Proviso to Notification Should Not Be Given a Greater Significant Role, Except as Carving Out an Exception

Being dissatisfied with the order passed in appeal, the appellant knocked at the doors of the Sales Tax Tribunal, Chandigarh (the Tribunal) which dismissed the appeal by its order dated September 9, 2002. The dismissal of the appeal by the tribunal compelled the appellant to prefer Writ Petition No. 2346 of 2003, seeking a direction to the tribunal to make a reference to the High Court. The High Court accepting the prayer of the assessee called for a reference from the tribunal, and the tribunal vide its order dated 14.10.2003 in S.T.M. No. 82 of 2002-03 made a reference to the High Court for its opinion.

After stating the case, the tribunal referred the following questions for the opinion of the High Court:

(i) Whether the notification dated 4.9.1995 issued under Section 8(5) of the CST Act is relatable to the exemption of goods or the person selling it?

(ii) Whether in view of the notification dated 4.9.1995 issued under Section 8(5) of the CST Act and Rule 28A of the Rules, the interstate sales of the goods manufactured by an “exempted unit”, even by any other dealer, is exempted from the levy of the Central Sales Act?

Before the High Court it was contended by the assessee that the notification dated 4.9.1995 issued by the State Government provides for grant of exemption on the sale of goods manufactured in the State of Haryana by any dealer holding valid exemption certificate under Rule 28 of the Rules and not to the dealer and, therefore, the goods sold by the assessee in the course of inter-state trade were not liable to be taxed. In support of the said proposition, reliance was placed on International Cotton Corporation (P) Ltd. v. Commercial Tax Officer, Hubli [1975 (35) STC 1], Pine Chemicals Ltd. and others v. Assessing Authority and others [1992 (85) STC 432], Khadi and Village Soap Industries Association and another v. State of Haryana and others [JT 1994 (5) SC 233], State of Rajasthan v. Sarvotam Vegetables Products [1996 (101) STC 547] and Commissioner of Sales Tax v. Industrial Coal Enterprises [1999 (114) STC 365].

On behalf of the revenue, it was urged that the notification in question provided for grant of exemption only on the sale of goods manufactured in the State by a dealer holding valid exemption certificate under Rule 28 of the Rules, subject to the condition that such dealer had not charged tax under the CST Act on the sale of goods manufactured by it, and not in respect of the sale of goods by other dealers in the course of inter-state trade. It was the sand of the revenue that the assessee had not been granted exemption certificate under Rule 28A of the Rules and as such, the goods sold by it in course of inter-state trade were not exempted from the tax under the CST Act merely because the same had been purchased from M/s Bharati Telecom Limited which possesses a valid exemption certificate. Reliance was placed on the decision of Supreme Court in State Level Committee and another v. Morgardhsammar India Ltd. [1996 (101) STC 1].

Thus, the ultimate conclusion recorded by the High Court is that successive sales of goods manufactured by dealer holding valid exemption certificate were exempt from payment of sales tax so long as they were inter-state sales but in respect of sale of goods by a dealer not holding exemption certificate under Rule 28A in the course of inter-state trade, the benefit of exemption envisaged under notification dated 4.9.1995 were not available to such dealer . The Division Bench proceeded to clarify that in respect of stages of sale which are exempt from payment of tax under the Act are covered by Rule 28A(4)(c) but notification dated 4.9.1995 was applicable only to sale of goods manufactured by the exempted unit. Being of this view, it answered the reference in favour of the revenue and against the assessee.

Against the judgement of the High Court special leave petition was filed. The Supreme Court allowed the appeal, set aside all the impugned orders and held that assessees shall reap the benefit of the notification dated 4.9.1995.

The operative part of the judgement read as under :

As mentioned earlier, sub-section (5) to Section 8 of the CST Act begins with the non-obstante clause and empowers State Governments to issue a notification in the official gazette subject to the condition(s) as may be specified and under clause (a) direct that no tax shall be payable by any dealer having his place of business in the State in respect of sale in the course of inter-state trade or commerce, etc. and under clause (b) in respect of sales of goods or classes of goods, etc. In this context, Rule 28A is extremely relevant. The said Rule, as per heading relates to class of industries, period and other conditions for exemption/deferment from payment of tax. Sub-rule 1, 2(f), (j), (k), (l), (n) clauses (i), (ii), (iii), (4)(a) and sub-rule 4(2)(c) of Rule 28A are relevant.

Sub-rule (1) makes it clear that industries are covered under this rule and the said industries would not be entitled to any deferment or exemption from payment of tax under any other provisions of these rules. The expression ’eligible industrial unit’ is defined in clause (f) to sub-rule (2). Similarly, ’eligibility certificate’, ’exemption certificate’, etc. are defined in clauses (j) and (k) to sub-rule (2). Clause (n) to sub-rule (2) defines the expression ’notional sales tax liability’ and clause (i) states that the amount of tax payable under the CST Act on sales of finished product of eligible industrial unit made in the course of inter-state trade or commerce shall be computed at the rate of tax applicable as if the sales were made against form ’C’. In other words, inter- state trade or commerce of finished products of eligible industrial units will be treated as notional sales tax liability. The reference in the clause is to the eligible industrial unit and sales of finished products made by the said units, which are sold in the course of inter-state trade or commerce.

The purport and impact of Rule 28-A is with reference to eligible industrial unit, is not only clear from the definition clauses which define eligibility certificate, exemption certificate, etc. but also from sub-rule (4) which stipulates that the benefit of tax exemption or deferment shall be given to an eligible industrial unit holding exemption or entitlement certificate for the period specified. Clause (c) to sub- rule (4)(2) postulates that goods manufactured by an eligible industrial unit availing of exemption under this Rule shall be exempt from levy or tax on all successive stage/stages of sale or purchase, subject to the dealer affecting the said purchase or sale furnishing a certificate in the form of ST-14A obtained from the assessing authority. This clause has the effect of granting exemption from levy of tax at all successive stages of sale and purchase in intra- state trade or commerce i.e. within the State of Haryana. To put it differently, it extends the benefit granted under clause (n)(ii) which relates to inter- state trade or commerce to intra-state sale or purchase. Such sales may be one or successive and tax at all stages is exempt. The exemption, therefore, is good specific, subject of course to other conditions being satisfied.

It is not disputed that on all intra-state sales no tax has been charged as the said transactions were treated as exempt by eh tax authorities. However, in the course of inter-state sales, it is submitted by the revenue that the exemption would be limited and available only if the manufacturer i.e. the eligible industrial unit makes sale in inter-state trade or commerce, but if a third party, who had procured the goods from the eligible industrial unit makes inter- state sale, such trade or commerce would not be exempt. The contention of the State suffers from incorrect appreciation and understanding of the purport and objective behind Rule 28A and the notification in question. The basic objective and purpose is to exempt the goods manufactured in the State when they are further transferred in the course of inter-state or intra-state trade or commerce. Therefore, reference is made to the eligible industries and the goods manufactured by the said industries, which are entitled to exemption. The exemption notification refers to the sale of goods manufactured by a dealer holding a valid exemption certificate. The emphasis is on the goods manufactured. However, it is confined by the condition that the said manufacture should be within the exemption period and by a dealer holding an exemption certificate.

We have r eproduced the exemption notification above and referred to the language employed. At this juncture, it is absolutely necessary to understand the language employed in the proviso to the notification. If there was no proviso to the notification there would have been no difficulty whatsoever in holding that the exemption is qua the goods manufactured and was not curtailed or restricted to the sales made by the manufacturer dealer and would not apply to the second or subsequent sales made by a trader, who buys the goods from the manufacturer-dealer and sells the same in the course of inter-state trade or commerce. It is pertinent to note that, clause (ii) of sub-rule (n) refers to sale of finished products in the course of inter-state trade or commerce where the finished products are manufactured by eligible industrial unit. There is no stipulation that only the first sale or the sale by the eligible industrial unit in inter State or Trade would be exempt. The confusion arises, as it seems to us, in the proviso to the notification which states that the manufacturer- dealer should not have charged tax. It needs no special emphasis to mention that provisos can serve various purposes. The normal function is to qualify something enacted therein but for the said proviso would fall within the purview of the enactment. It is in the nature of exception. [See: Kedarnath Jute Manufacturing Co. Ltd. v. Commercial Tax Officer [AIR 1966 SC 12], Hidayatullah, J. (as his Lordship then was) in Shah Bhojraj Kuverji Oil Mills and Ginning Factory v. Subhash Chandra Yograj Sinha [AIR 1961 SC 1596], had observed that a proviso is generally added to an enactment to qualify or create an exception to what is in the enactment, and the proviso is not interpreted as stating a general rule. Further, except for instances dealt with in the proviso, the same should not be used for interpreting the main provision/enactment, so as to exclude something by implication. If is by nature of an addendum or dealing with a subject matter which is foreign to main enactment. (See: CIT Mysore etc. v. Indo Mercantile Bank Ltd. [AIR 1959 SC 713]. Proviso should not be normally construed as nullifying the enactment or as taking away completely a right conferred.

Read in this manner, we do not think the proviso should be given a greater or more significant role in interpretation of the main part of the notification, except as carving out an exception. It means and implies that the requirement of the proviso should be satisfied i.e. manufacturing dealer should not have charged the tax. The proviso would not scruttle or negate the main provision by holding that the first transaction by the eligible manufacturing dealer in the course by way of inter-state sale would be exempt but if the inter-state sale is made by trade/purchaser, the same would not be exempt. That will not be the correct understanding of the proviso. Giving overdue and extended implied interpretation to the proviso in the notification will nullify and unreasonably restrict the general and plain words of the main notification. Such construction is not warranted.

Quite apart from the above, Rule 28A(40(c) supports the interpretation and does not counter it. The said rule exempts all intra-state sales including subsequent sales. The reason for enacting this clause is obvious. The intention is to exempt all subsequent stages in the State of Haryana and the eligible product can be sold a number of times, without payment of tax. Intra-state sales refer to sale between two parties within the State of Haryana. Inter-state transaction results in movement of goods from State of Haryana to another State. Thus, clause (i) of sub- rule 2(4) refers to inter-state trade or commerce and the notification does not refer to subsequent sales as in case of Rule 28A(4)(c). Whether or not tax should be paid on subsequent sales/purchase in the other State cannot be made subject matter of Rule 28A or the notification. Inter-State sale from the State of Haryana will be only once or not a repeated one. Therefore, there is no requirement of reference to subsequent sale. In this context, it is rightly submitted by the assessee that there is only one inter-State sale from the State of Haryana and the interpretation as suggested by the revenue would tantamount to making the exempted goods chargeable to tax, and the said goods would cease to enjoy the competitive edge given to the manufacturer in the State of Haryana. It will be counter-productive.

We allow the appeals and set aside all the impugned orders and hold that assesses shall reap the benefit of the notification dated 4.9.1995 as interpreted by us.

Authorities relied upon : 1999 (114) STC 365, 1996 (101) STC 1, 1975 (35) STC 1,AIR 1966 SC 12,AIR 1961 SC 1596,AIR 1959 SC 713.