MP High Court Sets Aside Commercial Tax On Diamond Cement For Sale Of Food In Factory Canteen

The Madhya Pradesh High Court has, applying settled law, set aside the levy of commercial tax on subsidised food supplied in a factory canteen run as a statutory welfare measure in a 1995–96 assessment involving Diamond Cement, while upholding the rest of the demand.

The court, however, upheld tax liability on scrap sales, coal purchases, and denial of set-off on certain items.

The bench, consisting of Justice Vivek Rusia and Justice Pradeep Mittal, partly allowed the writ petition filed by M/s Diamond Cement challenging the assessment for the year 1995–96 under the Madhya Pradesh Commercial Tax Act, 1994.

The petitioner, a cement manufacturing unit, had challenged the assessment order whereby the department levied tax on the sale of iron scrap, coal purchases, and canteen sales, and disallowed set-off on items such as tyres, tubes, lubricants and batteries used in mining operations.

The case of the petitioner was that iron and steel were purchased from registered dealers after payment of tax, and the scrap generated was merely leftover material arising from cutting and sizing, which did not amount to manufacture and hence should not be taxed again.

It was further contended that coal was purchased from a registered dealer against valid invoices and payments made through banking channels, and therefore, no further tax could be levied.

With respect to canteen sales, the petitioner argued that the facility was maintained under a statutory obligation under the Factories Act and food was supplied at subsidised rates on a no-profit basis, thus lacking any commercial character.

The petitioner also claimed that tyres, tubes, lubricants and batteries used in dumpers and heavy machinery in captive mines were integral to the manufacturing process and eligible for set-off.

The State, however, opposed the petition, contending that scrap constitutes a distinct commercial commodity, and its sale is taxable. It was further argued that the petitioner failed to establish that coal purchases were tax-paid, particularly as the supplier's registration stood cancelled retrospectively.

The department also maintained that even subsidised canteen sales involve transfer of goods for consideration and fall within the definition of “sale,” and that items like tyres and lubricants are not directly used in manufacturing and therefore do not qualify for set-off.

The Court, after examining the record, upheld the levy of tax on scrap sales, observing that scrap, though arising from cutting of iron and steel, constitutes a distinct commercially saleable commodity and is liable to tax

The bench stated that ".....The scrap is a product after undergoing the manufacturing process. It may not be useful for the petitioner, but that iron steel rod, sheets, angle of a particular length and size will be used for other small-scale industries as a raw material. The petitioner admittedly sold these scraps to small industries, namely Jagdamba Castings Private Limited and Quality Welding. Therefore, it was rightly treated as a sale....."

On the issue of coal purchases, the Court found that the petitioner failed to produce sufficient evidence to prove that the goods were tax-paid, particularly in light of the supplier's cancelled registration, and therefore sustained the tax demand.

However, in respect of canteen sales, the Court took a different view and held that the petitioner was not running the canteen with a profit motive but merely fulfilling a welfare obligation, and therefore, the levy of commercial tax on such transactions was not permissible. Accordingly, the tax demand on canteen sales was set aside.

The bench stated that "So far the levy of commercial tax on canteen sale of Rs. 11,41,409/- is concerned, it is not the case of the petitioner that the sale of food in the canteen was free of cost or on the coupon given to the employees. The canteen provides food, tea, and snacks at the subsidised rate as a labour welfare measure under the statutory provision of the Factories Act as held by the Full Bench of this Court in Commissioner of Sales Tax (supra), and the petitioner is not engaged in the business of sale of food items by way of canteen or restaurant. Therefore, the levy of commercial tax is not permissible. Hence, to that extent, the petitioner is not liable to pay the tax and penalty under the head of canteen sale."

The court also upheld the denial of set-off on tyres, tubes, lubricants and batteries, holding that these items are used in vehicles and machinery for transportation and maintenance purposes and are not directly connected with the manufacturing of cement.

"So far, the claim of set-off of Rs.1,38,325/- on the purchase of tyres, tubes, and lubricants is concerned, they are not directly related to the manufacturing of the cement. They are not a raw material to be used in manufacturing for building materials. Hence, the recovery under this assessment is maintained", stated the bench.

In view of the above findings, the writ petition was partly allowed, with the Court quashing the tax demand on canteen sales while maintaining the rest of the assessment.

For Petitioner: Advocates A.K. Shrivastava and Amit Shrivastava

For Respondent: Advocate Rajvardhan Dutt Pararha