By G. G. Goyal, Chartered Accountant , C. B. Thakar, Advocate
Introduction
Under VAT laws, tax can be
levied on sale of ‘goods’. Completed
sale is liable to tax. However, there may be a situation where the goods sold
are returned by the buyer. Since the transaction of sale is already complete,
even if subsequently there is sales return (which is also referred to as ‘goods
return’) the liability will still remain on the same. However, the legislature
gave some latitude by giving facility of deduction of sales return from taxable
turnover, if such return is within the stipulated time limit.
There are provisions under
Maharashtra Vat Act (MVAT Act) and Central Sales Tax Act (CST Act) explaining
that if the goods sold are returned back within six months from the date of
sale, then such return should be given deduction and no tax should be payable
on such goods return portion. If the return is beyond the prescribed period of
six months, then the deduction is not allowable and tax is payable on the full
sale value.
Sales
Return – Scope
The issue arises as to when
the goods returned are eligible for deduction as sales return? An important
judgement has come on the same from Hon. Bombay High Court. The judgement is in
case of Reliance Industries Ltd. vs. State of Maharashtra (50 GSTR 1)(Bom).
The facts in this case, as narrated by High Court are as under:
“3. In Writ Petition No. 2217
of 2015, the Petitioner is Reliance Industries Limited (for short
“RIL”) which is a public limited company inter alia engaged in
the manufacture of petrochemicals. Respondent No.1 is the State of Maharashtra,
through its Secretary, Ministry of Finance. Respondent No.2 is the MSTT
constituted under the BST Act. Respondent No.3 is Bharat Petroleum Corporation
Limited (for short “BPCL”) which is a public sector undertaking
engaged in the business of refining and selling petroleum products and who is
the supplier of Kerosene to RIL in the present dispute. Respondent No.4 is the
Commissioner of Sales Tax functioning and discharging his duties under the
provisions of the BST Act.
4. It is the case of RIL that
in or around 1992, RIL had established a petrochemical plant in Patalganga for
manufacturing Linear Alkyl Benzenes (“LAB”). RIL required N-Paraffin
as a raw material for the manufacture of LAB. According to RIL, Kerosene (also
known as Paraffin), is a mixture of Hydrocarbons in the range of C-8 to C-18.
Out of such mixture, the Hydrocarbons C-8 and C-9 are known as Light Paraffin.
Hydrocarbons from C-10 to C-13 are known as N-Paraffin (which is required by
RIL). The range of Hydrocarbons from C-14 to C-18 are known as Heavy Paraffin.
According to RIL, N-Paraffin itself is also Kerosene and is one of the many
constituents of Kerosene.
5. According to RIL,
N-Paraffin is easily obtained from kerosene by using a molecular sieve. This,
according to RIL, is only a physical activity not involving any chemical
reaction. The molecular sieve would absorb the N-Paraffin only and the rest of
the Kerosene would simply pass through the said Sieve. Subsequently, the
N-Paraffin is de-absorbed from the molecular Sieve.
6. According to RIL, BPCL is
having a refinery at Mahul for many years prior to 1992. One of the products
produced by BPCL in the said refinery is Kerosene. Kerosene is as such sold by
BPCL through the Public Distribution System (involving a dealer network) to its
final consumers.
7. Be that as it may, an exclusive
pipeline of approximately 56 kms was laid connecting the Mahul refinery and
Petitioner’s factory at Patalganga so as to ensure continuous and constant to
and fro movement of the requisite quantity of Kerosene from BPCL to RIL and
from RIL to BPCL, respectively. It is in these circumstances that RIL entered
into an agreement dated 24th August, 1992 with BPCL for procurement
of Superior Kerosene Oil. As this Kerosene was required for manufacturing of
LAB as Feed Stock (FS), it was described as KO (LABFS). A copy of this
agreement can be found at Exhibit “C” to the Writ Petition.
8. According to RIL, it was
agreed between itself and BPCL that Kerosene would be delivered to RIL. In
turn, RIL would consume the suitable quantity of Kerosene by taking out N-
Paraffin required by it and send the balance quantity of Kerosene back to BPCL
as a “return stream”. According to RIL, this agreement mandatorily
required the Petitioner (by way of “return stream”) to return the
quantity of Kerosene after extracting the N-Paraffin. According to RIL, this
agreement thus provided for supply of Kerosene solely for the purposes of
consuming the requisite quantity of kerosene. Thereafter, the balance quantity
of Kerosene was to be returned back to BPCL.
9. According to RIL, the
“return stream” is a common phrase used in the petroleum and
petrochemical industry both within India as also internationally. A petroleum
product would be sent by the refinery to a petrochemical complex. The
petrochemical complex would use/consume the required quantity of item and
return the balance petroleum product to the refinery as a “return
stream”.”
In a nutshell, the issue was
that BPCL has to supply kerosene namely KO (LABFS) to RIL. RIL to extract
n-paraffin from the said kerosene and the balance kerosene will be returned
back to BPCL. The issue was whether such return of kerosene by RIL to BPCL will
be purchase by BPCL from RIL or it will simply be a case of sales return by RIL
to BPCL.
There were a number of issues
involved in the case. There were arguments from the both the sides.
Hon. High Court considered
arguments from both the sides and also referred to the relevant provisions
under MVAT Act like definition of manufacture, resale, turnover of sale etc.
After having such reference, Hon. High Court observed about the merits of the
case as under:
“53. What can be discerned
from the aforesaid definitions and as even correctly submitted by Mr.
Venkatraman as well as Mr. Dada is that for there to be a sales return, the
goods originally supplied and the delivery of the return stream should be one
and the same goods. If the goods that are sought to be returned are a product
which is different from the one that was originally supplied, the same can
never be termed as a sales return.
54. In the facts of the
present case, we are clearly of the view that the product that was supplied by
BPCL to RIL in the first leg of the transaction was different from the return
stream that was supplied/returned by RIL to BPCL. As mentioned earlier, the
Kerosene that was supplied by BPCL to RIL was rich in N-Paraffin. It comprises
of Hydrocarbons C9 to C14. The Kerosene that was sought to be returned by RIL
to BPCL was after the extraction of N-Paraffin. In other words, Hydrocarbons C9
to C14 were specifically denuded from the Kerosene that was returned by RIL to
BPCL. In fact, it is not in dispute that the returned Kerosene is denuded by
more than 50% of N-Paraffin. The Kerosene that was supplied by BPCL also known
as SKO (LABFS) which contains N- Paraffins was viable for commercial extraction
of N-Paraffin whereas the product given by the RIL to BPCL after extracting the
N-Paraffin is not viable for extraction of N-Paraffin due to the fact that the
return stream does not contain the extractable quantity. At least to our mind,
therefore, it is clear that the product supplied by the BPCL to RIL is very
different from the product that is returned by RIL to BPCL. To put it in other
words, the Kerosene supplied by the BPCL to RIL is pre-processed and the
Kerosene returned by RIL to BPCL is a processed product and hence are two
different commercial products. It is true that even the returned Kerosene meets
the BIS standards to be termed and used as Kerosene, but that alone cannot be
the test to come to the conclusion that the product returned by RIL is one and
the same as was supplied by BPCL to RIL in the first leg of the transaction. It
is an admitted fact before us, at least across the bar, that the Kerosene
supplied by BPCL to RIL can be used for extraction of N Paraffins whereas the
Kerosene returned by RIL to BPCL cannot be used for the same purpose. The
process of extraction carried out by RIL is thus a manufacture within the
meaning of the said expression as defined in the BST Act and the kerosene is
therefore not returned to BPCL in the same form. In other words, BPCL cannot
use the Kerosene returned by RIL to be supplied to another Petrochemical plant
for extraction of N-Paraffin. This, to our mind, would clearly go to establish
that the Kerosene supplied by BPCL to RIL in the first leg of the transaction
and the product returned by RIL to BPCL in the second leg of the transaction,
at least for the purposes of sales tax, are two different products. It cannot
be disputed that the two products are different in character and use. This
being the case, it is quite clear that the return stream of Kerosene and which
was sought to be returned by RIL to BPCL can never be termed as a sales return
but in fact a sale by RIL to BPCL.”
Thus, Hon. High Court decided
the yard stick about scope of sales return. If the goods sold and returned are
not the same goods but different goods, then there is no scope for claim of
sales return.
Prospective
effect to the liability
One more issue which is
decided in this matter is about prospective effect to the adverse determination
order. Since the dealer was guided earlier by favorable determination order.
Hon. High Court held that even if it is now reversed, still the protection is
required to be given for past liability. The relevant observations of Hon. High
Court are as under:
“70. What is ex-facie
clear from reading the provisions of Section 52 is that the Commissioner, in
the given facts and circumstances of the case, certainly has the power to
exercise his discretion and give prospective effect to the DDQ order passed by
him u/s. 52(1). As correctly submitted by Mr. Venkatraman as well as Mr. Dada,
in the facts of the present case, since the DDQ order dated 11th
September, 2006 was passed in favour of the assessee, there was no occasion nor
any reason to request the Commissioner to grant prospective effect to his
order. The question of prospective effect would only arise when the order of
the Commissioner was reversed by the Tribunal vide the impugned order dated 20th
January, 2015. Further, it is not in dispute before us that it is for the first
time in the history of the Bombay Sales Tax Act that the DDQ order passed by
the Commissioner u/s. 52 (1) was challenged by
the State of Maharashtra before the MSTT. From the facts narrated in this
judgement, it is also clear that bonafide litigation between the parties
has gone on right from the year 1992 till 2015. Further, right from the
assessment years 1988-1989 till 2004-2005, the assessments have been allowed in
favour of the assessee, namely RIL on the basis that the return stream of
Kerosene was a “goods return”. If prospective effect is not given to
the order of the Tribunal it would effectively lead to a situation that all
past assessments would have to be reopened and which would be highly unfair and
prejudicial not only to RIL but also to BPCL.”
Conclusion
The judgement has far reaching
effect in understanding the scope of sales return. It is also a guiding
judgement in respect of use of discretionary power of prospective effect in
determination proceedings. The dealers’ community may have good guidance from
the above judgement.
