Eligibility to issue C form
Q. Whether C form can be issued for the purchase of DEPB during 2009-10, 2010-11 and 2011-12 when the same are not resold and utilised for the import of raw materials used in manufacturing of goods for sale.
Facts: During the above years DEPB was taxable goods taxed @ 4% under entry 39 of Schedule C appended to MVAT Act, 2002.
There are several Companies who had purchased DEPB in market in those years and issued C form and paid 2% CST and did not resell the DEPB, but utilised the same for the import of goods viz.raw materials, which have been used by them in the manufacture of other goods and manufactured goods are sold and VAT on the same is paid. Most of the assessments are over accepting the transactions.
Now the investigation wing has issued notice in Form 215 alleging that there is misuse of C form and according to them DEPB is not directly used in manufacture and to that extent there is misuse of C form and proposal is to levy penalty u/s. 10(d) of the CST Act, 1956.
Apart from the submissions made by the Companies submitting that the DEPB is goods and the same is forming a part of purchase price paid for the import of raw materials and hence there is no contravention.
Besides this we relied on very old judgments of Apex Court viz. J. K. Spg. & Weaving Mills Ltd. reported in (1965)- of STC P-563 (SC) and also submitted a copy of recent Delhi High Court judgments (copy of the same submitted).
The learned Counsel is requested to opine “whether our contention raised are in order and what are chances in Appeal”.
Reply
The issue involved is required to be seen in the light of provisions of CST Act, 1956. As per section 8(3), C form can be used for various purposes as mentioned in the said section. Section 8(3) is reproduced below for ready reference.
“8. Rates of tax on sales in the course of inter-State trade or commerce.
(3) The goods referred to in clause (b) of sub-section (1) –
(a) Omitted
(b) Are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for resale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or [1] [in telecommunications network or] in mining or in generation or distribution of electricity or any other form of power.
(c) Are containers or other materials specified in the certificate of registration of the registered dealer purchasing the goods, being containers or materials intended for being used for the packing of goods for sale;
(d) Are containers or other materials used for the packing of any goods or classes of goods specified in the certificate of registration referred to in clause (b) or for the packing of any containers or other materials specified in the certificate of registration referred to in clause (c)….”
It can be seen that the C form can be issued for various purposes mentioned above like use in manufacturing of goods for sale, resale, packing or generation of electricity and mining etc.
In the given facts, your purchases against C form of DEPB can be eligible if it can be satisfied that they are used in manufacturing of goods for sale.
DEPB is separate commodity. It is used for clearing of imported goods. The said item can be said to be consumed in clearing of such import. Clearing of imported goods cannot be considered as manufacturing by itself. It is true that the raw materials so cleared are used for manufacturing of goods for sale. However, this is subsequent event, post consumption of DEPB. Therefore it will be difficult to sustain that it is used in manufacturing.
You have referred to judgment in case of J. K. Spg. & Weaving Mills Ltd. reported in (1965) – of STC P-563 (SC). The said judgment speaks about eligibility of using C form, if the purchases to be made are integrally connected with the manufacturing process. Since, DEPB are not directly in manufacturing process, it will be difficult to maintain that they are integrally connected with the manufacturing process.
You have cited judgment in case of Jagriti Plastics Ltd. v. Commissioner of Trade & Taxes (2015) 62 Taxamann.com 62 (Delhi). In this case the facts are different. The issue was regarding ITC under Local VAT Act. Short facts narrated in the article attached with the query are reproduced below to understand the facts and legal position.
“3.3) As per the provisions of Sec. 9 of the DVAT Act, input tax credit is available in respect of the turnover of purchases occurring during the tax period where the purchase arises in the course of his activities as a dealer and the goods are to be used by him directly or indirectly for the purpose of making the sales liable to tax. Thus only condition for claiming input tax credit is whether the goods purchased are “used” by the dealer directly or indirectly for making the sale. Hon. High Court held that there could be no doubt that the price of the goods imported has an element of customs duty paid on such goods. The component of customs duty is reduced to the extent of the usage by the appellant of the DEPB scrips. The reduced customs duty is embedded in the resale price of the imported goods. Thus, the use of the DEPB scrips is for the purpose of the appellant selling the imported goods. ‘Usage’ in this context has to be seen as the use that affects the price of the goods although it may not be used tangible in the goods themselves. There is no warrant to limit the understanding of the word ‘use’ to an actual direct tangible or physical use in the imported goods. Thus words ‘used’ cannot be construed to mean only actual use. If any goods like DEPB have an impact on price of finished product, it is also regarded as ‘use’ for the purpose of claiming input tax credit.”
It can be seen that even indirect use was also eligible for ITC and it appears that based on said provision the issue is resolved by Hon. Delhi High Court in favour of dealer. However, this analogy may not apply under CST Act, in light of above restricted eligibility as per Section 8(3) of CST Act.
Reference can also be made to the earlier judgments under BST era. Under BST Act, purchase tax was attracted on DEPB and dealers tired to claim set-off on the same under Rule 42I as used in manufacturing. Tribunal has negatived the said contention saying that DEPB cannot be considered as used in manufacturing. Readily reference can be made to the judgment in case of Impex Diamonds (S.A.1361 of 1998 dated 18-11-2000).
Therefore, there appears to be remote possibility to contend that the DEPB used for import of goods is used in manufacturing.
However, the issue is about levy of penalty. In our opinion, this is not a case for penalty. Penalty can be attracted, if there is conscious disregard of the legal position. Here two views are possible. Also the claim was under bona fide belief and cannot be said with mala fide intention. The assessing authority has also allowed such use, shows that there was acceptance of view about eligibility to issue C form. Therefore, no penalty can be attracted on the facts. There are number of judgments which support the above view like Hindustan Steel Ltd. (25 STC 211)(SC). About nature of penalty in fiscal laws, Hon’ble Supreme Court has observed as under:
“Under the Act penalty may be imposed for failure to register as a dealer: section 9(1) r/w section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to the act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as a dealer acted in the honest and genuine belief that the company was not a dealer. Granting that they erred, no case for imposing penalty was made out.”
Therefore, in light of ratio laid down by Hon. Supreme Court, the penalty cannot be attracted.
C. B. Thakar
Advocate