Ind Rubber Trades Kodimatha, Kottayam District v Authority for Clarification under Section 94 KVAT Act, 2003

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU THURSDAY, THE 22ND DAY OF JUNE 2017/1ST ASHADHA, 1939 OT. Appeal. No.8 of 2013 ----------------------------- APPELLANT: ------------- IND RUBBER TRADES KODIMATHA, KOTTAYAM DISTRICT, REPRESENTED BY ITS PROPRIETOR MATHEW T. THOMAS. BY ADVS. SRI.S.ANIL KUMAR (TRIVANDRUM) SRI.K.S.HARIHARAN NAIR RESPONDENT: ---------------- AUTHORITY FOR CLARIFICATION UNDER SECTION 94 OF THE KERALA VALUE ADDED TAX ACT, 2003 REPRESENTED BY THE JOINT COMMISSIONER (GENERAL) COMMERCIAL TAXES, TAX TOWERS, KARAMANA THIRUVANANTHAPURAM - 695 002. ## BY SR. GOVERNMENT PLEADER SRI.MOHAMMED RAFIQ THIS OTHER TAX APPEAL HAVING BEEN FINALLY HEARD ON 22-06-2017, ALONG WITH OTAP. 10/2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ## **ANTONY DOMINIC, J. & DAMA SESHADRI NAIDU, J.** ------------------------------------------------ O. T. Appeal Nos.8, 10 of 2013 -----------------------------------------------Dated this the 22[nd ] day of June, 2017 ## **JUDGMENT** ## **Antony Dominic, J.** 1. aTwo assesses registered under the Kerala Value Added Tax Act, 2003, (KVAT Act, for short) have filed these appeals aggrieved by the proceedings of the Authority for clarification constituted under Section 94 of the KVAT Act whereby it was clarified thus: - “(a) As such, it is clarified that sale of commodities to an industrial unit situated in a Special Economic Zone located outside the State is an inter-state sale for which, the set-off and refund provisions for an inter-state sale under Section 11, 12 and 13 of Kerala Value Added Tax Act, 2003 will be applicable. On the point, sale to SEZ units outside the State is an interstate sale exempted from tax and so adjustment of input tax, if any, is permissible only in excess of 5% as per third proviso to sec.11 (3) of the KVAT Act. With regard to rubber specifically, the provisions of S.R.O. O. T. Appeal Nos.8, 10 of 2013 -2- No.753/2011 will be applicable for interstate sales. - (b) For the foregoing reasons, it is also clarified that exemptions/concessions to SEZ situated within the State will be governed solely by the provisions to this effect in sub-section (7) of section 6 of the KVAT Act and sale to SEZ will not be deemed export by virtue of interpretations of “export” in the SEZ Act. The clarification No.C331297/07/CT dated 15/9/2007, issued earlier is also reconsidered and is modified to the above extent.” 2. Petitioners contend that, being dealers registered under the KVAT Act, in the course of their business, they have sold rubber sheets to industrial units in the Special Economic Zones situated outside the state. According to them, in view of Annexure-I clarification issued by the Commissioner for Commercial Taxes, who, at the relevant time, was exercising the powers under Section 94 of the KVAT Act, such sales were to be treated as deemed exports and that input tax credit paid by a dealer in respect of such goods are entitled either for refund under Section 13(2) or O. T. Appeal Nos.8, 10 of 2013 -3- set off under Section 13(3) of the KVAT Act. It is their case that on the strength of Annexure-I order dated 15.09.2007, the statutory benefits under Section 13(2) or 13(3) of the KVAT Act were being extended to them and that subsequently, the department took the view that Annexure-I is inapplicable to the appellants and on that basis, issued notices calling upon them to refund the amounts already refunded. It was thereupon, that clarification was sought from the Authority constituted under Section 94 of the Act by virtue of the amendment with effect from 01.04.2009 and that resulted in Annexure-V proceedings of the Authority clarifying to the effect as extracted above. 3. In these appeals, learned counsel appearing for the appellants mainly contended that in view of Section 94(7) of the KVAT Act, the Authority being subordinate to the Commissioner for Commercial Taxes, could not have modified the orders passed by the Commissioner in exercise of his powers under Section 94. Secondly, it is argued that O. T. Appeal Nos.8, 10 of 2013 -4- in view of the provisions contained in the Special Economic Zones Act, 2005, (SEZ Act, for short), sale to a unit within the SEZ is a deemed export which finding is already recorded in Annexure-I, entitling the appellant to the benefit of Section 13(2) or 13(3) of the KVAT Act, as the case may be. He further argued that till impugned clarification was issued by the Authority, the field was governed by Annexure-I clarification and that the appellants could not have been called upon to refund amounts already refunded to them. 4. All these contentions were contradicted by the learned Government Pleader who not only referred us to the provisions of SEZ Act, KVAT Act and the Central Sales Tax Act, 1956, (CST Act, for short), but also the relevant judgments. 5. We have considered the submissions made. 6. According to us, the first issue to be considered is whether there is any force in the contention that the sale O. T. Appeal Nos.8, 10 of 2013 -5- effected to an industrial unit within the SEZ is a deemed export. This question has to be answered in the light of the provisions contained in the SEZ Act itself. Section 53 of the SEZ Act provides that the Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purpose of undertaking the authorized operations. “Authorized operations” is a term defined in Section 2(c) of the Act as operations which may be authorized under Section 4(2) and Section 15(9). Section-4 deals with establishment of Special Economic Zones and approval and authorization to operate to Developer. Sub-section 2 thereof entitles the Board to authorize the Developer to undertake in a SEZ such operations which the central government may authorize. Section 15 deals with setting up of units. Sub-section 9, provides that the Development Commissioner may grant a letter of approval to the person concerned to set up a unit and undertake such operations which the Development O. T. Appeal Nos.8, 10 of 2013 -6- Commissioner may authorize and every such operations so authorized shall be mentioned in the letter of approval. In exercise of the powers under Section 4(2), the Central Government have issued Notification dated 27.10.2006 notifying the operations which are to be authorised by the Boards of Approval while approving the authorized operations in the SEZs. A reading of the list attached to the Notification show that the authorized operations enumerated therein relate to development of infrastructural facilities within SEZ and do not relate to manufacture/production or product development. Therefore, it is evident from Section 53 that the concept of territory outside the customs territory of India, as embodied in this Section, is limited to the purposes of undertaking authorized operations, which operations are enumerated in the Notification dated 27.10.2006. In other words, SEZ is treated in Section 53 of the SEZ Act as a foreign territory only for the purpose of development of infrastructural facilities within the SEZ only. O. T. Appeal Nos.8, 10 of 2013 -7- 7. Further, provision has been made in Section 26 of the Act providing for exemptions, drawbacks and concessions to every developer and entrepreneur. To the extent it is relevant, section 26(g) provides that subject to the provisions of sub-section 2, every developer and entrepreneur shall be entitled to exemption from levy of taxes on the sale or purchase of goods other than newspapers under the Central Sales Tax Act, if such goods are meant to carry on the authorized operations by the developer or entrepreneur. Similarly, Section-50 empower the State Government to grant exemptions and it provides that the State Government may for the purpose of giving effect to the provisions of the Act notify policies for developers and units and take suitable steps for enactment of any law granting exemption from the state taxes, levies and duties to the developer or entrepreneur. In other words, the aforesaid statutory provisions makes it clear that insofar as the CST Act is concerned, Section 26(g) provides for O. T. Appeal Nos.8, 10 of 2013 -8- exemption if the goods purchased are meant for the authorized operations by the developer or entrepreneur whereas Section-50 entitles the State Government to grant exemption from the state taxes to the developer or entrepreneur. 8. Having thus understood the relevant provisions of the SEZ Act, if we turn to the Central Sales Tax Act, it can be seen that consequential provisions have been made in Section-8(6) thereof which provides that no tax shall be payable on sales in the course of inter-state trade or commerce to a dealer in a SEZ. Section 8(6) to (8) read thus: - “8(6) Notwithstanding anything contained in this section, no tax under this Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter-State trade or commerce to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, reconditioning, reengineering, packaging or for use as packing material or packing accessories in a unit located in any special economic zone or for development, O. T. Appeal Nos.8, 10 of 2013 -9- operation and maintenance of special economic zone by the developer of the special economic zone, if such registered dealer has been authorized to establish such unit or to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this behalf. (7) The goods referred to in sub-section (6) shall be the goods of such class or classes of goods as specified in the certificate of registration of the registered dealer referred to in that sub-section. (8) The provisions of sub-sections (6) and (7) shall not apply to any sale of goods made in the course of inter-State trade or commerce unless the dealer selling such goods furnishes to the prescribed authority referred to in sub-section (4) a declaration in the prescribed manner on the prescribed form obtained from the authority specified by the Central Government under subsection (6), duly filled in and signed by the registered dealer to whom such goods are sold.” 9. Similarly in the KVAT Act also, provisions for exemption have been made in Section 6(7) (b) which reads as under: “Section 6(7)(b) sale of any building materials, industrial inputs, plant and machinery including components, spares, tools and consumables in relation thereto any developer or industrial unit O. T. Appeal Nos.8, 10 of 2013 -10- or establishments situated in any Special Economic Zone in the State for setting up the unit or use in the manufacture of other goods shall, subject to such conditions or restrictions, as may be prescribed, be exempted from tax.” 10. These statutory provisions came to be considered by this Court in the judgment in **Lalitha Muralidharan v.** ## **Commissioner of Commercial Taxes, Thiruvananthapuram** **[(2016) 91 VST 175(Ker)]** and the learned single Judge of this Court rejected the contention that, sale to a unit in the SEZ is a deemed export by holding thus: - “13. It will be seen from a reading of Section 53 of the SEZ Act that an SEZ is deemed to be a territory outside the customs territory of India only for the purposes of undertaking authorised operations. The term "authorised operations" is defined in Section 2(c) of the Act as meaning operations which may be authorised under Section 4(2) and Section 15(9) of the Act. Section 4(2) and Section 15(9) speak of such operations, which are authorised by the Central Government, and in respect of which the Developer of a unit has the authorisation of the Board of Approval. Further, an overview of the provisions of the SEZ Act indicates that it is a special law enacted with the specific object of providing an internationally competitive environment for exports and there are specific provisions therein that are tailored to provide tax exemptions and other benefits to the units -11- O. T. Appeal Nos.8, 10 of 2013 situated in the SEZ's. The overriding effect given to provisions of the Act is only with a view to further the objects of the Act and cannot confer on the units in the SEZ a status other than what is contemplated for the purposes of their functioning under the Act. It is against this schematic backdrop that one has to consider whether a sale from a unit in the DTA to a unit in the SEZ can be treated as an export for all purposes, including for the purposes of the CST Act. As already noted, the words "export" and "import" have a different connotation under the SEZ Act, when compared with the definition of the same words under the Customs Act. While "export" is defined as including a supply from a unit in the DTA to a unit in the SEZ, the word also includes the activity of taking goods or providing services out of India from a unit in the SEZ. Similarly, the word "import" does not include the bringing of goods into a unit in the SEZ, from the DTA. It is also relevant to note that Section 7 of the SEZ Act that deals with exemption from taxes, duties and cesses does not specifically grant an exemption from Customs duties or CST or State VAT levies. The exemption from State VAT levies is separately contemplated under Section 50 of the SEZ Act and is left to the discretion of the State Legislatures. It is apparent, therefore, that while enacting the SEZ Act, the Parliament did not intend to treat a supply from the DTA to a unit in the SEZ as an export for the purposes of the CST Act or Article 286 of the Constitution. Had the Parliament any such intention, then it would not have been necessary to provide for an exemption from State taxes, levies and duties, at the discretion of State Legislatures for, any sale of goods to an SEZ unit, would have qualified as an export sale for the purpose of the CST Act, and there would have been no necessity for an exemption provision. As a matter of fact, even under the CST Act, through an amendment that was brought in with effect O. T. Appeal Nos.8, 10 of 2013 -12- from 10.09.2004, Section 8(6) of the Act was amended to provide an exemption from CST in cases where there is an inter-state sale effected to registered dealers who are permitted to set up units in SEZ's. The said provision reads as follows: "8. Rates of tax on sales in the course of inter-state trade or commerce:.-- (1) to (5) **** (6) Notwithstanding anything contained in this Section, no tax under this Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter-State trade or commerce to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading production, processing, assembling, repairing, reconditioning, re-engineering, packaging or for use as packing material or packing accessories in a unit located in any special economic zone or for development, operation and maintenance of special economic zone by the developer of the special economic Zone, if such registered dealer has been authorised to establish such unit or to develop, operate and maintain such special economic Zone by the authority specified by the Central Government in this behalf.” 14. Similarly, under the KVAT Act, there is a provision that grants exemption in respect of sale of goods to units in a SEZ, under certain circumstances. Section 6(7)(b) of the KVAT Act reads as follows: O. T. Appeal Nos.8, 10 of 2013 -13- "6. Levy of tax on sale or purchase of goods.-- (7) Notwithstanding anything contained in sub-section (1),-- (a) **** (b) sale of any building materials, industrial inputs, plant and machinery including components, spares, tools and consumables in relation thereto to any developer or industrial unit or establishments situated in any Special Economic Zone in the State for setting up the unit or use in the manufacture of other goods shall, subject to such conditions or restrictions, as may be prescribed, be exempted from tax." 15. The aforesaid provisions seem to suggest that the legislative intention under the SEZ Act was to treat sales to units in the SEZ as taxable sales, subject to specific exemptions that were provided for, either under the CST Act or under the respective State legislations. In the absence of any exemption, therefore, such sales effected from the DTA to a unit in the SEZ would not qualify to be export sales for the purposes of S. 5(1) of the CST Act or for the purposes of Art. 286 of the Constitution of India. I, therefore, find against the petitioner on this issue.” 11. This judgment of the learned single Judge was challenged before a Division Bench of this Court in W.A. No.2665/2015 and the appeal was dismissed by judgment dated 14.06.2017. O. T. Appeal Nos.8, 10 of 2013 -14- 12. In the light of the aforesaid statutory provisions and authoritative pronouncement by this Court, conclusion is irresistible that sale by registered dealers like the appellants to units within the SEZ do not qualify to be deemed exports and instead their entitlement, for statutory benefits are governed by the provisions of Section 8 of the CST Act and Section 6 of the KVAT Act. Viewed in that manner, the conclusion as contained in impugned clarification will have to be sustained and we do so. 13. Now what remains is the issue whether the appellants should refund the amounts already refunded to them on the strength of Annexure-I. Annexure-I was issued by the Commissioner in exercise of his powers under Section 94 of the KVAT Act. That Annexure was modified by the Authority which came into existence only by the impugned proceedings. Therefore, until the impugned proceedings were issued, the department was bound by Annexure-I and it is on that basis that refunds were also O. T. Appeal Nos.8, 10 of 2013 -15- allowed to the assessee. That apart, the Commissioner also has not issued any clarification that the impugned order would be retrospective as empowered under Section 94(2). 14. In such circumstances, while we uphold the legality of the impugned order, we, also hold that the appellants shall not be liable to refund any amount already refunded to them on the strength of Annexure-I order dated 15.09.2007. The appeals are disposed of accordingly. Sd/- **ANTONY DOMINIC JUDGE** Sd/- **DAMA SESHADRI NAIDU JUDGE** kns/- //TRUE COPY// P.S. TO JUDGE O. T. Appeal Nos.8, 10 of 2013 -16-