ITEM NO. 1-A           ( For Judgment )

           COURT No.5     SECTION  III

              S U P R E M E   C O U R T   O F   I N D I A                            RECORD OF PROCEEDINGS

Civil Appeal No......./2009 @ SLP(C) No. 23970 of 2007

State of Haryana ..   Appellant(s)     Versus

M/s Liberty Enterprises ..   Respondent(s)           

        WITH                

      CIVIL APPEAL NO....../2009 @ SLP(C) NO. 24170 OF 2007        CIVIL APPEAL NO....../2009 @ SLP(C) NO.  6975 OF 2008        CIVIL APPEAL NO....../2009 @ SLP(C) NO.  6976 OF 2008

DATE : 17/03/2009      These matters were called on for pronouncement of                        judgment today.  

                                                                                For Appellant(s) Mr. T.V. George, Adv.

   For Respondent(s) Mr. M.P. Devanath, Adv.

Mr. Mohan Pandey, Adv.

              ---

Hon'ble Mr. Justice S.H. Kapadia pronounced the judgment of the Bench

comprising his Lordship and Hon'ble Mr. Justice H.L. Dattu.

Delay condoned.

Leave granted.

The appeals filed by the Department are dismissed in terms of the signed

judgment which is placed on the file.

[ S. Thapar ]     PS to Registrar

 [ Madhu Saxena ]    Court Master  

[ Signed reportable judgment is placed on the file ]

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  1618   OF 2009 (Arising out of S.L.P.(C) No.23970 of 2007)

State of Haryana … Appellant (s)

Versus

M/s. Liberty Enterprises … Respondent(s)

WITH

Civil Appeal No. 1619 of 2009 – Arising out of S.L.P. (C) No.24170 of 2007 Civil Appeal No. 1620 of 2009 – Arising out of S.L.P. (C) No.6975 of 2008 Civil Appeal No. 1621 of 2009 – Arising out of S.L.P. (C) No.6976 of 2008

J U D G M E N T

S. H. KAPADIA, J.

1. Delay condoned.

2. Leave granted.

Facts in the Lead Matter:

3. For the sake of  convenience we state the facts  occurring in

Civil Appeal No. 1618 of 2009 – Arising out of S.L.P.(C) No.23970

of 2007 – State of Haryana vs. M/s.  Liberty Enterprises.

4. M/s.  Liberty  Enterprises  (assessee)  is  engaged  in  the

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manufacture of shoes in the State of Haryana.  They availed exemption

from payment of sales tax under Section 13B of Haryana General Sales

Tax Act, 1973 read with Rule 28A of Haryana General Sales Tax Rules,

1975 respectively.  Assessee was granted Exemption Certificate No.116

for an amount of Rs.533 lakhs with effect from 15.3.95 to 14.3.2002 in

terms of Rule 28A of the said 1975 Rules.  The assessee availed benefit

of exemption till 31.12.96 and from 1.1.97 the assessee switched over

to the deferment tax payment scheme.   Till  31.12.96 the exemption

granted to the assessee was for  an amount  of  Rs.53.94 lakhs.   On

exercising option of deferment, an entitlement Certificate No.07 for an

amount of Rs.479.06 lakhs effective for the period 1.1.97 to 14.3.2002

was issued to the assessee in place of earlier Exemption Certificate.

5. The  assessment  of  the  assessee  for  the  year  1996-97  was

finalized vide order dated 12.3.01; from the total gross turnover the

Assessing Authority allowed the deduction of Export Sales against the

Declaration  Forms.   However,  the  assessment  was  revised  by  the

Revisional Authority, Karnal, which assessed the Export Sales made

during  the  period  of  exemption  (1.4.96  to  31.12.96)  at  4%  for  the

purpose of Rule 28A of the 1975 Rules.  Since the exempted quantum

of the assessee fixed at Rs.53.94 lakhs stood exhausted, the excess

amount  was  ordered  to  be  recovered  by  the  Revisional  Authority.

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Against  the  said  order  of  the  Revisional  Authority,  the  assessee

appealed before the Haryana Tax Tribunal.  Vide Order dated 13.1.04

the Tribunal set aside the order of the Revisional Authority which was

challenged by the State of Haryana (Department) by way of civil writ

petition before the High Court of Punjab & Haryana at Chandigarh.  By

the impugned Order dated 26.5.06, the High Court dismissed the said

writ petition in terms of its earlier judgment rendered in the case of

M/s.  Kagaz  Print-N-Pack  (India)  Pvt.  Ltd.  v.  State  of  Haryana–

(G.S.T.R.No.10 of 2004)

ISSUE

6. The short question which arises for determination in this civil

appeal is : whether Export Sales are includible in “notional tax liability”

of a unit as defined in Rule 28A(2)(n) of the 1975 Rules.

CONTENTIONS

7. Mr. Anoop G. Choudhary, learned senior counsel appearing on

behalf of the State, submitted that in terms of the proviso to Rule 28A

(4)(a) of the 1975 Rules, the benefit of exemption on payment of tax was

available to a unit on its ‘gross turnover’  which was defined to mean

the total receipt on account of sales made by a dealer, which included

even the Export Sales.  In this connection, reliance was placed on the

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proviso  to  Rule  28A(4)(a)  which  inter  alia states  that  the  benefit  of

exemption shall extend to tax on ‘gross turnover’, which according to

learned  counsel  would  cover  total  sales  receipts  (including  Export

Sales).  

8. On  the  other  hand,  Mr.  Monish  Panda,  learned  counsel

appearing on behalf of the assessee, submitted that exemption from

payment of sales tax stood provided for under Section 13B of the said

1973 Act.   It  provided  for  exemption  from payment  of  sales  tax  to

eligible units  subject to the conditions mentioned in the Rules.  The

conditions for availing the exemption were provided for under Rule 28A

of  the  1975 Rules.   The  exemption  was available  from the  date  of

commercial production.  The benefit of exemption, according to learned

advocate, was available for a specified period and upto the specified

quantum.   According  to  learned  advocate,  for  the  purpose  of

calculating the quantum of exemption, the “notional sales tax liability”

was to be taken into consideration.  The expression “notional sales tax

liability” stood defined in Rule 28A(2)(n) of the 1973 Rules.  According

to learned advocate, on a bare reading of 28A(2)(n), it is clear that all

the incidences of sales transaction that are to be computed for arriving

at the notional sales tax liability stood incorporated in the said sub-

rule.  According to learned advocate, on a bare reading of the above

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sub-rule, it is clear that sale made in the course of export outside India

(“Export  Sale”,  for  short)  was  not  included  in  “notional  sales  tax

liability” as defined in Rule 28A(2)(n).  According to learned advocate,

such exclusion of Export Sale from the meaning of “notional sales tax

liability” under Rule 28A(2)(n) leads to the clear conclusion that Rule

28A never intended to deem “Export Sale” within “notional sales tax

liability” and, therefore, learned advocate urged that in the context of

‘notional tax liability’,  turnover of export  goods could not have been

included in the ‘gross turnover’.

Relevant Provisions of Law:

9. To decide the controversy we need to quote relevant provisions

of the 1973 Act and 1975 Rules which read as under:

“1973 ACT:   

Section  2.  Definitions: -  In  this  Act,  unless  there  is  anything repugnant in the subject or context.-

(e) – “export” means the taking out of goods from the State to any place  outside  it  otherwise than by way of  sale  in the course of inter-State trade or commerce or in the course of export out of the territory of India (gg) – “gross turnover” means the aggregate of the amounts of sales and purchases and parts of sales and purchases made by any dealer  whether as  principal,  agent  or  in any other capacity during  the  given period less any sum allowed as cash discount according  to  ordinary  trade  practice,  but  including  any  sum charged for anything done by the dealer in respect of the goods at the time of, or before, delivery thereof;

(p)  –  “taxable  turnover” means  that  part  of  a  dealer’s  gross

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turnover which remains after allowing deductions under Section 27 of the Act.

Section 6 – Incidence of Taxation:-

(1) Subject to the provisions of Section 15 and 27 of this Act, every  dealer  whose  gross  turnover  during  the  year  immediately preceding  the  27th day  of  May,  1971  exceeded  the  taxable quantum, shall  from the 27th day of May, 1971 and every other dealer shall, on the expiry of thirty days after the date on which his gross turnover first exceeds the taxable quantum, be liable to pay tax under this Act on the sale or purchase of goods by him in the State at the stage hereinafter provided.-

(a) to (c) xxx xxx xxx (i) & (ii) xxx xxx xxx

Provided … xxx xxx xxx

Provided further that in the case of a dealer, -  

(a) who  imports  any  goods  for  sale  or  for  use  in manufacturing or processing any goods for sale, the liability to pay tax  shall  commence  from  the  date  on  which  he  imports  such goods;

(b) who manufactures or  processes any goods for sale,  the liability to pay tax shall  commence, from the date on which his gross turnover, during any year, first exceeds the taxable quantum;

(c) who exports any goods purchased within the State, the liability  to  pay  tax  shall  commence from the  date  on which  he purchases such goods;  

… … …

Section  12  –  No  tax  payable  in  case  of  inter-State  trade,  etc.- Notwithstanding anything contained in this Act, a tax on the sale or purchase of goods shall not be imposed under this Act;

(i) where  such  sale  or  purchase  takes  place  outside  the State; (ii) where such sale or purchase takes place in the course of import of the goods into, or export of the goods out of, the territory of India; or (iii) where such sale or purchase takes place in the course of inter-State trade or commerce.

Section 13B.- Power to exempt certain class of industries.-

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The State  Government  may,  if  satisfied  that  it  is  necessary  or expedient so to do in the interest of industrial development of the State, exempt such class of industries from the payment of tax, for such period and subject to such conditions as may be prescribed.

Section 27 – Taxable turnover.-  

(1) In  this  Act,  the  expression,  “taxable  turnover”  means that  part  of  a  dealer’s  gross  turnover  during  any  period  which remains after deducting therefrom his turnover during that period –  

(a) on account of –

(i) to (iii) xxx xxx xxx

(iv) Sale and purchase of goods falling under Section 12:  … … …”

“1975 RULES :

Rule 28A. Class of industries, period and other conditions for exemption/deferment from payment of tax (Sections 13B and 25A)  –  (1)  The  industries  covered  under  this  rule  shall  not  be entitled to any deferment or exemption from payment of tax under any other provisions of these rules.

(2) For  the  purposes  of  this  Chapter,  unless  the  context otherwise requires –  

(n) “notional sales tax liability” means-

(i) amount of tax payable on the sales of finished products of the eligible industrial unit under the Local Sales Tax Law but for an exemption computed at the maximum rates specified under the Local Sales Tax Law as applicable from time to time; and  

Explanation:-  The sales  made on consignment  basis  within the State of Haryana or branch transfer within the State of Haryana shall also be deemed to be sales made within the State and liable to tax;

(ii) amount of tax payable under the Central Sales Tax Act, 1956, on the sales of  finished products of the eligible industrial unit  made  in  the  course  of  inter-State  trade  or  commerce computed at the rate of tax applicable to such sales as if  these were made against certificate in form C on the basis that the sales

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are eligible to tax under the said Act.

Explanation:-  The branch transfers or consignment sales outside the State of Haryana shall be deemed to be the sale in the course of inter-State trade or commerce. Note : The expression and terms, if any appearing in this rule not defined above shall unless the context otherwise requires carry the same meaning as assigned to them under the Act and rules made thereunder.   Rule 28A

(3) Option – An eligible industrial unit may opt either to avail benefit of tax exemption or deferment.  Option once exercised shall be  final  except  that  it  can be  changed once  from exemption to deferment  for  the  remaining  period  and  balanced  quantum  of benefit.

Rule 28A

(4)(a) Subject to other provisions of this rule,  the benefit of tax exemption or deferment shall be given to an eligible industrial unit holding exemption or entitlement certificate, as the case may be to the extent, for the period, from year to year in various zones from the  date  of  commercial  production or  from the date  of  issue of entitlement exemption/exemption certificate as may be opted as under:-  

… … …

Provided that in the case of exemption the benefit shall extend to tax on gross turnover and in the case of deferment, it shall extend to tax on the taxable turnover of goods manufactured by the unit.

… … …

Explanation:-  1. For the purpose of  arriving at  the limit  of  tax exemption/deferment,  the notional  sales  tax liability  of  the unit shall be taken into consideration.”

(emphasis supplied by us)

FINDINGS:

10. At the outset, we may state that there is a vital difference between

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the scheme of Deduction and a scheme for Exemption.   Even within the

scheme of  exemption  there  is  a  basic  difference  between the  “Basis”  for

computation of the quantum of benefit and the “Limit” or ceiling to be placed

on that quantum.  There is no dispute that but for exemption claimed, the

assessee was a dealer, who was subject to incidence of sales tax under the

1973 Act.  Its transactions were liable to be dealt with in accordance with

the provisions of the Act relating to taxability.  What was exempted under

the Act and the Rules was payment of tax by a class of dealers who had been

issued eligibility/exemption certificates.  This is not in dispute.  Under the

provisions  of  1975 Rules  benefit  of  exemption  from payment  of  tax  was

available for a specified period and upto the specified quantum.  Rule 28A

provides for calculation of the quantum of exemption  upto the limit of tax

exemption and, therefore, it provides for deduction of the “notional sales tax

liability”  from the  total  exemption  limit  available  to  a  dealer  during  the

period of exemption.   

11. Rule 28A(2)(n) included in its purview the following transactions:

(a) amount of tax payable under the local sales tax law;

(b) sales made on consignment basis within the State or the branch transfers within the State;

(c) amount of tax payable under the Central Sales Tax Act, 1956 on the sales made in the course of inter-State trade or commerce; and

(d) branch transfers or consignment sales outside the State.

12. A perusal of the above transactions, included in the “notional sales

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tax liability”, shows that the said Rule 28A(2)(n) of the 1975 Rules included

sales  which were otherwise  exigible  to sales tax,  namely,  local  sales and

inter-State sales and secondly the Rule also included branch transfers or

consignment sales outside the State and sales made on consignment basis

or  branch  transfers  within  the  State  by  treating  them as  deemed sales,

which two transactions were otherwise not exigible to sales tax for any other

unit not availing the exemption.  In other words, a unit availing exemption

from payment  of  sales  tax  under  Rule  28A  had been  disallowed  certain

deductions which were otherwise available to an assessee if it would have

been  a  case  of  normal  assessment.   The  assessee  was  eligible  to  avail

deductions from its ‘gross turnover’ for transactions relating to inter-State

branch transfers or consignment sales outside the State and sales made on

consignment basis or branch transfers within the State.  These deductions

stood disallowed to a unit allowing exemption for calculating the “notional

sales tax liability” as defined in Rule 28A(2)(n),  as a condition for grant of

exemption.  It is important, however, to note that the “notional sales tax

liability” apart from the above referred to transactions did not include even

by a deeming fiction the Export Sale(s).  Export Sale(s) was not included in

‘notional  tax  liability’  by  a  deeming  fiction  or  otherwise.   A  scheme  for

Exemption has to be interpreted in the strict sense.  A scheme for Deduction

provides for conditions to be specified for grant of exemption.  Export Sales

were never  sought  to  be  included in  the  “notional  sales  tax  liability”  as

defined  in  Rule  28A(2)(n).   The  assessee  was  not  entitled  to  avail  tax

incentives beyond the period of exemption.  The assessee was not entitled to

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avail exemption of tax also beyond the maximum limit of tax determined and

certified  in  his  eligibility/exemption  certificate.   Therefore,  the  scheme

contemplated  tax-limit  and  time-limit.   The  notional  tax  liability  was

deductible from the total exemption limit available to a dealer during the

period of exemption.  To the extent the notional tax liability exceeded the

total exemption limit, the Department was entitled to order the recovery of

the difference.  In the present case, the Department has sought to recover

the difference  on the  ground that  the  notional  tax  liability  exceeded the

exempted quantum during the period of exemption.

13. Rule 28A deals with computation of the quantum of tax incentive

available to a dealer in whose favour eligibility certificate is issued.  In order

to regulate the exemption scheme the concept of “notional sales tax liability”

stood incorporated vide Rule 28A(2)(n) of the 1975 Rules.     

14. The Department has placed heavy reliance on the proviso in Rule

28A(4)(a), which has been quoted above.  The said proviso states that in case

of exemption, the benefit shall extend to tax on gross turnover and in case of

deferment  it  shall  extend  to  tax  on  the  taxable  turnover  of  the  goods

manufactured by the unit.  We have quoted the definition of the word “gross

turnover” which is defined to mean the aggregate of the amount of sales and

purchases made by any dealer.  The Department placed heavy reliance on

this definition of  the words “gross turnover” to say that it  would include

Export Sales, particularly, when Rule 28A contains a proviso to the effect

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that in case of exemption, the benefit shall extend to tax on “gross turnover”.

There  is  no  dispute  on  this  proposition.   However,  in  this  case  we  are

concerned with the “limit” to be placed on tax exemption/deferment and for

calculating that limit/ceiling one has to take into account the notional sales

tax liability of the unit.  Therefore, one has to read the proviso in Rule 28A(4)

with Explanation 1 which states that “for the purposes of arriving at the

limit of tax exemption/deferment, the notional sales tax liability of the unit

shall be taken into consideration”.  It is because of the said Explanation that

notional sales tax liability has been defined in Rule 28A(2)(n).  Therefore, one

has to go strictly by the definition of the words “notional sales tax liability” in

the said Rule 28A(2)(n) of the 1975 Rules.   

15. There is one more aspect which needs to be considered.  For the

purpose of granting exemption from payment of sales tax under Section 13B

of the 1973 Act, the Legislature incorporated Rule 28B on 16.9.98 providing

conditions for availing exemption from payment of sales tax to eligible units.

Under the provisions of Rule 28B of the 1975 Rules, benefit of exemption

was  available  for  a  specified  period  and  upto  the  specified  quantum.

However,  Rule  28B  provided  that  for  the  purposes  of  calculating  the

quantum of exemption availed by the unit upto the limit of tax exemption

allowed, the notional  sales tax liability  shall  be taken into consideration.

Accordingly, notional sales tax liability stood defined even in Rule 28B(2)(m).

On a bare reading of the definition of “notional sales tax liability” under Rule

28B(2)(m) it is clear that the definition included within its scope “sales made

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in exports outside India” by deeming it to be a sale in the course of inter-

State trade or commerce.  Such deeming fiction did not exist in Rule 28A(2)

(n).   Rule  28B(2)(m)  is  not  applicable  to  the  facts  of  the  present  case.

However,  in  order to  explain  the position,  we have  discussed,  by way of

analogy, Rule 28B(2)(m) of the 1975 Rules.  

16. For the aforestated reasons, we hold that  Export  Sales were not

includible in the matter of calculation of “notional tax liability” during the

period in question.

17. Before  concluding  learned  counsel  for  the  State  also  raised  the

question of constitutionality by stating that the Export Sales in any event

were not  taxable  by  the  State  Government  in  view of  Article  286 of  the

Constitution read with Section 12 of the 1973 Act.  We keep this question of

law open.   

18. Suffice  it  to  state  that  Export  Sales  were  not  included  in  the

definition of “notional sales tax liability” as defined in Rule 28A(2)(n) of the

1975 Rules.  On this point alone the assessee succeeds.

19. For  the  aforestated  reasons,  the  civil  appeals  filed  by  the

Department are accordingly dismissed with no order as to costs.      

……………………………J.                                                           (S.H. Kapadia)

……….………………….J.                                               (H. L. Dattu)   

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New Delhi; March 17, 2009.