Madras High Court Archives - Page 2 of 2

The Madras High Court in a recent decision^[1] held that empty liquor bottles do not constitute scrap under Section 206C, IT Act, 1961. Accordingly, it held that the petitioner, M/s Tamil Nadu State Marketing Corporation Ltd (‘TASMAC’), was not obliged to deduct tax at source when collecting licence fee from bar licencees who were authorized to sell empty bottles left behind by customers.

Facts

The petitioner, TASMAC, challenged the orders of the Income Tax Department wherein it was treated as an ‘assessee in default’ for failure to deduct tax at source under Section 206C, IT Act, 1961. The Income Tax Department contended that the petitioner should have deducted TCS on the amounts tendered by the successful bar licensee towards tax from sale of empty bottles by treating the sale of bottles as scrap. The petitioner has been given a statutory monopoly to sell – wholesale and retail – Indian Made Foreign Liquor (IMFL), in the State of Tamil Nadu. The petitioner invites tenders for running bars adjacent to its retail vending liquor shops. It floats tenders to select third-party bar contractors to sell eatables and collect empty bottles from bars adjacent to its retail shops. As per the terms of bar licence, the licencee was allowed monetise empty bottles. The petitioner selected the winning tenders, used to retain 1% of the tender amount as agency commission and remit the remaining 99% to the State Government.

The Income Tax Department contended that the petitioner fulfilled the conditions of being a seller under Explanation to Section 206C of the IT Act, 1961. The Department elaborated that the petitioner alone had the right over empty bottles as only it could award tenders for their sale and thus the awarding of tenders amounted to it selling scrap to winning bidders through the tendering process.

The petitioners, on the other hand, contended that they only sold alcohol from distilleries and breweries to their ultimate customers via their retail outlets and they did not sell empty bottles to the customers. The petitioner clarified that the empty liquor bottles were sold by the licencees and they retained the entire consideration. Thus, the contention that the petitioner was seller of empty bottles and licencees the buyer was erroneous.

High Court’s Interpretation of ‘Manufacture’ and ‘Scrap’ Proves Crucial

The Madras High Court waxed eloquent and in a verbose manner about the role of petitioner in the State of Tamil Nadu. However, the issue that proved crucial to the fate of the case was the meaning of scrap. The Income Tax Department argued that empty bottles constituted scrap as per Explanation to Section 206C while the petitioner argued otherwise. Explanation (b) to Section 206C states that for the purpose of this Section –

Scrap means waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons; (emphasis added)

The Income Tax Department argued that the empty bottles were scrap since they were constituted via a mechanical process. The argument was that empty bottles were only generated when the liquor bottles are opened and consumed by the consumers and that the process of opening bottled liquor bottles involved them being subjected to external force beyond their yield strength to access contents of the bottle which was nothing but a mechanical process. (para 49) The petitioner described the above interpretation of the term mechanical process as absurd and unsustainable in law. (para 34)

The Madras High Court observed that while the term ‘manufacture’ had been defined under Section 2(29BA) of IT Act, 1961 the term ‘mechanical working of materials’ in the definition of scrap has not been defined separately. In the absence of a separate definition, the High Court noted that the doctrine of nocitur a sociis should be applied. The said doctrine, in its simplest version, means that when two or more words susceptible of analogous meaning are used together they must be understood in cognate sense as if they take their colour from each other. (paras 90-91) Relying on the above doctrine, the High Court opined that that an activity that does not amount to manufacture but resembles manufacture is the only activity that can be included in the expression ‘mechanical working of material.’ And accordingly, the High Court concluded that:

Mere opening, breaking or uncorking of a liquor bottle by mere twisting the seal in a liquor bottle will not amount to generation of “scrap” from “mechanical working of material” for the purpose of explanation to Section 206C of the Act.

That apart, the activity of opening or uncorking of the bottle is also not by the petitioner. These are independent and autonomous acts of individual consumers who decides to consume liquor purchased from the Tasmac Shops of the petitioner which have a licensed premises (Bar) adjacent to them under the provisions of the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003. (paras 99 and 100)

The Madras High Court further underlined its observations by stating that the empty water bottles were neither the property of the petitioners or of the licencees, and that the petitioner was merely regulating the sales of empty bottles and the same cannot be equated to sale of bottles by the petitioner.

Conclusion

The Madras High Court adopted a prudent approach in the impugned case by relying on and correctly applying the doctrine of nocitur a sociis. The said approach was a reasonable way of rebutting the Income Tax Department’s argument that opening of the liquor bottle amounted to a mechanical process, an interpretation that certainly stretched the limits of acceptable interpretation of expressions used in a tax statute.

^[1] M/s Tamil Nadu State Marketing Corporation Ltd v The Deputy Commissioner of Income Tax TS-798-HC-2023MAD.

In a recent judgment^[1], the Madras High Court held that there is no requirement to issue a credit note when the goods were returned to the seller without delivery to the buyer. The High Court held that the credit note was necessary for adjustment of tax liabilities, and the said requirement did not arise when the goods were not delivered to the buyer in the first place.

Facts and Arguments

The petitioner, based in Chennai, had transported a consignment of solar power generating systems/solar panels of different descriptions to the buyer in Tiruppur. The goods were transported accompanied by different invoices and accompanying e-way bills. When the goods were being transported there was a heavy downpour, the solar panels got wet and the buyer refused to take delivery of the goods. The petitioner generated new e-way bills and transported goods back to the factory in Chennai, but on the way the goods were intercepted.

The intercepting officers claimed that it was necessary for the goods to be accompanied with credit notes, and in the absence of the same presumed an intent to evade tax. accordingly, proceedings were initiated against the petitioner under Section 129, CGST Act, 2017. The petitioner paid the penalty under protest, but later challenged the initiation of proceedings under Section 129 and officer’s view that a credit note was necessary even though the buyer had not taken delivery of the goods. As per the petitioner, issuance of credit note is only necessary if the goods were delivered to the buyer in the first place.

Madras High Court Decides

The Madras High Court examined Section 34 and observed that:

Thus, the goods which are being returned need not necessarily accompany a Credit Note. The Credit Note or Debit Note as the case may be are intended only for adjustment of tax liabilities on account of return of the goods and where tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply. (para 23)

The High Court stressed on the need for and rationale of credit note, and to that extent, it was correct. However, it is also important to point out that the supplier’s obligation to issue a credit note is only triggered if there is a supply of goods or services in question.

Since the issuance of credit note was viewed as not compulsory, the Madras High Court also concluded that ‘the detention of the goods was per se illegal and unwarranted’ particularly in light of the facts that were accompanied with valid e-way bills.

As regards the payment of penalty and interest under Section 129, CGST Act, 2017, the Madras High Court made an important observation. The High Court observed that under the system and on the GST portal, the taxpayer only had the option to make payments on a voluntary basis and there was no option to take the goods back by claiming that the payment was made under protest. The High Court concluded that:

Therefore, the system and procedure cannot be used against the petitioner particularly in the light of the fact that the detention itself was illegal. Credit note under Section 34 is not required to be issued at the stage, when the goods were being returned without even they having been received by the recipient. Issuance of Credit Note and/or Debit Note under Section 34(1) of the CGST Act, is only for adjustment of tax liability. (para 31)

Conclusion

The Madras High Court has made some obvious but important observations in the impugned case. The fact that credit note is to be issued only if a supply of goods or services is made to the buyer is an obvious legal position, but the intercepting officers needed a reminder of the scope of their powers and grounds for detention of goods under Section 129, CGST Act, 2017. Equally, the High Court’s observations that the system cannot be used against a taxpayer to claim that the payment was not made under protest, especially if there is no option to make such a payment in the system.

^[1] Luminous Power Technologies Ltd v State Tax Officer [2023] 153 taxmann.com 623 (Madras).

Empty Liquor Bottles Are Not Scrap: Madras High Court

Madras High Court Holds that Credit Note Not Required When No Delivery of Goods