By TIOL News Service

NEW DELHI, AUG 26, 2016: THE issue is - Whether the benefit of exemption u/s 4B(1) can be restricted to a manufacturer only who is engaged in sale of goods, when the said provision itself extends such benefit to the first purchaser who sells or supplies goods to another dealer having valid recognition certificate u/s 4B(2). NO IS THE ANSWER.

Facts of the case:

The assessee is the first purchaser of wheat from the farmers in the State of U.P and supplies the wheat so purchased to certain Roller Flour Mills in the State for conversion of the same to Atta and Maida. After conversion of wheat into flour, it was taken back by the assessee from those flour mills for onward sale. As per the provision of Section 4B(1) r/w Notification dated 29th August 2003 which provided for exemption in respect of goods that were "sold or supplied" by the first purchaser of the goods to such Roller Flour Mills, the assessee had been claiming exemption since 2004. However, this exemption was denied to the assessee on the ground that such exemption was not available in case of supply of the wheat to the Roller Flour Mills. Accordingly, two show cause notices were issued confirming the demand, which was later on upheld by the High Court.

The Supreme Court has held that,

++ it is not disputed that the provision of Section 3D of the U.P Trade tax Act, which provides for levy of trade tax on the purchases & sale of certain goods, includes wheat as well. Notwithstanding Section 3D, there is a special provision of Section 4B(1)(a-1) which provides special relief to such assessees. The heading of the section is "special relief to certain manufacturers". It is a common case of the parties that the provisions of Section 4B(1)(a-1) are attracted in the present case, benefit whereof has been sought by the assessee. This was followed by a Notification issued by the State Government stipulating that no tax would be payable by a registered dealer who is the first purchaser of wheat within the State when such wheat is "sold or supplied" by such first purchaser to a Roller Flour Mill and Atta Chakki Plant holding a valid recognition certificate u/s 4B(2) and such manufactured goods shall be notified goods for the purposes of the said section. It is clear from the above that this Notification which was issued in exercise of powers conferred u/s 4B(1)(a-1) prescribed that no tax shall be payable by the said registered dealer who is the first purchaser. Of course, this Notification mentions certain conditions and restrictions as well. It is not in dispute that the assessee herein had supplied the goods to three flour mills which are other dealers. It is also not in dispute that the assessee is the first purchaser of the wheat which was supplied to the said three dealers. Two dealers were having valid recognition certificate issued to them under sub-Section(2) and there was some dispute as far as third dealer is concerned. In appeal, the said third dealer also succeeded, as a result of which, it was also issued a valid recognition certificate. Thus, this condition also stood satisfied;

++ notwithstanding the same, the High Court has dismissed the writ petitions on the spacious ground that the Notification dated 29.08.2003 though uses the expression "sold or supplied", the words "or supplied" are redundant because they are mechanically borrowed from the wording of Section 4B(1)(a-1). The High Court ignored the fact that this Notification was, in fact, issued by the State Government in exercise of powers conferred u/s 4B(1)(a-1) and it was but natural to prescribe the same language and the conditions which are mentioned therein and there was nothing to feel surprised as to why the aforesaid expression was mechanically borrowed from the wording of Section 4B(1)(a-1). It is stated at the cost of repetition that Section 4B(1)(a-1), which is a statutory provision, itself provides for special relief not only in the case where the goods are sold but also supplied by a dealer. Excluding the goods which are supplied by a dealer, in fact, would be doing violence to the provisions of Section 4B(1)(a-1). The Notification was, thus, rightly issued by the State Government giving the benefit to those goods which are supplied as well. It was not proper on the part of the High Court to tinker with the language of the Notification and exclude the benefit which is given to the dealer who supplies the goods to another dealer and confined the same only to the sale of goods. It is also to be noted that the High Court presumed that if the words "or supplied" are not removed, there would be a danger of misuse of the Notification. While making these observations, the High Court has given a hypothetical illustration by stating that in order to avail the benefit of the Notification and evade payment of purchase tax, a particular supplier may set up a middle man or an agent who will be the first purchaser and who will claim exemption under the said Notification and will supply wheat to flour mill beyond its assessed grinding capacity and the excess quantity of wheat which the flour mill will receive is only by way of supply and not by way of purchase. Therefore, the Notification should have been read as it is and on that basis the High Court was supposed to examine as to whether the assessee satisfied the conditions of Section 4B r/w the aforesaid Notification or not;

++ it is to be noted that Section 4B starts with a non-obstante clause, which clearly mentions that special relief which is provided u/s 4B would be available notwithstanding anything contained in certain provisions therein and Section 3D is specifically included. It would mean that the provisions of Section 3D have no relevance at all while considering whether a particular assessee is entitled to special relief u/s 4B or not. No doubt, marginal note states that the special relief is to "certain manufacturers". However, in the body of the section and particularly, sub-section(1), manufacturer is not mentioned at all and as can be noticed from our discussion, the benefit is extended to the dealer who is the first purchaser of the goods and sells or supplies the same to another dealer who holds a valid recognition certificate u/s 4B(2). Thus, benefit is extended to a dealer and for availing this benefit it is not necessary that he has to be a manufacturer. Further, once we hold that the benefit is available to the dealer who sells or supplies the goods, the conditions and restrictions are to be read in that context.

(See 2016-TIOL-131-SC-CT)