U. P. TRADE TAX: TAX ON PURCHASE OF PADDY BY MANUFACTURERS OF RICE

www.taxtalkindia.com presentation

       Here in this article, I am going to deal with levy of tax on purchase of paddy, under the provisions of the Uttar Pradesh Trade Tax Act, 1948 (hereinafter referred to as the State Act) as it stood at the relevant time, where such purchased paddy had been used in manufacture of rice and such rice had been sold in the course of export out of the territory of India falling either under section 5(1) or section 5(3) of the Central Sales Tax Act, 1956. I will examine the liability of payment of tax under the provisions of the said Acts as they existed on or after December 01, 1998.
      If we look at the provisions, we find that following provisions have been in existence:-

       Here, I would like to point out that in Notifications No Krishi Vipannan Evam Krishi Videsh Vyapaar Anubhaag-2 Sankhya-1176/67 -2000-02(12)-2000, Dated 24 October, 2000 and No Krishi Vipannan Evam Krishi Videsh Vyapaar Anubhaag-2 Sankhya-1152/Assi -2-2005-02(12)-2000, Dated 30 September, 2005,  there is no mention of any provision of any Act in exercise of powers of which levy of trade tax has been waived. Such non-mentioning of provision does not vitiate the notification or makes the notification invalid simply on the ground that there is no mention of State Government’s power to issue such notification specially where such notification is within the powers given to Government under any State Act. Under section 4-B of the State Act, (under Uttar Pradesh Trade Tax Act, 1948), the State Government had been fully empowered to fix rate of tax in respect of raw materials, packing materials, fuels, etc. required by manufacturers of notified goods if manufactured notified goods were to be sold inside the State or in the course of inter-state trade or commerce or in the course of export out of India. Also section 4-B (7) covers sales described in sections 5(1) and section 5(3) both. Hence, both notifications, quoted above, are under and covered by powers under section 4-B of the Act. One may argue that section 4-B is applicable in cases of manufacturers who hold Recognition Certificate issued under sub-section 4-B (2), but above both notifications does not speck about such Certificate. It is to be noted that general rate of tax on purchase of paddy had been 4 percent and in case of dealers holding registration certificate, such rate had been 2 percent. Notification dated 24-10-2000 clearly has mention of “Niryaat kiye jaa rahe samast prakaar ke chaawal ko utpaadit karane mein prayaukt dhaan par vartmaan mein lagaaye ja rahe 2 pratishat vyaapar kar se chhoot rahegi.”
       Vide Notification No. KA. NI.-2-2383 / XI-9(251)/97-U.P.-Act-15-48-Order-98 Dated 23 November, 1998, issued under section 4-B of the Uttar Pradesh Trade Tax Act, 1948, rate of 2 percent was fixed in respect of sale of declared goods to or as the case may be, purchase of declared goods by, a dealer holding Recognition Certificate issued under subsection (2) of section 4-B of the State Act. Paddy falls under the category of declared goods. On issue of this notification, purchase of paddy, by rice manufacturers who held Recognition Certificate in this behalf, became liable for payment of tax on purchase of paddy at the rate of 2 percent.
        If we look at the notification no. 289 dated February 12, 1999, we find that raw materials, etc. were exempted in the hands of manufacturers who held Recognition Certificate if manufactured goods were exported out of India. This notification had been issued in exercise of powers under section 4-B of the State Act. In sub-section (2) of section 4-B, it had been provided that Recognition Certificate can be issued to a manufacturer if notified manufactured goods are intended to be sold by him in the State or in the course of inter-state trade or commerce or in the course of export out of India. Notification issued under this sub-section cannot be read beyond the provisions of this sub-section. This implies that term “exported out of India” used in the notification dated February 12, 1999, mean that manufactured goods should be sold in the course of export out of India. Sub-section (7) says that phrase “in the course of export out of India” will be understood as defined in section 5 of the Central Sales Tax Act, 1956. If we analyze the provisions of section 5 of the Central Act, we find that sub-section (1) covers direct export sales and sub-section (3) covers indirect export sales. Thus section 5 of the Central Act and hence sub-section (2) of section 4-B covers direct export sales as well as indirect export sales.
       Even if it is thought that notification no. 289 dated February 12, 1999 did not cover indirect export, even then purchase of paddy, in cases of dealers who held Recognition Certificate and who sold rice either directly or indirectly, had been exempt from payment of tax with effect from 1-11-2000 in view of notification numbers Krishi Vipannan Evam Krishi Videsh Vyapaar Anubhaag-2 Sankhya-1176/67 -2000-02(12)-2000, Dated 24 October, 2000 and No Krishi Vipannan Evam Krishi Videsh Vyapaar Anubhaag-2 Sankhya-1152/Assi -2-2005-02(12)-2000, Dated 30 September, 2005.

         Clause (ca) of section 15 of the CST Act provides a fiction that for sub-section (3) of section 5 of the CST Act, which deals with indirect export of goods, paddy and rice will be treated same commodities. It implies that if export contract in between direct exporter and foreign buyer is for sale of rice, then in order to fulfill the export order, direct exporter can purchase rice as well as paddy. In this case sale of paddy to direct exporter against Form H and purchase of paddy by such exporter against Form H shall also be treated a sale and purchase in the course of export covered under sub-section (3) of section 5 of the CST Act.
         Sub-section (3) of section 5 of the CST Act covers the sale and purchase of goods in between direct exporter and the dealer who makes sale of goods to direct exporter. Any earlier transaction of sale or purchase is not covered under section 5(3) of the CST Act.

        Thus we see that clause (ca) of section 15 of the CST Act entitles the -

        Clause (ca) of section 15 of the CST Act is of no use for direct exporters who purchase rice in order to fulfill the export order of rice. Such direct exporters, in view of provisions of section 5(3) of the CST Act, are entitled to purchase rice without payment of tax for fulfilling their export order. Thus clause (ca) of section 15 of the CST Act provides benefit to those direct exporters who purchase paddy for fulfilling their existing export contract of rice, procure rice out of such paddy and export rice so procured and to those suppliers of paddy who supply paddy to such direct exporters of rice.

Example-1:  

      A dealer X is direct exporter of rice. It enters into contract of export of rice with a foreign buyer. In order to fulfill its export order, it makes purchase of rice against Form H from another dealer Y and exports such rice to foreign buyer.
      In this case,

Example-2: 

      A dealer X is a direct exporter of rice. It enters into contract of export of rice with a foreign buyer. In order to fulfill its export order, it makes purchase of paddy against Form H from another dealer Y. The dealer X procures rice out of such paddy and exports such rice to foreign buyer.
In this case,

Example-3: 

      A dealer X is a direct exporter of rice. It enters into contract of export of rice with a foreign buyer. In order to fulfill its export order, it makes purchase of rice against Form H from another dealer Y who is manufacturer of rice. Y, in order to fulfill its contract of supply of rice with Z, makes purchase of paddy from a trader of paddy Z. The dealer Y procures rice out of such paddy and supplies rice to direct exporter X. X exports such rice to foreign buyer.
      If we examine this case ignoring notifications issued by the Government of Uttar Pradesh, we find that-

      A dealer Y is manufacturer of rice. It makes random purchases of paddy from within the State for use in manufacture of rice with an intention of sale of rice in the course of direct export. Whenever it finds a foreign buyer, it exports rice to foreign destination.
      In this case, paddy is not purchased in order to fulfill some particular export order. Therefore, sub-section (3) of section 5 of the CST Act will not be applicable. Therefore, sale or purchase of paddy will not be in the course of export. Such sale or purchase of paddy will be a local sale and local purchase.

Example-5: 

      A dealer Y is manufacturer of rice. It makes random purchases of paddy from within the State for use in manufacture of rice with an intention of sale of rice to some exporter against Form H.  It manufactures rice. A direct exporter, X, in order to fulfill a particular export order, places order for purchase of rice with Y.  Y makes sale of rice to X against Form H. X exports such rice to foreign destination.
      In this case, purchase of paddy is not the last purchase preceding sale occasioning export. Therefore, it will not fall under section 5(3) of the CST Act. At the same time, sale of rice by Y to X or purchase of rice by X from Y is the last sale or last purchase preceding sale occasioning export. Purchase of rice by exporter X has been made against Form H from Y in order to fulfill particular existing export order; hence, sale of rice by Y to X and purchase of rice by X from Y will be covered under section 5(3) of the CST Act and will be in the course of export. In this case, purchase of paddy will be a local purchase governed by State Act.

Levy of tax on local purchase of paddy in view of notifications issued by the Government of Uttar Pradesh.

      Where a rice manufacturer, who holds a recognition certificate for purchase of paddy for use in manufacture of rice and intends to sale manufactured rice in the course of export, (whether directly or through exporter against Form H), makes local purchase of paddy randomly, such purchase of paddy, in view of the above discussions, will be local purchase. Tax liability on such purchase is to be examined in view of the provisions of the State Act.
      In Uttar Pradesh, first purchase of paddy has been liable to tax under section 3 –D of the U. P. Trade Tax Act. From within the State, a manufacturer of rice can procure paddy in two ways. He may purchase paddy directly from farmers or from persons other than registered dealer. In that case, he will be first purchaser of such paddy. In the second case, manufacturer of rice may purchase paddy from or through a registered dealer. Such other dealer, selling or supplying paddy to manufacturer, may himself be first purchaser or a subsequent purchaser of such paddy. Where such other dealer is first purchaser of paddy, he will have to pay tax.
      For providing relief to manufacturers, who obtain Recognition Certificate referred to in sub-section (2) of section 4-B of the State Act and who manufacture notified goods for sale within the State or in the course of inter-state trade or commerce or in the course of export out of India, sub-section (1) of section 4-B gives powers to the State Government for issuing notification for-

       Sub-section (1) of section 4-B of the State Act has three clauses, namely, (a), (a-1) and (b). Each clause empowers the State Government for issuing notification for granting exemption from payment of tax or for payment of tax at such concessional rate of tax as may be notified and for specifying goods which are to be treated notified goods. Clause (a) empowers the State Government for issuing notification in respect of goods -

       Clause (b) of sub-section 4-B of the State Act empowers the State Government for issuing notification in respect of goods sale of which by any dealer to manufacturer is liable to tax in the hands of such selling dealer. Clause (a-1) of sub-section 4-B of the State Act empowers the State Government for issuing notification, in respect of goods-

       For reference, we are reproducing sub-sections (1) and (2) of section 4-B of the State Act as under.

“4-B          Special relief to certain manufacturers.-

Where any declared goods liable to tax under sub-section (1) of section 3-D are sold or supplied by a dealer, who is the first purchaser thereof, to another dealer, holding a valid recognition certificate under sub-section (2) in respect thereof, the State Government may, subject to such conditions and restrictions as may be specified by a notification in that behalf, grant the same relief as mentioned in clause (a) to such first purchaser:
              Provided that any notification under this clause or clause (a) in respect of paddy may also be made effective from a date not earlier than the first day of may, 1977;
        Provided further that the rules to carry out the objects of this clause or clause (a) may also be made effective from a date not earlier than the first day of May, 1977;

Where any goods liable to tax under any other provision of this Act are sold by a dealer to another dealer and such other dealer furnishes to the selling dealer in prescribed form and manner a certificate to the effect that he holds a recognition certificate issued under sub-section (2) in respect thereof, the selling dealer shall be liable in respect of those goods to tax at such concessional rate or be wholly or partly exempt from tax, whether unconditionally or subject to the conditions and restrictions specified in that behalf as may be notified in the Gazette by the State Government in that behalf.

               A careful reading of clause (a-1) of sub-section (1) of section 4-B of the Act reveals that in respect of any declared goods the first purchase of which is liable to tax under section 3-D of the Act, by notification the State Government, under clause (a-1), can provide the same relief, which is available to recognition certificate holder manufacturers under clause (a) in respect of first purchase of such declared goods, to dealers who are first purchasers of such declared goods and who sell or supply such goods to recognition certificate holder manufacturers. This implies that where in respect of first purchase of any declared goods, liable to tax under section 3-D, any relief is not available under clause (a) to recognition certificate holder manufacturers in any specified circumstances, the State Government can not give relief in those circumstances to dealers who are first purchasers of such goods and who sell or supply such goods to recognition certificate holder manufacturers.
            Paddy falls under the category of declared goods. Also first purchase of paddy has been liable to tax under section 3-D of the State Act. Now if we look at the notification No. 284 dated 25-01-2001, we find that the State Government has issued this notification in exercise of its powers under clause (a-1) of sub-section (1) of section 4-B of the State Act. Notification covers all declared goods, the first purchase of which is liable to tax under section 3-D of the State Act. By this notification, first purchase of such goods has been exempted from levy of tax in the hands of the dealer who sells or supplies goods to a recognition certificate holder manufacturer, if manufactured goods are sold against Form H prescribed in section 5 of the CST Act to a dealer who exports such manufactured goods out of India. Alternatively, we can say that first purchase of such goods has been exempted from levy of tax in the hands of the dealer who sells or supplies the goods to a recognition certificate holder manufacturer, who makes sale of manufactured goods in the course of export out of India as defined in sub-section (3) of section 5 of the CST Act.  Here relief is subjected to condition of export covered under section 5(3) of the CST. No relief is available where condition of export as defined in section 5(3) of the CST Act is not fulfilled. This notification could have only been issued if there would have been some notification which grants exemption from payment of tax on first purchase of such goods to manufacturer of goods subject to condition that the manufacturer makes sale in the course of export out of India as defined in section 5(3) of the CST Act.
            Now let us look at the notifications issued, under clause (a) of sub-section (1) of section 3-D of the State Act, prior to date of issue of the notification referred to in earlier paragraph and which granted exemption from payment of tax on first purchase of declared goods liable to tax under section 3-D of the State Act where such first purchase of such goods is made by the recognition certificate holder manufacturer who makes sale of manufactured goods in the course of export out of India as defined in section 5(3) of the CST Act. There is no notification which exclusively provides exemption, in respect of first purchase of-

      But we find that notification No. 289 dated 12-02-1999 has been issued in exercise of powers under clause (a) and clause (b) of section 4-B of the State Act. This notification grants exemption from payment of tax on sale to, or as the case may be, purchase by recognition certificate holder manufacturers of all goods, except goods manufactured by distilleries and breweries, subject to the condition that manufactured goods are exported out of India. The notification covers first purchase of goods (including declared goods) liable to tax under section 3-D of the Act.
        Another notification which grants exemption from payment of tax on purchase of paddy by manufacturers of rice is Krishi Vipannan Evam Krishi Videsh Vyapaar Anubhaag-2 Sankhya-1176/67 -2000-02(12)-2000, Dated 24 October, 2000. Among other conditions of exemption in this notification, one of the conditions is that rice manufactured should be exported out of India by the manufacturer directly or indirectly against Form H through export merchants, export houses, etc. But this notification is only for paddy and not for all declared goods, the first purchase of which is liable to tax under section 3-D of the State Act. Relief granted by this notification can be extended by a notification under clause (a-1) of section 4-B of the State Act only in respect of paddy. But notification no. 284 dated 25-01-2001 provides exemption in respect of all declared goods (including paddy) the first purchase of which is liable to tax in the hands of the dealer who sells opr supplies goods to manufacturer. Therefore, it can safely be concluded that while issuing notification no. 284 dated 25-01-2001, the Government has not intended to extend the benefit given to manufacturers by notification Sankhya-1176/67 -2000-02(12)-2000, Dated 24 October, 2000 to dealers who sell or supply paddy to manufacturers who held recognition certificate for manufacture of rice.
       There is no other notification issued prior to notification No. 284 dated 25-01-2001. Again notification no. 289 dated 12-02-1999 covers purchase of all goods (including declared goods which includes paddy) the first purchase of which is liable to tax in manufacturer’s hands. The condition of applicability of notification is that manufactured goods should be exported out of India. In view of the condition laid down in sub-section (2) of section 4-B of the State Act relating sale of manufactured goods, the expression ‘manufactured goods should be exported out of India’ used in notification no. 289 dated 12-02-1999 could only mean that benefit given in the notification will be available only when manufactured goods are sold in the course of export out of India and are exported out of India. One may say that expression ‘manufactured goods is exported out of India’ implies that manufactured goods could be sold in the course of export out of India only by the manufacturer himself. But –

       This leads to second interpretation that goods may be exported out of India by direct exporter-cum-manufacturer as well as by the indirect exporter who makes purchase of manufactured goods from the manufacturer for fulfilling his existing export order with the foreign buyer.
       If possibility of two interpretations (which I do not find) can be thought, then first interpretation that manufactured goods can be exported out of India by the manufacturer himself makes the notification No. 284 dated 25-01-2001 invalid and second interpretation that manufactured goods can be exported out of India by the manufacturer as well as by the indirect exporter, upholds the validity of notification No. 284 dated 25-01-2001. In such circumstances, principle of harmonious construction of statues requires that notification No. 289 dated 12-2-1999 should cover direct export sale as well as indirect export sale.
       Also section 5 of the CST Act defines three types of sales or purchases in the course of export of the goods out of the territory of India. These sales or purchases are:

       So when we speak about a sale in the course of the export out of the territory of India, we mean a sale out of aforesaid three types of sales.
       In view of the above discussion, I am of the opinion that inter alia, the first purchase of goods, including first purchase of paddy, by a recognition certificate holder manufacturer has been exempt from levy of tax under the notification no. 289 dated 12-02-1999, if manufactured goods were sold in the course of export out of India where such export had fallen either under sub-section (1) of section 5 or under sub-section (3) of section 5 of the CST Act.
       In order to promote export of rice from the State of Uttar Pradesh, the State Government, under export policy of rice,  has also issued notification Krishi Vipannan Evam Krishi Videsh Vyapaar Anubhaag-2 Sankhya-1176/67 -2000-02(12)-2000, Dated 24 October, 2000. This notification has been applicable for the period commencing on November 01, 2000 and ending on September 30, 2005. Facilities given by the notification have been extended by No Krishi Vipannan Evam Krishi Videsh Vyapaar Anubhaag-2 Sankhya-1152/Assi -2-2005-02(12)-2000, Dated 30 September, 2005, for the period of next five years. So far as it is related to exemption from tax on purchase of paddy by the miller, these notifications provides exemption if rice procured out of paddy is exported out of India either by the manufacturer directly or indirectly through export merchant, export houses, etc. where sale of rice is made to such exporters against Form H. As discussed above, exemption in these notifications in respect of tax on paddy has been given to recognition certificate holder manufacturers. If a manufacturer fulfills conditions laid down in these notifications, then purchase of paddy will enjoy exemption under these notifications.

***