to tax" cannot be equated to the words "having
      suffered tax". There is one more point to be noted. Section 5(1)
      of the 1948 Act refers to rate of tax whereas Section 5( 1-A)
      refers to the stage at which the tax is to be levied. As stated
      above, Section 5(1-A) refers not only to the stage of sale at
                                                                             D
      which the tax is to be levied, it also refers to the issuance of
      notification by the State Government on which date alone the
      tax becomes leviable. Therefore. the scheme of 1948 Act is
      different from the scheme of Section 5(1) of Rajasthan Sales
      Tax Act. 1954 considered by the Constitution Bench of this Court
      in Gannon Dunkerley (supra). Section 5(1) of Rajasthan Sales           E
      Tax Act, 1954 referred only to the rate of fixation and not to the
      stage of taxation One more distinguishing feature which is
      required to be mentioned is that under Section 30-A read with
      Rule 4 and Rule 4-A of 1991 Rules, exemption is given to the
      dealer/unit whereas Rule 29(xii) of 1949 Rules framed under            F
.•    1948 Act gives deduction to the goods. Since the said Rule
      29(xii) refers to the purchase value of the goods which stood
      subjected to tax 1t becomes clear that under the scheme of 1948
      Act even the eligible unit has to be assessed to tax~ Under that
      assessment, the Department had to compute the tax liability.           G
      The Department had to compute the amount of tax payable by
      the eligible unit as such tax has to be appropriated towards the
      exerT'ption entitlement. Therefore, the words used in Rule 29(xii)
      are "the purchase value of goods which had been subjected to
      tax under Section 5(1-A)". Hence. we cannot equate the scheme          H
                                                                          ( )

    590       SUPREME COURT REPORTS                    [2008) 4 S.C.R.


A   of 1948 Act and the Rules framed thereunder with the scheme
    of the Rajasthan Sales Tax Act, 1954.

       15. Before concluding we may refer to the judgment of the
  Constitution Bench of this Court in the case of M/s. Gannon
  Dunkerley and Co. and ors. V. State of Rajasthan and ors.
B (supra). In that case it was held that the goods, on which no tax
  was leviable under Section 5(1) of Raiasthan Sales Tax Act,
  1954, were not subjected to any tax and, therefore. there was
  no question of such goods having suffered tax at the rates
  prescribed under Section 5 of the said Act. We quote
C hereinbelow paras 68 and 69 of the said judgment which read
  as under:

          "68. The constitutional validity of a statute has to be
          determined on the basis of its provisions and on the ambit
          of the operation as reasonably construed and if, so judged,
D
          it does not pass the test of constitut:onality it cannot be
          pronounced valid merely because 1t is administered in a
          manner which might not conflict with the constitutional
          requirements. [See: Collector of Customs v. Nathella
          Sampathu Chetty (1962) 3 SCR 786) The rules framed
E         under the Raiasthan Sales Tax Act would not. therefore,
          be of any assistance in resolving the question regarding
          the validity of Section 5(3). We have, however, examined
          the rules that have been framed and we find that they do
          not improve the position. The relevant provisions in this
F         regard are contained in sub-ruie (2) of Rule 29 of the            •.,
          Rajasthan Sales Tax Rules which makes provision for
          deductions from the turnover in the case of a works contract.
          The said sub-rule (2) contains two clauses. Clause (i),
          which is referable to the proviso to sub-section (3) of
G         Section 5, provides for deduction of the value of the goods
          transferred in execution of works contract. whether as
          goods or in some other form, which have already suffered
          tax at the rates prescribed by Section 5 or which are
          exempted from tax under Section 4. Clause (ii) is referable
H         to Explanation (i) of Section 2(t) and it provides for
           STATE OF PUNJAB & OTHERS ETC. ETC v MIS.                   591
           PERFECT SYNTHETICS ETC_ ETC [KAPADIA J]

I>           deduction of all sums towards labour charges, which are A
             directly co-related with the goods. property in which has
             passed in the execution of works contract, whether as
             goods or in some other form.
             69. Shri Krishnamurthy Iyer. the learned counsel appear:ng
             for the State of Rajasthan, has submitted that the words         8
             "which have already suffered tax at the rates prescribed
             under Section 5" are wide enough to permit deduction in
             respect of goods on which no tax is leviable under sub-
             section (1) of Section 5 of the Act, namely, sales in the
             course of inter-State trade or commerce or sales outside         c
             the State or in the course of import and export as well as
             sales of goods which have been declared to be of special
             importance in the course of inter-State trade or commerce
             under Section 14 of the Central Sales Tax Act and are
             governed by Section 15 of the said Act. We find it difficult     D
             to accept this contention. The words "which have already
             suffered at the rates prescribed under Section 5" only
             refer to the goods which have already been subjected to
             tax under the Act at the rates specified under Section 5,
             and their value is to be excluded from the turnover. The         E
             goods on which no tax is leviable under sub-section (1) of
             Section 5 are not subject to any tax under the Act and
             there is no question of such goods having suffered tax at
             the rates prescribed under Section 5. In this context we
     ,.      may again refer to the definition of taxable turnover            F
     ...     contained in Section 2(s} of the Rajasthan Sales Tax Act
             wherein provision is made under clauses (i) to (iv) for
             deduction from the turnover for arriving at the taxable
             turnover. Clause (i) refers to sale of goods "on which no
             tax is leviab!e under this Acf' and clause (ii) refers to sale
                                                                              G
             of goods "which have already been subjected to tax under
             this Act." These clauses show that the legislature has made
      ~-     a distinction between a sale of goods on which no tax 1s
             leviable and a sale of goods which has already b3en
             subjected to tax under the Act. Clause (i) of sub-rule (2) of
                                                                              H
     592       SUPREME COURT REPORTS                      [2008] 4 S.C.R.


A          Rule 29 is a provision similar to that contained in clause           -+
           (ii) of Section 2(s). It is, therefore, not possible to construe
           clause (i) of sub-rule (2) of Rule 29 to mean that sales on
           which no tax is leviable under sub-section (1) of Section
           5 are to be excluded from the turnover for the purpose of
 B         computing tax on such turnover in relation to a works
           contract."
           16. It is important to note that under Rule 29(2) of the
     Rajasthan Sales Tax Rules, 1955, provision was made for
     deduction from the turnover in the case of a works contract. Sub-
c    rule (2) contained two clauses. Clause (i) referred to the proviso
     to Section 5(3) which inter alia provided for deduction of the
     value of the goods transferred in execution of works contract
     which had suffered tax at the rates prescribed by section or
     which stood exempted from tax under Section 4. Clause {ii)
 D   referred to Section 2 and it provided for deduction of labour
     charges. In this case, we are concerned only with clause (i) which
     provided for deduction of value of goods transferred in execution
     of works contract which had suffered tax at the rates prescribed
     by Section 5. The underlined sentence is relied upon by the
 E   learned counsel appearing on behalf of the Department to
     contend that the present case is similar to the case of M/s.
     Gannon Dunkerley (supra). We do not agree with this
     contention. It is important to note that Rule 29(2) of the Rajasthan
     Sales Tax Rules, 1955 used the words "goods which had
 F   suffered tax at the rates prescribed under Section 5". Therefore,         '.,.
     Section 5 of the Rajas than Sales Tax Act, 1954 dealt with only
     the rate of tax. Therefore, Section 5 of the Rajasthan Sales Tax
     Act, 1954 contemplated only rate fixation and not to the stage
     of taxation whereas in the present case, we are concerned with
     Section 5(1.-A) of 1948 Act which, as stated above, refers to ·
'G
     the stage at which the tax has to be levied, namely, first stage of
     sale. Moreover, the expression "which had already suffered tax"
      is not there in Rule 29(xii) of 1949 Rules. In fact, Rule 29(xii)       -r-
      does not say the goods should have suffered tax or the tax should
      have been paid or that the goods had been subjected to tax
 H
  STATE OF PUNJAB & OTHERS ETC. ETC. v. MIS.              593
  PERFECT SYNTHETICS ETC. ETC. [KAPADIA, J.]

under Section 4 or under the said Act and, therefore, the scheme A
of the Act in question is quite different from the scheme of
Rajasthan Sales Tax Act, 1954. Therefore, in our view the
judgment of the Constitution Bench in iV"l/s. Gannon Dunkerley
(supra) has no application to the facts of the present case. For
the same reasons, the judgment of the Division Bench of this B
Court in the case of State of il/i.P. and ors. v. Indore Iron &
Steel Mills Pvt. Ltd.-(1998) 6 SCC 416 has also no application
to the present case.
     17. For the aforestated reasons, we find no infirmity in the
impugned judgment. Hence, this civil appeal is accordingly C
dismissed with no order as to costs.
K.K.T.                                    Appeal dismissed.