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March 29, 2022

No TCS exemption on Purchase of Tendu leaves from Forest Department for Sale to manufacturer of bidis

by Mahesh Mara in GST, Income Tax

No TCS exemption on Purchase of Tendu leaves from Forest Department for Sale to manufacturer of bidis

Fact and Issue of the case

The question involved in this petition is whether the members of the petitioner-association, who are the contractors of Tendu leaves (a forest produce), are entitled to claim exemption under sub-section (1A) of Section 206C of the Income Tax Act, 1961 from the collection of tax at source from them by the seller, namely, the Forest Department of the State of Maharashtra?

The petitioner-association is registered under the Societies Registration Act, 1860. The members of the petitioner-association are registered Tendu contractors having separate registrations under the Maharashtra Forest Produce (Regulation of Trade) Act, 1969 (for short, “the Regulation of Trade Act”) and the Maharashtra Forest Produce (Regulation of Trade in Tendu Leaves) Rules, 1969. The Tendu leaf  is  a  “forest produce” within  the  meaning  of  the  Indian  Forest  Act,  1927  and  it  is  grown  naturally  in  the  forest  areas.  The Tendu leaves are used for manufacture of bidi.

Section 3 of the Regulation of Trade Act empowers the State Government to divide every area into such number of units as it may deem fit in respect of each forest produce. Section 4 thereof empowers the State Government to appoint agents in different units for the purpose of purchase and trade in forest produce on its behalf. It also empowers the State Government to prescribe procedure for appointment of agents and terms and conditions for such appointment. The State Government adopts procedure for public auction to sell or appoint agents for collection of Tendu leaves. The agent or the purchaser has to pay the amount offered by him in the auction as per the terms and conditions contained in the agreement of licence executed, which include the taxes as are leviable from time to time.

The contractor appointed as agent or licensee pursuant to the auction conducted is required to process the Tendu leaves.

After introduction of the provision of Section 206C under the Income Tax Act, the Department of Revenue, Central Board of  Director  Taxes,  communicated   its   decision   in   writing  on 23-1-1989 to the Maharashtra Tendu Leaves Merchants’ Association that the question of collection of tax at source at the time of sale of Tendu leaves was examined and the operation of drying and sprinkling of water, etc., on the Tendu leaves purchased by the  traders  is  held  to  constitute  ‘processing’.  It was the decision that the traders of Tendu leaves conducting the process would not fall within the ambit of Section 206 of the said Act and, therefore, no tax could be collected at source from the purchases made by the traders.

The aforesaid decision was changed by the Government of India, Ministry of Finance, Department of Revenue, on 10-1-1996, communicating that the operations carried out by the Tendu leaves’ traders do not change the nature and character of the leaves and those are performed only to maintain the leaves in a saleable and marketable condition. Further such operations do not result in any change in the product and, therefore, merely drying, sprinkling of water, bundling of the Tendu leaves, etc., cannot be equated with processing. As a result, it is clarified that the provisions of Section 206C of the Income Tax Act shall be applicable to the case of the Tendu leaves’ traders, as the exception carved out in the proviso to sub-section (1)  of  Section   206C   is   not   applicable.   The   earlier   letter    dated 23-1-1989 was withdrawn.

The  petition,  therefore,  challenges  the   circular dated    10-1-1996    and    further    the     communications dated 29-11-2018 and 27-12-2018 issued by the Joint Commissioner of Income Tax and the Deputy Conservators of Forests, Bramhapuri and Gadchiroli Divisions, reiterating the same position. The petitioner claims that the contractors of the Tendu leaves, who are the members of the petitioner-association, are entitled to exemption under sub-section (1A) of Section 206C of the said Act while purchasing the Tendu leaves from the Forest Department of the State of Maharashtra.

Observation of the court

It is the transaction of sale of Tendu leaves, which is covered by the provision of sub-section (1) of Section 206C of the Income-Tax Act, creating a liability upon the seller of it, to collect the tax at source at the rate of 5% of the value of the transaction. This provision takes in its sweep all kinds of transactions of sale of Tendu leaves; it be for the purposes or utilization for the processing or manufacture or production of different articles or things, such transaction would also attract the statutory liability. Undisputedly, the members of the petitioner-association collect the tax at source from the manufacturers of bidi, at the time of sale of the processed Tendu leaves, as per sub-section (1) of Section 206C of the said Act.

Keeping in view the aforesaid position, we are of the opinion that the provision of sub-section (1A) of Section 206C of the Income Tax Act operates as an exception to sub-section (1) and it admits an exemption from the collection of tax at source where the goods are utilized for the purposes of manufacturing, processing or producing articles or things. Such provision of exemption under the taxing statute has to be construed very strictly. If the exemption is denied, the burden to establish eligibility for exemption has to be discharged by a person or an assessee who claims the benefit of it.

It is admitted that the re-sale of Tendu leaves, as it is without any process, after purchase from the Forest Department would amount to trading which does not qualify for exemption under sub-section (1A) of Section 206C of the Income Tax Act. It is the submission that the unprocessed Tendu leaves cannot be utilized for the purposes of manufacture or production of bidis and in such a case, the character of Tendu leaves is not changed. The processed Tendu leaves sold are actually utilized for manufacture  of  bidi, a distinct product, which comes into existence, and hence qualify for exemption under sub-section (1A) of Section 206C of the said Act.

Relying upon the decision of the Apex Court in the case of Chowgule & Co. Pvt. Ltd. and another v. Union of India and others, reported in (1981) 1 SCC 653, it is urged that what is necessary in order to characterize an operation as processing is that the commodity must, as a result of operation, experience a change, which does not necessarily bring into existence a different product like bidi. The nature and extent of change is not material. From the said decision, a distinction is pointed out between manufacture and processing to urge that it is not necessary that the processing of commodity or goods should result in bringing into some different product so as to qualify for grant of exemption under sub-section (1A) of Section 206C of the Income Tax Act.

Now we proceed to deal with the contentions advanced. The first contention being that the Tendu leaves purchased from the Forest Department of the State of Maharashtra are processed so that it can be utilized for manufacture of bidi, it is covered by the  word  ‘processing’  employed  under  sub-section (1A) of  Section  206C  of  the  Income  Tax  Act.  Shri Kaptan does not dispute that the identical process carried on the Tendu leaves was considered in decisions of several High Courts deciding the question as to whether the exemption under Section 206C of the said Act can be made available and those decisions isCIT v. Ashwin Kumar Gordhanbhai and Bros. Pvt. Ltd., reported in [1995] 212 ITR 614 (Gujarat);

Even assuming that it is the processing of Tendu leaves, which is involved in terms of sub-section (1A), we are unable to understand the argument as to how the purchase and sale of processed Tendu leaves would not constitute ‘trading’ within the meaning of sub-section (1A). There is no restriction that the sale of processed or unprocessed Tendu leaves should only be to the manufacturer or producer of bidis, and Section 206C of the Income Tax Act does not provide for exemption from the collection of tax at source, if such Tendu leaves are sold to the manufacturer or producer of bidis therefrom. As a matter of fact, the members of the petitioner-association are collecting such tax at source from such manufacturers of bidi, at the time of sale of processed leaves and there is no grievance in respect of it. In view of this, even if the members of the petitioner-association are engaged in the sale of such Tendu leaves to the manufacturer or producer of bidis, it would be the trading, which would not qualify for exemption under sub-section (1A) of Section 206C of the Income Tax Act.

 In fact, it is admitted in the petition that the members of the petitioner-association are registered under the Maharashtra Forest    Produce    (Regulation    of     Trade)     Act,     1969   (for short, “the Regulation of Trade Act”). They are the agents of the State Government appointed under sub-section (1) of Section 4 of the Regulation of Trade Act for the purposes of purchase of and trade in the forest produce. The business of trading of Tendu leaves by the members of the petitioner-association is controlled and regulated by the Regulation of Trade Act and the Rules framed thereunder. The members of the petitioner-association thus enjoy the statutory status as the purchasers and traders in the forest produce, namely, Tendu leaves from the Forest Department of the State Government. The purchasers and traders of Tendu leaves stand excluded from the exemption under sub-section  (1A)  of  Section 206C of the Income Tax Act.

It is urged that decisions of the High Court cited above on the question of exemption under Section 206C of the Income Tax Act follow the decision of the Apex Court in the case of Chowgule & Co. Pvt. Ltd., cited supra. According to him, the ratio of this decision of the Apex Court has been misconstrued. He submits that the decision of the Apex Court in fact operates in favour of the petitioner, holding that what is necessary in order to characterize an operation as ‘processing’ is that the commodity must, as a result of the operation, experience some change, which does not necessarily bring into existence a different product, like bidi. The distinction made by the Apex Court between the ‘manufacture’ and ‘processing’ has been ignored.

We have gone through the decision of the Apex Court in Chowgule & Co.’s case, cited supra.

In Chowgule & Co. Pvt. Ltd.’s case, the eligibility to claim lower rate of sales tax was that the goods of the class or classes purchased by the registered dealer, as being intended for re-sale by him, for use by him in the manufacture or processing of goods for sale or mining

We would also like to deal with the language employed under sub-section (1A) of Section 206C of the Income Tax Act in the light of the intention of the Legislature in granting such exemption. Once the availability of exemption, where the goods are processed for the purposes of trading or selling to the manufacturer or producer of different articles or things therefrom, is ruled out under sub-section (1A), the intention of the Legislature becomes clear to understand the word ‘processing’, as an intermediary process to qualify the produce, namely, Tendu leaves, for being utilized for the purposes of manufacture or production of articles or things therefrom. It is an integrated process of manufacture or producing bidi in this case, from the processed Tendu leaves, which qualifies for exemption. The placement of the word ‘processing’ in between ‘manufacturing’ and “or producing articles or things” under sub-section (1A) is also significantly indicate such intention of the Legislature. The processing of Tendu leaves in this case may qualify for the purposes of trading or sale, but not for the utilization for the purposes of manufacture of bidis.

Section 11 of the Regulation of Trade Act deals with the registration of the manufacturer of finished goods using the forest produce, who has to get himself registered with the concerned Department of the State Government in a manner provided under Rule 9 of the Rules framed under the Regulation of Trade Act. It is not the claim of the petitioner-association that they are also the manufacturers of bidi and the Tendu leaves purchased by them from the Forest Department of the State Government are processed for utilization in the process of manufacture of bidi. It is not an integral part of the process of manufacture of bidi. It is thus clear that unless the members of the petitioner-association get themselves registered as the manufacturers of bidi under Section 11 of the Regulation of Trade Act, it cannot be said that they are utilizing the processed Tendu leaves for the purposes of manufacture of bidi. The expression ‘processing’ under sub-section (1A) will have, therefore, to be necessarily understood as an intermediary process in the manufacture of bidi.’

Conclusion

The court do not find any substance in the challenge raised in this petition, which is dismissed. Rule stands discharged. No order as to costs.

Gondia-Beedi-Leaves-Contractors-Association-Vs-Union-of-India-Bombay-High-Court

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