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Rajarajeswari Parboiled Rice Industry v. Commercial Tax Officer

Andhra Pradesh High Court

Apr 9, 1999

Judgment

Subsequent
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Factual and Procedural Background

A group of writ petitioners, predominantly rice millers, challenged either a Circular issued by the Commissioner of Commercial Taxes, Andhra Pradesh (CCTs. Ref. A.II(1)/2954/96 dated 24-06-1998) or certain provisional or final assessment orders made under the A.P. General Sales Tax Act. The core factual pattern in the batch is that the petitioners purchase paddy within the State, convert it into rice, and sell the rice to dealers who export the rice pursuant to orders placed by foreign buyers. In at least one petition (W.P. No. 28355 of 1998) the claim for exemption was negatived on the basis of the Commissioner's Circular.

The Commissioner's Circular interpreted Section 5(3) of the Central Sales Tax (CST) Act read with Clause (ca) introduced to Section 15 of the CST Act by the Finance Act, 1996, and took the view that where a miller sells rice to exporters (who then export), the purchase of paddy by the miller would not be a purchase immediately prior to export and hence not exempt. The petitioners challenged the Circular's validity and its application in the impugned assessments.

Legal Issues Presented

Whether the Circular issued by the Commissioner of Commercial Taxes dated 24-06-1998 (interpreting Sec. 5(3) of the CST Act read with Sec. 15(ca)) is valid and can bind subordinate assessing and appellate authorities.
Whether the purchase of paddy by a rice miller who converts it into rice and whose rice is exported (either by the miller or by a purchaser/exporter) is covered by the exemption under Section 5(3) of the Central Sales Tax Act read with Clause (ca) of Section 15 introduced by the 1996 amendment.
Whether the Commissioner erred in failing to consider the Explanation to Section 7(b) of the A.P. General Sales Tax Act when issuing the Circular and in interpreting the interaction between the APGST provision and the Central Sales Tax provisions.
Whether, given administrative realities, petitioners could be permitted to seek relief by writ instead of first exhausting statutory appeals where the Circular effectively precluded a meaningful appellate remedy.

Arguments of the Parties

Petitioners' Arguments

Clause (ca) of Section 15 of the CST Act was introduced to grant tax exemption to dealers (like the petitioners) who purchased paddy in order to fulfil export obligations pursuant to contracts with foreign buyers.
The Explanation to Section 7(b) of the A.P. General Sales Tax Act (which extends "sale or purchase effected immediately before the export" to include the last sale or purchase preceding that sale/purchase for export, per Sec. 5(3) CST) squarely covers the petitioners' purchases of paddy where such purchases are pursuant to orders placed by exporters.
The Explanation read with Clause 15(ca) extends a greater benefit than Sec. 5(3) alone and, therefore, in levying tax under the APGST Act the Commissioner and assessing authority cannot overlook or ignore this provision; petitioners are entitled to claim the benefit conferred by that Explanation.

Respondent / Government Pleader's Arguments

The purchase of paddy which is two stages prior to the sale occasioning the export (i.e., where a miller sells rice to an exporter who then exports) is not covered by Sec. 5(3) read with Sec.15(ca) of the CST Act; the Commissioner's Circular adopts this view.
In many cases the assessing authority found that the petitioners' purchases of paddy were not traceable to or backed by any export order; where evidence of nexus was absent, exemption was rightly rejected.
The petitioners should challenge factual findings (such as lack of nexus) before appellate and revisional authorities constituted under the Act rather than seek immediate relief under Article 226 on matters of fact.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bismilla & Co. v. State of Andhra Pradesh (8 APSTJ, P-80)	Support for the interpretation (as reflected in the Commissioner's Circular) that where a miller sells rice to exporters and the exporter exports the rice, the purchase of paddy in the hands of the miller will not be exempt as a purchase immediately prior to export.	Referenced as the authority relied upon by the Commissioner in the Circular to support the view excluding the miller's paddy purchase from exemption; the Court noted the Circular's reliance on this decision but did not base its ruling solely on that precedent.
Filterco. v. Commissioner Of Sales Tax, M.P. (61 STC 318)	Principle allowing a writ petitioner to seek relief without exhausting alternative statutory remedies where such remedies would be futile because administrative realities make appeal ineffective.	Used to justify considering the writ petitions on merits despite availability of statutory appeals, because the Commissioner's Circular effectively bound subordinate authorities and rendered appeals futile in practice.

Court's Reasoning and Analysis

The court proceeded in analytical steps:

It first set out the statutory framework: Section 42-A of the APGST Act empowers the Commissioner to issue instructions to subordinates (not interfering with appellate discretion); Section 5(3) CST Act deems the last sale/purchase preceding the sale occasioning export to be in the course of export; and Clause (ca) of Section 15 CST Act (inserted in 1996) treats paddy and rice as a single commodity for purposes of Sec. 5(3) where rice procured from paddy is exported.
The Court noted the Commissioner's Circular (issued after Clause (ca) insertion) took the position that if a miller sells rice to exporters (who export), the miller's purchase of paddy is not a purchase immediately prior to export and thus not exempt; the Circular expressly relied on the A.P. High Court decision in Bismilla & Co.
The Court observed the practical legal effect of the Circular: it binds assessing authorities and, in substance, inhibits subordinate appellate authorities (who are administratively subordinate and subject to revision by the Commissioner) from taking an independent view. Given that, and relying on the precedent in Filterco, the Court considered it appropriate to rule on the Circular's validity without insisting on exhaustion of statutory appeals.
On examining the Circular, the Court found that the Commissioner had analyzed Sec. 5(3) read with Sec.15(ca) but had failed to refer to or take into account the Explanation to Section 7(b) of the APGST Act — a provision that explicitly extends the meaning of "sale or purchase effected immediately before the export" to include the last sale or purchase preceding that sale/purchase for export (i.e., a repeater of the Sec.5(3) concept within APGST).
Petitioners' counsel argued that the Explanation to Sec. 7(b) together with Clause 15(ca) of the CST Act should entitle them to exemption, and that the Commissioner was not entitled to ignore this APGST provision when levying tax under the APGST Act.
The Court declined to express any definitive view on the substantive interpretation of Sec.5(3) or the Explanation to Sec.7(b) in light of contextual facts of individual cases. However, the Court concluded that the Commissioner's failure to address or apply the Explanation to Sec.7(b) when issuing the Circular resulted in a truncated and incomplete approach; by excluding Section 7 of the APGST Act from consideration, the Circular was vitiated.
On that short ground (failure to consider an equally relevant and crucial provision of APGST), the Court set aside the Circular. The Court therefore allowed writ petitions where assessments were made quoting/following the Circular and directed reassessment in those cases; petitions where exemption was negatived independently of the Circular (on the basis of interpretation of Sec.5(3) or lack of nexus) were dismissed, leaving those petitioners to pursue remedies under the Act.
The Court expressly left open the substantive questions about entitlement to exemption under Sec.5(3) read with Sec.15(ca) of CST Act and the Explanation to Sec.7 of the APGST Act for determination by appropriate authorities uninfluenced by the invalidated Circular.
Finally, the Court permitted petitioners who had not preferred appeals because of writ pendency to file appeals within three weeks and directed that such appeals be heard on merits without raising limitation objections.

Holding and Implications

Holding:

The Circular issued by the Commissioner of Commercial Taxes dated 24-06-1998 is quashed.

Implications and direct consequences:

Writ petitions in which assessments were made expressly quoting and following the Commissioner's Circular have been allowed; the impugned assessment orders in those matters are set aside and the assessments (provisional or final) are to be re-done without being influenced by the invalidated Circular.
The Court listed specific writ petition numbers which are allowed and for which assessments are set aside with liberty to make fresh assessments: Writ Petition Nos. 28355/98, 20160/98, 20408/98, 4786/99, 22630/98, 23737/98, 28514/98, 28353/98, 33260/98 and 2960/99.
Additional writ petitions were allowed where the Circular's contents were repeated verbatim in assessment orders (even if not expressly referenced): Writ Petition Nos. 3197/99, 2957/99, 3198/99, 3199/99, 3684/99, 3685/99, 3686/99, 3702/99, 3185/99, 3163/99, 3092/99, 2728/99 and 2729/99. In particular, two petitions (3686/99 and 3702/99) which contained passing observations about non-production of export documents were nonetheless treated as standing on the same footing because the main thrust was interpretation in light of the Circular.
Writ petitions in which the exemption was negatived independently of the Circular (on interpretation of Sec. 5(3) or on lack of nexus between export orders and purchases) were dismissed, subject to the observations in the Judgment: Writ Petition Nos. 20409/98, 22590/98, 19269/98, 19677/98, 26545/98, 20417/98 and 22465/98.
Where petitioners did not prefer appeals because of the pendency of the writ petitions, they are permitted to file appeals within three weeks; such appeals must be heard on merits and cannot be objected to on the ground of limitation.
The Court explicitly refrained from deciding whether petitioners are entitled to exemption under Section 5(3) read with Section 15(ca) of the CST Act or under the Explanation to Section 7 of the APGST Act; those substantive questions are left open to the appropriate authorities to decide independently and without being fettered by the Commissioner's Circular.

No costs were awarded in respect of the dismissed petitions, and the Court did not lay down a substantive interpretation of the central statutory provisions — it invalidated the Circular on the limited ground that the Commissioner failed to consider a crucial provision (the Explanation to Section 7(b) of the APGST Act) and thus made a truncated approach.

Show all summary ...

P. Vcnhatoroma Rcddi, J.:— The writ petitioners, almost all of whom are Rice Millers, have filed these writ petitions either questioning the Circular issued by the Commissioner of Commercial Taxes, Andhra Pradesh in CCTs. Ref. A.II(1)/2954/96, dated 24-06-1998 or the assessment orders-provisional or final, made under the A.P General Sales Tax Act, against them. In some of the assessment years, for instance in W.P No. 28355 of 1998, a reference has been made to the Circular of the Commissioner and the claim for exemption was negatived on the basis of the said circular.

2. The relevant portion of the Circular, which was issued after Clause (ca) was introduced into Section 15 of the Central Sales Tax Act by Finance Act of 1996, reads as follows:

“When rice is exported to other countries no tax can be levied on the corresponding value of paddy used after obtaining such rice. This clarification is applicable when rice miller after purchasing paddy converts it into rice and exports the rice. But it will not apply to the transactions where a miller is selling rice to other countries. As per Section 5(3) of the CST Act only one sale and one purchase prior to export are exempt from tax. If a miller sells rice to exporters and in turn the exporter exports the rice the purchase of paddy in the hands of the miller will not be exempt from tax and the purchase will not be a purchase immediately prior to export even though paddy and rice are treated as one and the same commodity for the purpose of Section 5(3). There is no doubt about the above interpretation in the light of the decision of the A.P High Court in the case of Bismilla & Co. v. State of Andhra Pradesh (8 APSTJ, P-80).”

3. Under Section 42-A of the A.P General Sales Tax Act, 1957, the Commissioner is empowered to issue instructions and directions not inconsistent with the provisions of the Act to his subordinate’ officers for the proper administration of the Act and such officers and other persons connected with the enforcement of the Act, shall comply with such orders, instructions and directions. The proviso says that no such orders, instructions or directions shall be deemed to interfere with the discretion of an appellate authority. Coming to the broad facts of the case, the petitioners purchase the paddy within the State, convert them into rice and sell the rice to the dealers who export the rice pursuant to the orders placed on them by the foreign buyers. Under Section 5(3) of the Central Sales Tax Act, the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods shall be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with the agreement or order for or in relation to such export. This provision was introduced in the year 1976 in order to expand the ambit of tax immunity extended to the transactions intimately connected with export. The Central Sales Tax Act was further amended in the year 1996 by adding Clause (ca) to Sec. 15 so as to amplify the scope of immunity under Sec. 5(3) to the export transactions involving rice. Clause (ca) of Sec. 15 reads as follows:—

“Where a tax on sale or purchase of paddy referred to in sub-clause (i) of clause (i) of Sec. 14 is leviable under that law and the rice procured out of such paddy is exported out of India, then for the purposes of subsection (3) of Section 5, the paddy and rice shall be treated as a single commodity.”

4. It is the contention of the petitioners that Clause (ca) has been introduced to grant tax exemption to dealers like the petitioners who purchased paddy in order to facilitate the fulfilment of the export obligation pursuant to a contract with a foreign buyer.

5. However, it is the contention of the learned Government Pleader that the transaction of purchase of paddy, which is two stages prior to the sale occasioning the export is not covered by the provisions contained in Sec. 5(3) read with Sec. 15(ca) of the Central Sales Tax Act. The same view has been taken by the Commissioner and the relevant portion of the Circular extracted above is self-explanatory. It is also contended by the learned Government Pleader that in many cases, there is a finding to the effect that the purchase of paddy by the petitioners is not traceable to or backed up by any export order and the claim was rejected for want of evidence in this behalf. However, the learned Counsel appearing for the petitioners endeavoured vehemently to attack this finding. But we are not inclined to go into the correctness or otherwise of the finding on this aspect of the case in exercise of our jurisdiction under Art. 226 of the Constitution inasmuch as it is a factual finding and the petitioners have to necessarily challenge the same before the appellate and revisional authorities constituted under the Act.

6. We, therefore, heard the arguments insofar as the validity of the impugned circular of the Commissioner is concerned. It cannot be gainsaid that in the face of the circular issued by the Commissioner, the assessing and appellate authorities under the Act who are subordinates to the Commissioner cannot take an independent view on the interpretation of the relevant provisions. It is true that the Act enjoins that the Commissioner's circular is not binding on the appellate authority. But, in effect and in substance the appellate authority, who is administratively subordinate to the Commissioner and whose orders are also amenable to revision by the Commissioner will be inhibited to take a different view. The Supreme Court, more or less, in similar circumstances, allowed the assessee to seek relief without resorting to the alternative remedies, because in the opinion of the Supreme Court, the remedy of appeal will be a futile remedy vide Filterco. v. Commissioner Of Sales Tax, M.P . 61 STC 318.. In any case, as far as the assessing authority is concerned, there can be no dispute that the Circular is binding. In many cases which form part of this batch, provisional assessments are made and the final assessments are yet to be made and naturally, the assessing authorities will reiterate the view taken by them earlier based on the Circular of the Commissioner.

7. In these circumstances, we felt it necessary to consider the validity of the Circular of the Commissioner, though the petitioners have the remedy of appeal to the appellate Deputy Commissioner against the order of the assessing authority.

8. On a perusal of the Circular of the Commissioner, we find that the Commissioner interpreted Sec. 5(3) read with Sec. 15(ca) and analysed the position thereunder. However, the Commissioner has not referred to nor taken into account another relevant and crucial provision, namely the Explanation to Section 7(b) of the A.P General Sales Tax Act. The said explanation reads as follows:—

“For the purpose of Clause (b), the expression ‘sale or purchase effected immediately before the export of such goods’ in so far as it relates to export to any place outside the territory of India, shall include the last sale or purchase of any such goods preceding the sale or purchase effected immediately before the export of such goods, as referred to in sub-sec. (3) of Sec. 5 of the Central Sales Tax Act, 1956.”

(emphasis supplied)

9. The contention of the learned Counsel for the petitioners is that the purchase of paddy by the petitioners pursuant to the orders placed on them by the exporters of rice is squarely covered by the Explanation, whatever view may be taken as regards the interpretation of Sec. 5(3). It is contended that this explanation read with clause 15(ca) squarely extends the tax exemption to the transactions of purchase of paddy by the petitioners and is a complete answer to the departmental stand. It is further contended that while levying tax under the provisions of the A.P General Sales Tax Act, it is not open to the Commissioner or the assessing authority to overlook this provision and even if it confers greater benefit than what Sec. 5(3) does, the petitioners will be legally entitled to claim that benefit.

10. For the purpose of disposal of these writ petitions, we are not inclined to express any view on the question as regards the interpretation of Sec. 5(3) and the Explanation to Sec. 7 in the light of the contextual facts. Suffice it to observe that the contention put forward by the Counsel for the petitioners cannot be discarded outright. There is some force in the contention. The Commissioner while issuing a clarification or instruction to the Subordinates ought to have addressed himself to an equally important and relevant provision i.e, the Explanation to Sec. 7(b) of APGST Act. The failure to refer to that provision and the failure to apply his mind as regards the impact of that provision on the disputed transactions or its inter-relation to the provisions of the Central Sales Tax Act, in our view, vitiates the circular of the Commissioner and it is on this short ground, we set aside the circular of the Commissioner. The Commissioner, by referring to the provisions of the Central Sales Tax Act and excluding from consideration Section 7 of the APGST Act, has in our view, made a truncated approach to the problem and such a circular shall not be allowed to stand and have a binding or persuasive effect on the concerned authorities.

11. We, therefore, quash the aforementioned circular issued by the Commissioner of Commercial Taxes. Consequentially, we allow such of these writ petitions in which the assessments were made quoting and following the circular of the Commissioner. In such cases, the assessments-provisional or final shall be re-done. However, those writ petitions, in which the claim for exemption has been negatived independently without referring to the Commissioner's circular, either on the interpretation of Sec. 5(3) or on the ground of lack of nexus between the export orders and the purchases, we dismiss the writ petitions leaving it open to the petitioners to seek appropriate remedies under the Act.

12. We shall not be understood to have expressed any view on the question whether the petitioners are entitled to exemption under the provisions of Section 5(3) read with Section 15(ca) of CST Act or Explanation to Section 7 of the APGST Act. These questions are left open to be decided by the appropriate authorities independently and without being fettered by the Commissioner's circular.

13. In those cases where the petitioners did not prefer the appeals on account of the pendency of the writ petitions, it is open to them to file appeals within a period of three weeks from today and if such appeals are filed, the appeals shall be heard on merits without raising any objection as to limitation. The ultimate result in individual cases is as follows:

The Writ Petition Nos. 28355/98, 20160/98, 20408/98, 4786/99, 22630/98, 23737/98, 28514/98, 28353/98, 33260/98 and 2960/99 are allowed and the impugned assessment orders are set aside with a liberty to make fresh assessments.

14. The Writ Petition Nos. 3197/99, 2957/99, 3198/99, 3199/99, 3684/99, 3685/99, 3686/99, 3702/99, 3185/99, 3163/99, 3092/99, 2728 and 2729 of 1999 are also allowed. Though in the assessment orders, there is no specific reference to the Commissioner's circular, we find that the contents of the Circular are repeated verbatim and therefore, it cannot be said that the invalidated circular had no impact on the decision making. We may also mention that in Writ Petition Nos. 3686/99 and 3702/99, a passing observation has been made by the assessing authority that the relevant documents evidencing the export order etc., have not been filed. However, the main thrust is on the interpretation of Section 5(3)/15(ca), in the light of the Commissioner's Circular. In the show-cause notice, lack of satisfactory proof or non-production of documents has not been mentioned as a ground for disallowing the exemption. Hence, these two writ petitions also stand on the same footing.

15. The Writ Petition Nos. 20409/98, 22590/98, 19269/98, 19677/98, 26545/98, 20417/98 and 22465/98 are dismissed subject to the observations made in the Judgment. No costs.