Madras High Court Upholds Sales Tax Demand Against Ford India Over Breach of Exemption Conditions

The Madras High Court has upheld the levy of Tamil Nadu sales tax on Ford India, holding that the company breached the conditions of a state government notification granting a sales tax exemption on purchases of goods used for manufacturing passenger cars after availing the benefit by furnishing declarations.

The dispute relates to the 2001-02 assessment year

The exemption under G.O. Ms. No. 381 covered purchases of goods used in the manufacture, assembling, packing and labelling of passenger cars and components at Ford India's Maraimalai Nagar factory.

The court held that Ford failed to establish that the goods purchased under the exemption were used for the declared purpose and therefore became liable to pay sales tax under the notification itself.

It ruled that having claimed the exemption, Ford India was bound to comply with its conditions and could not later invoke the export exemption under Section 5(3) of the Central Sales Tax Act to avoid its sales tax liability.

A division bench comprising Justice Dr. G. Jayachandran and Justice N. Mala dismissed Ford India's case. It affirmed the order of the Tamil Nadu Sales Tax Appellate Tribunal, which had restored the Assessing Officer's demand for sales tax after finding that Ford India had breached the conditions attached to the exemption notification.

The dispute arose after the tax department found that Ford had purchased goods without payment of tax by furnishing declarations under the state government notification but had not produced evidence correlating those purchases with the manufacture of export vehicles.

The Assessing Officer therefore withdrew the exemption and levied tax. While the First Appellate Authority held that such transactions were protected under Section 5(3) of the Central Sales Tax Act, the Tribunal reversed that finding and restored the assessment order.

Rejecting Ford's reliance on Section 5(3) of the CST Act, the High Court held that the export exemption is available to sellers supplying goods to exporters and cannot override the consequences of violating conditions attached to a State tax exemption.

It observed that having voluntarily obtained the benefit under G.O. Ms. No. 381 by submitting declarations regarding the intended use of goods, Ford was estopped from taking a contrary stand after failing to satisfy those conditions.

"In the case on hand, the sale invoices were raised showing the factory address of the trader's office in Tamil Nadu. Hence, the provisions of the TNGST Act squarely applies in respect of the sales turnover of the cars imported", the bench observed. 

The court also upheld the tribunal's decision to restore the Assessing Officer's order even though the Department had not filed a separate appeal. It observed that the Tribunal was justified in correcting the First Appellate Authority's misapplication of law, since the Government Order specifically required recovery of tax upon breach of its conditions and such liability could not be substituted with compounding proceedings.

"The trader has failed to produce records that the alleged goods purchased were used in the manufacture of taxable goods. For violation of the conditions stipulated in G.O.Ms.No.381, the trader is liable to pay tax as contemplated under the said Government order, independently of other provisions of law", it observed.

Accordingly, the High Court answered both substantial questions of law in favour of the Department and dismissed Ford India's case, confirming that the company was liable to pay tax for breach of the conditions governing the concessional exemption.

For Petitioner: Advocate Raghavan Ramabadran

For Respondent: G.Dhanamandhri, Standing Counsel