Purchase Tax on Empty Bottles: Supreme Court Clarifies “Use” Under Tamil Nadu Act (29 June 2020)

Introduction

Date of the Judgment: 29 June 2020

Citation: (2020) INSC 532

Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J.

Can a state levy purchase tax on empty bottles used to package liquor, even if the bottles themselves are not consumed in the manufacturing process? The Supreme Court of India recently tackled this complex question, examining the scope of “use” under the Tamil Nadu General Sales Tax Act, 1959. This judgment clarifies the circumstances under which purchase tax can be levied on goods used in the production process, even if those goods retain their original identity. The bench comprised Justices A.M. Khanwilkar and Dinesh Maheshwari, with the majority opinion authored by Justice Dinesh Maheshwari.

Case Background

Mohan Breweries and Distilleries Limited, a company manufacturing Beer and Indian Made Foreign Liquor (IMFL), purchased empty bottles from unregistered dealers and non-dealers. These bottles were used to package their products. The Commercial Tax Officer proposed to levy purchase tax under Section 7-A of the Tamil Nadu General Sales Tax Act, 1959, arguing that the bottles were used in the manufacturing process and had not been taxed at the point of purchase. The assessee contended that the bottles were merely containers, not raw materials, and that they were taxed when the liquor was sold. The dispute centered on whether the purchase of these bottles attracted purchase tax under the Act.

Timeline

Legal Framework

The core of the dispute lies in the interpretation of Section 7-A of the Tamil Nadu General Sales Tax Act, 1959, which deals with the levy of purchase tax. This section states that a dealer who purchases goods, on which no tax is payable, and then uses those goods in the manufacture of other goods, or disposes of them in a way other than by sale, is liable to pay purchase tax. The relevant parts of the Act are:

• Section 3(1): Mandates every dealer with a turnover exceeding a certain limit to pay tax.
• Section 3(7): States that when goods are sold with containers, the turnover includes the price of the containers, taxed at the same rate as the goods.
• Section 7-A(1):

  “Subject to the provisions of sub-section (1) of section 3, every dealer who in the course of his business purchases from a registered dealer or from any other person, any goods, (the sale or purchase of which is liable to tax under this Act) in circumstances in which no tax is payable under sections 3 or 4, as the case may be, not being a circumstance in which goods liable to tax under sub-section (2) of section 3 or section 4, were purchased at a point other than the taxable point specified in the First or the Second Schedule and either,
  (a) consumes or uses such goods in the manufacture of other goods for sale or otherwise; or
  (b) disposes of such goods in any manner other than by way of sale in the State; or
  (c) despatches or carries them to a place outside the State except as a direct result of sale or purchase in the course of inter-State trade or commerce, shall pay tax on the turnover relating to the purchase as aforesaid at the rate mentioned in sections 3 or 4, as the case may be.”

The key issue is whether the empty bottles are “used” in the manufacture of beer and IMFL, triggering purchase tax under Section 7-A(1)(a) of the Tamil Nadu General Sales Tax Act, 1959.

Arguments

Assessee’s Arguments:

• The assessee argued that the bottles were not “consumed” or “used” in the manufacture of liquor. They contended that the manufacturing process of beer and IMFL was complete before bottling.
• The bottles were merely containers, not raw materials, and retained their identity throughout the process.
• The sale value of the bottles was already taxed when the liquor was sold, so imposing purchase tax would amount to double taxation.
• The assessee relied on earlier clarifications from the department that supported their position.
• They cited the decision in Hotel Balaji and Ors. v. State of Andhra Pradesh and Ors. [(1993) 88 STC 98], arguing that purchase tax should only apply if goods cease to exist or are consumed in the manufacturing process.
• The assessee also contended that the term “or for” was not present in Section 7-A(1)(a) during the relevant period, limiting the scope of the provision.

Revenue’s Arguments:

• The revenue argued that the amendment to Section 7-A of the Tamil Nadu General Sales Tax Act, 1959, by adding “or uses,” broadened the scope of the provision.
• The bottles were essential for making the manufactured goods marketable.
• The revenue cited the decision in Premier Breweries v. State of Kerala [(1998) 108 STC 598], stating that packed goods should be seen as one whole for calculating turnover.
• They also relied on Appollo Saline Pharmaceuticals (P) Limited v. State of Tamil Nadu [(2000) 120 STC 493], where the court held that bottles for intravenous fluid were part of the composite unit.
• The revenue argued that the use of bottles was imperative as per the Tamil Nadu Indian Made Foreign Spirits (Manufacture) Rules, 1981 and the Tamil Nadu Brewery Rules, 1983.
• They contended that the levy of sales tax on bottles sold with liquor did not preclude the levy of purchase tax.
• The revenue also relied on the decision in Assistant Commissioner (Intelligence) v. Nandanam Construction Co. [(1999) 115 STC 427] to support their argument that when goods cease to exist in their original form, purchase tax is applicable.

Sub-Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the purchase turnover of empty bottles purchased by the petitioner Company, who are engaged in the business of manufacturing Beer and IMFL products, from unregistered dealers for bottling Beer and IMFL manufactured by them, through the bought note to the extent of Rs. 24,78,20,465.00 is attracted for purchase tax under Section 7-A of the Tamil Nadu General Sales Tax Act?
2. Whether purchase tax is leviable on the purchase turnover of the empty bottles purchased by the petitioner Company to the extent of Rs. 24,78,20,465.00, under Section 7-A of the Act, in spite of the clarifications dated 9.11.1989 and 27.12.2000 issued in favour of the petitioner Company by the Special Commissioner of Commercial Taxes, Chennai, in view of Section 28A of the Act?
3. Whether cash discount on the price offered by the petitioner Company to the TASMAC is taxable in view of explanation 2(iii) to Section 2(r) of the Act?

Treatment of the Issue by the Court

Authorities

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court distinguished Hotel Balaji and Ors. v. State of Andhra Pradesh and Ors. [(1993) 88 STC 98] as it pertained to a different statute.
• The Court followed Premier Breweries v. State of Kerala [(1998) 108 STC 598] and Assistant Commissioner (Intelligence) v. Nandanam Construction Co. [(1999) 115 STC 427], emphasizing that packed goods are a composite unit and that purchase tax is applicable when goods cease to exist in their original form.
• The Court relied on the interpretation of “or otherwise” in Ganesh Prasad Dixit v. Commissioner of Sales Tax, Madhya Pradesh [(1969) 24 STC 343] as approved by Assistant Commissioner (Intelligence) v. Nandanam Construction Co. [(1999) 115 STC 427], holding that “or otherwise” qualifies “manufacture” and not “sale”.
• The Court held that the clarifications issued by the department were not binding, following the dictum in Commissioner of Central Excise, Bolpur v. Ratan Melting & Wire Industries [(2008) 13 SCC 1].
• The Court followed Neyveli Lignite Corporation Ltd. v. Commercial Tax Officer, Cuddalore and Anr. [(2001) 124 STC 586] to hold that cash discounts are not taxable.
• The Court cited State of Uttar Pradesh and Ors. v. Mohan Meakin Breweries Ltd. and Anr. [(2011) 13 SCC 588] to emphasize that bottling is a separate process from manufacturing.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the term “use” in Section 7-A(1)(a) of the Tamil Nadu General Sales Tax Act, 1959. The Court emphasized that the term “use” is broader than “consumption” and that the use of bottles for bottling was integral to the assessee’s business activity. The Court also emphasized the object of Section 7-A to plug leakage and prevent evasion of tax. This was a significant factor in the Court’s reasoning.

Fact:Law Ratio

The court’s reasoning was primarily based on the legal interpretation of Section 7-A of the Tamil Nadu General Sales Tax Act, 1959, and the relevant precedents. While the facts of the case were considered, the legal analysis was the dominant factor in the court’s decision.

Logical Reasoning:

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Conclusion

The Supreme Court held that the purchase of empty bottles by Mohan Breweries and Distilleries Limited was subject to purchase tax under Section 7-A of the Tamil Nadu General Sales Tax Act, 1959. The Court reasoned that the bottles were “used” in the business activity of the assessee, even if they were not “consumed” in the manufacturing process. The Court also held that the clarifications issued by the department were not binding and could not override the interpretation of the law by the courts. However, the Court allowed the cash discount claimed by the assessee, holding that it was not taxable.

Final Orders:

• The Supreme Court upheld the levy of purchase tax on empty bottles.
• The Supreme Court held that the clarifications issued by the department were not binding.
• The Supreme Court allowed the cash discount claimed by the assessee.
• The appeal was partly allowed.

Implications for the Assessee:

• Mohan Breweries and Distilleries Limited was liable to pay purchase tax on the empty bottles purchased.
• The assessee could not rely on the earlier clarifications issued by the department.
• The assessee received relief on the cash discount issue.

Key Takeaways

This judgment clarifies several important aspects of purchase tax under the Tamil Nadu General Sales Tax Act, 1959:

• Interpretation of “Use”: The term “use” in Section 7-A(1)(a) is broader than “consumption.” It includes any activity that is integral to the business, even if the goods retain their original identity.
• Binding Nature of Legal Precedents: The law declared by the courts is binding, and clarifications issued by the department cannot override the judicial interpretation of the law.
• Purchase Tax vs. Sales Tax: The levy of sales tax on goods sold with containers does not preclude the levy of purchase tax on the containers if they are used in the business activity.
• Cash Discounts: Cash discounts are not included in the turnover for the purpose of sales tax.

Frequently Asked Questions (FAQs)

1. Q: What was the main issue in this case?
   
   A: The main issue was whether purchase tax was applicable on empty bottles purchased by breweries under the Tamil Nadu General Sales Tax Act, 1959.
2. Q: What did the Supreme Court decide about the purchase tax on empty bottles?
   
   A: The Supreme Court held that purchase tax was applicable on empty bottles as they were “used” in the business of the assessee.
3. Q: What is the significance of the term “use” in this case?
   
   A: The term “use” was interpreted broadly to include any activity integral to the business, even if the goods are not consumed or transformed.
4. Q: Were the earlier clarifications issued by the tax department binding in this case?
   
   A: No, the Supreme Court held that the clarifications were not binding and could not override the judicial interpretation of the law.
5. Q: What was the court’s decision on the cash discount?
   
   A: The court held that cash discounts were not taxable and allowed the claim of the assessee.
6. Q: What is the object of Section 7-A of the Tamil Nadu General Sales Tax Act, 1959?
   
   A: The object of Section 7-A is to plug leakage and prevent evasion of tax by levying tax on goods that are not taxed at the point of purchase but are used in the manufacture of other goods.
7. Q: How does this judgment affect other businesses that use containers?
   
   A: This judgment clarifies that purchase tax may be applicable on containers if they are used in the business activity, even if they are not consumed or transformed in the manufacturing process.