Furnace Oil used in Manufacture and Transferred to Branches Outside State: Bombay HC rules Set-Off of Sales Tax Available after 6% Reduction of Purchase Price [Read Order]
The bench clarified that the expression "goods which are dispatched" in Sub-Rule 3(a) must be read in the context of Sub-Rule 2(iii), which includes goods "used by him in the manufacture of goods which will in fact be sold by him" outside the State.
The Bombay High Court has affirmed that M/s. Borosil Glass Works Ltd. is entitled to a set-off of sales tax on the purchase of furnace oil, but only after a mandatory reduction of 6% of the purchase price, as the manufactured goods were partly transferred to branches outside the State.
The common question of law before the division bench of Justice M.S. Sonak and Justice Advait M. Sethna was:
"Whether on the facts and in the circumstances of the case, and on the correct interpretation of Rule 41-D of Bombay Sales Tax Rules, 1959, the full set-off is available under Rule 41D main provision or the set off is available after reducing 6 per cent of purchase price under sub-rule 3(a) of Rule 41D on purchases of furnace oil used in manufacture of goods partly sold locally and partly transferred to branches outside the state?"
The dispute arose during the assessment period of 1992-93 for Borosil Glass Works Ltd. (assessee), which manufactured taxable goods using furnace oil, and subsequently sold a portion locally while transferring the remaining 39% to its branches outside Maharashtra (a branch transfer, which Rule 41D treats as 'export').
The assessee argued for a complete set-off under the main provision of Rule 41D of the Bombay Sales Tax Rules, 1959. It contended that furnace oil, being a consumable that does not form part of the finished product, cannot be covered by the reduction provision, Rule 41D(3)(a), which applies to "goods which are dispatched."
The assessee also highlighted previous precedents of the Sales Tax Tribunal that permitted full set-off for consumables due to the impossibility of apportionment.
The Revenue contended that furnace oil is classified as a consumable and is distinct from “plant and machinery” which was expressly excluded from apportionment under the second provision to Rule 41D of Bombay Sales Tax Rules, 1959.
Therefore the revenue contended that as a consumable, its purchase price must be apportioned based on the ratio of local sales and branch transfers, mandating the 6% reduction on the portion transferred outside the State as per Rule 41D(3)(a).
The Court agreed with the Revenue, relying heavily on the rationale of the Larger Bench of the Tribunal in the case of Pudumjee Pulp and Paper Mills Ltd. Vs State of Maharashtra. The Court held that furnace oil, while a consumable, has an undeniable nexus with the manufactured goods that are dispatched to the branches.
The Court observed that the price of the furnace oil would have a nexus with the goods dispatched and there is no perversity in such findings, also in the canopy of factual complexion in these proceedings.
The bench clarified that the expression "goods which are dispatched" in Sub-Rule 3(a) must be read in the context of Sub-Rule 2(iii), which includes goods "used by him in the manufacture of goods which will in fact be sold by him" outside the State.
The Court dismissed the assessee's reference and answered the question in favour of the Revenue. The Court confirmed that the set-off for the purchase of furnace oil used in the manufacture of goods partly transferred to branches outside the state is available only after reducing 6% of the purchase price under Sub-Rule 3(a) of Rule 41D of the Sales Tax Rules.
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