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2016 (5) TMI 1037 - MADRAS HIGH COURT

2016 (5) TMI 1037 - MADRAS HIGH COURT - TMI - Liability of purchase tax - Inter-state stock transfer made to their own branches located in other States effected from the warehouse located in the Special Economic Zone - Appellant contended that they have an exemption by virtue of Section 12(1)(a) of TNSEZ Act, 2005. Such exemption as every developer or entrepreneur is entitled to exemption from the levy of taxes both on the sale as well as the purchase of goods, if such goods are meant to carry o .....

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the appellant, not with the idea of making the appellant a 100% export oriented unit. The appellant is entitled to apportion their exports and domestic sales in such a manner that they achieve a positive net foreign exchange within the stipulated period. Therefore, the inter state stock transfer made by the appellant to its own branches located outside the State, is very clearly authorised by Condition No.(v) of the Letter of Approval. Hence, the Department as well as the learned Judge were in .....

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the Domestic Tariff Area, unless an airport or seaport is also located within the SEZ. Similarly, a direct sale to a local purchaser within the State cannot also take place without the goods being removed from the SEZ to the DTA. Likewise, an inter-state sales in terms of the Central Sales Tax Act cannot also take place without the goods being removed from the SEZ to the DTA of the State, within which, the SEZ is located. The expression "removed from a SEZ to a DTA" appearing in Section 15(a) h .....

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he goods are removed from the SEZ to a DTA. The respondents also agree that even in cases where an inter-state sales takes place from a unit located in a SEZ, Section 15(a) does not have any application, despite the goods being removed from the SEZ to a DTA. Whenever a direct sale takes place from a unit located in SEZ to a local purchaser within the State, the chargeability of tax arises not because of the removal from SEZ to DTA, but because of the taxable event namely sale. Therefore, if the .....

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state sales, the State, in which, SEZ is located is deprived of its revenue. - Decided in favour of appellant - Writ Appeal Nos.1118 and 1119 of 2015 - Dated:- 12-4-2016 - V. Ramasubramanian And T. Mathivanan, JJ. For the Appellant : Mr. Arvind P. Datar and Mr.P.S.Raman, Senior Counsel and Mr.J.P.Singh and Ms. Garimachauhan for Mr. Arunkarthik Mohan and Mr.K.Prahladbhat For the Respondents : Mr. AL. Somayaji, Advocate General for Dr.Anitha Sumanth, Spl.Govt.Pleader (Taxes) Assisted by Mr.S.Manoh .....

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yaji, learned Advocate General assisted by Dr.Anitha Sumanth, learned Special Government Pleader (Taxes) appearing for the respondents. BACKGROUND FACTS 3. The appellant is a company having a unit located in the Special Economic Zone at Sriperumbudur. The unit of the appellant was issued with a Letter of Approval dated 7.3.2011 by the Competent Authority for the setting up of a unit for the purpose of "Trading and Warehousing Services for Mobile Phone and Sets and Mobile Phone Parts and Acc .....

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d in other States, by way of stock transfer. 5. Suddenly, the appellant was issued with notices on various dates in May, June, July and September 2013, in relation to the assessment year 2012-13, on the ground that the appellant was liable to pay purchase tax on the value of the goods transferred by the appellant to their branches in other States. The appellant filed their objections on various dates in July, August and September 2013 and in January and May 2014. 6. However, the Assessing Office .....

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ore, challenging the orders of assessment and the dismissal of the rectification petitions, the appellant filed two writ petitions in W.P.Nos. 21265 and 21266 of 2014. Both the writ petitions were dismissed by the learned Judge on the ground that the levy of purchase tax was in accordance with law. Aggrieved by the said order of the learned Judge, the appellant is before us. CONTENTIONS BEFORE THE LEARNED SINGLE JUDGE 8. Fortunately, there are no disputes on facts. The only dispute is with regar .....

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are meant to carry on the authorized operations. The Letter of Approval granted to the appellant by the Competent Authority permitted the appellant to carry on "Trading and Warehousing Services for Mobile Phone Hand Sets, Mobile Phone Parts and Accessories". According to the appellant, the inter-state stock transfer made by them to their own branches located in other States, is an operation authorised by the Letter of Approval and hence, the appellant claims that they have an exemptio .....

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les tax. Therefore, the respondents claim that the protection under Section 28 was not available to such cases. REASONINGS OF THE LEARNED JUDGE 11. By the order impugned in these appeals, the learned Judge held (i) that the inter-state stock transfer to the branches of the appellant located in other States, would not come within the purview of the term "authorised operations"; (ii) that the liability of the appellant to pay purchase tax was not exempted in view of Section 15(a) of the .....

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s Court in Tulsyan Nec Limited Vs. Assistant Commissioner (W.P.No.21453 of 2008 dated 9.1.2015). Therefore, the assessee has come up with the above appeals challenging the order of the learned Judge. GROUNDS OF APPEAL 12. Assailing the order of the learned Judge, it is contended by Mr.Arvind P Datar, learned Senior Counsel for the appellant- (a) that when the Letter of Approval, issued by the Competent Authority on 7.3.2011, authorised the appellant to carry on trading and warehousing services a .....

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ct have to be understood and interpreted in the context of the SEZ policy of the State Government as well as Sections 50 and 51 of the Central Enactment on the same subject; (d) that the reliance placed by the learned Judge upon Section 15 of the TNSEZ Act to come to the conclusion that every removal of goods from the SEZ to the Domestic Tariff Area would become chargeable to sales tax, is erroneous since Section 15(a) does not cover purchase tax; (e) that even the reliance placed by the learned .....

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t the distinction sought to be made by the learned Judge to the decision of the Gujarat High Court in Torrent Energy Limited, is also erroneous. 13. Supplementing the above arguments, it is contended by Mr.P.S. Raman, learned Senior Counsel for the appellant that while Section 12(1)(a) of the TNSEZ Act, 2005, grants exemption from the levy of taxes both on the sale as well as the purchase of goods, Section 15(a) merely makes the goods removed from SEZ to Domestic Tariff Area chargeable to sales .....

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d that even according to the respondents, exemption is provided from the levy of tax on transactions between units within the SEZ as well as exports. Therefore, he contended that there was no logic in denying the exemption in respect of purchase tax for inter-state stock transfers. The learned Senior Counsel also submitted that no obligation is cast upon a unit located in a Special Economic Zone, only to make exports. These units are allowed to effect local sales also, subject, however, to the c .....

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nomic and industrial development and the generation of new employment opportunities"; (b) that as per para 5(a) of the SEZ policy 2003, the units located in SEZs are entitled to exemption from all types of local taxes, only in respect of transactions made between units/establishments within the SEZs and in respect of supply of goods and services from the Domestic Tariff Area to the units in SEZs and hence, inter-state stock transfer is not entitled to the benefit of exemption; (c) that whil .....

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others [(1995) 98 STC 125]; and (e) that therefore, the order of the learned Judge does not call for any interference. ANALYSIS OF RIVAL CONTENTIONS 16. From the rival contentions, which we have extracted above, it appears to us that all these contentions raised on both sides could be brought within the broad spectrum of two primary questions. They are: (i) Whether the inter-state stock transfer effected by the unit located in SEZ, would come within the purview of the expression "authorized .....

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t, 2005 with a view to provide for the establishment, development and management of Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto. Section 3(1) of the Act enables the Central Government, the State Government or any person, either jointly or severally, to establish a Special Economic Zone, for the manufacture of goods or rendering of services or for both or as a free trade and warehousing zone. Section 5 of the Act prescribes the gui .....

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arcated into (i) processing area for the manufacture of goods or rendition of services; (ii) area for trading or warehousing purposes; and (iii) non processing areas, other than those covered by the first two items. 19. Under Section 7 of the Act, any goods or services exported out of or imported into or procured from the Domestic Tariff Area, are exempt from payment of taxes and duties under all enactments specified in First Schedule. Under Section 15 of the Act, any person intending to set up .....

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at the transfer of ownership in any goods brought into or produced or manufactured in any unit or the removal thereof from such unit, can be allowed subject to the terms and conditions stipulated by the Central Government. 21. Section 30 of the Central Act makes any goods removed from a Special Economic Zone to the Domestic Tariff Area, chargeable to duties of customs including anti-dumping, countervailing and safeguard duties. It will be of interest to note that Section 30 of the Central Enactm .....

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f the relevant entries in List II of the VII Schedule to The Constitution, the Central Government is not competent to grant exemption. Therefore, while the Central Enactment provides for exemption to the units located in SEZs created thereunder, only in respect of the taxes, levies and duties that can be imposed by the Central Government, a State Enactment alone can provide for exemption from payment of taxes, levies and duties that can be imposed exclusively by the State Government. 23. Section .....

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cted Act 18 of 2005. Section 2(f) of the Tamil Nadu Act made it clear that all words and expressions used, but not defined in the Tamil Nadu Act will have the same meaning, as assigned to them in the Central Enactment. 25. Section 3 of the Tamil Nadu Act is in pari-materia with Section 5(1) of the Central Enactment. Therefore, the Government is guided, while forwarding a proposal for establishment of a Special Economic Zone by 6 factors namely, (i) generation of additional economic activity; (ii .....

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entrepreneur, is provided and these exemptions are made available subject to the provisions of Sub-Section (2). Section 26(1) of the Central Enactment also contains a list of exemptions in Clauses (a) to (g) and these exemptions are also made available subject to the provisions of Sub-Section (2). In Sub-Section (2) of Section 12 of the Tamil Nadu Act as well as in Sub-Section (2) of Section 26 of the Central Enactment, the respective Governments are empowered to prescribe the manner, in which, .....

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ed in Section 2(c) of the Central Enactment. This is permissible in view of Section 2(f) of the State Enactment that permits the borrowal of the definitions from the Central Enactment. Section 2(c) of the Central Enactment defines the expression authorized operations to mean operations which may be authorized under Sections 4(2) and 15(9). Section 4(2) of the Central Enactment empowers the Board of Approval to authorise the Developer to undertake in a SEZ, such operations, which the Central Gove .....

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of interest to note that there are no provisions in the TNSEZ Act, which are similar to Sections 4(2) or 15(9). Therefore, it appears that the power for the grant of approval and the procedure for making an application and processing the same are all to be found only in the Central Enactment, as there are no provisions in the State Enactment with regard to these matters. This is why Section 28 of the TNSEZ Act does not merely contain a non-obstante clause, but also contains a stipulation that t .....

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Commissioner indicates the authorised operations the appellant is entitled to carry on. In column No.1 of the Letter of Approval, under the heading Authorized Operations it is indicated that no items of manufacture are to be undertaken. In column No.2, under the heading Authorized Operations , it is indicated that the appellant is entitled to carry on the following service activities namely trading and warehousing services for mobile phone handsets and mobile phone parts and accessories . After .....

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hall execute the Bond-cum- Legal undertaking as prescribed under the SEZ Rules 2006. (iv) You may import or procure from the DTA all the items required for your authorised operations under this approval except those prohibited under the ITC(HS) Classification of Export and Import items. (v) You may supply/ sell goods or services in the DTA in terms of the provisions of the SEZ Act, 2005 and Rules and Orders made therein. (xiii) If you fail to comply with the conditions stipulated above, this let .....

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d (v), if read harmoniously, would show that an export obligation is imposed upon the appellant, not with the idea of making the appellant a 100% export oriented unit. The appellant is entitled to apportion their exports and domestic sales in such a manner that they achieve a positive net foreign exchange within the stipulated period. 31. As we have indicated earlier, the Letter of Approval dated 7.3.2011 was issued in the name of the Development Commissioner. This is in terms of Section 15(9) o .....

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f Approval. Hence, the Department as well as the learned Judge were in error in thinking that an inter-state stock transfer would not come within the purview of the expression authorised operations . 32. We cannot forget that the very entitlement of a unit located in a SEZ to the benefits of the privileges and concessions, is contingent upon the unit carrying on authorised operations. If a unit carries on any unauthorised operation, the very Letter of Approval is liable for cancellation in terms .....

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oner in terms of Section 15(9) of the Central Enactment read with the definition of the expression authorised operations provided in Section 2(c) of the Central Enactment, read with Section 2(f) the TNSEZ Act, 2005. Therefore, the first question has to be answered in favour of the appellant. QUESTION (ii) : 33. The second question that falls for our consideration is as to whether the right conferred upon a developer or entrepreneur under Section 12(1) is circumscribed by the provisions of Sectio .....

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adu Additional Sales Tax Act, 1970; (c) exemption from the tax payable under the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990; (d) exemption from the tax payable under the Tamil Nadu Entry of Goods into Local Areas Act, 2001; (e) exemption from the tax payable under the Tamil Nadu Tax on Luxuries Act, 1981; (f) exemption from the tax payable under the Tamil Nadu Entertainments Tax Act, 1939; (g) exemption from the tax payable under the Tamil Nadu Advertisement Tax Act, 19 .....

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s, namely, Section 12 of the Tamil Nadu Act and Section 26 of the Central Act contain a list of exemptions available to a developer or entrepreneur. These exemptions, under both Enactments, are made available, subject only to Sub-Sections (2) of Section 12 of the Tamil Nadu Act and Section 26 of the Central Act. Sub-Sections (2) of both provisions empower the respective Governments to prescribe the manner, in which, and the terms and conditions, subject to which, the exemptions can be granted. 3 .....

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to, or produced or manufactured in any Unit or Special Economic Zone or removal thereof from such Unit or Zone shall be allowed, subject to such terms and conditions as may be prescribed". 37. Keeping in mind the features of Sections 12 and 14, let us now have a look at Section 15. Section 15 of the State Enactment is exactly similar to Section 30 of the Central enactment. Therefore, it will be useful to read both of them together in a tabular form as follows: Section 15 of State Act : &quo .....

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s leviable on such goods when imported; and (b) the rate of sales tax, additional sales tax and entry tax, if any, applicable to goods removed from a Special Economic Zone shall be at the rate in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of tax." Section 30 of Central Act : "30. Subject to the conditions specified in the rules made by the Central Government in this behalf- (a) any goods removed from a Special Economic Zone to .....

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hat is important for us to note from Section 30 of the Central Act and Section 15 of the State Enactment is that both of them use the every same expression any goods removed from a SEZ to the DTA . Both of them also use the same expression shall be chargeable . Both Sections make the chargeability contingent upon the conditions specified in the Rules made by the respective Governments. 39. But, there is an essential difference between the field of operation of Section 30 of the Central Act and S .....

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nd upon the question as to whether the importer proposes to make use of the goods for his own consumption or for sale in India. Even in cases where the importer proposes to process those goods to make out of them yet another product so as to re-export them to the same or another country, the chargeability does not get removed. He would only be entitled, upon re-export, to duty drawback or credit, etc. 40. In other words, the arrival of goods into the Domestic Tariff Area from Special Economic Zo .....

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very language in Section 30 of the Central Enactment, without realizing the folly. This appears to have given rise to a confusion as to the interpretation of Section 15 of the State Enactment. One has to understand the expression "removed" appearing in Section 30 of the Central enactment slightly differently from the same expression appearing under Section 15 of the State Enactment. While the expression "removed" appearing in the Central Enactment, signifies an event giving r .....

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hat a Special Economic Zone is and what possible scenarios could emerge when goods are removed from a SEZ. As we have stated earlier, a Special Economic Zone is to be treated as a foreign territory located within the territory of India. Fortunately, this proposition is not seriously contested by the learned Advocate General for the State. So long as authorised operations, as permitted by the Development Commissioner in his Letter of Approval, are carried on, a Special Economic Zone is to be trea .....

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he country, within which is located an airport or a seaport, so as to enable a unit inside the Special Economic Zone to export their goods and services directly from the Special Economic Zone, without such goods or services ever entering a Domestic Tariff Area. Even if the goods or services produced by a unit in a Special Economic Zone are entirely exported, those goods and services will have to necessarily enter the Domestic Tariff Area before reaching the airport or seaport. 43. The second sce .....

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far as such direct sales made by the appellant to a local purchaser within the State are concerned, the appellant is said to have admitted the said liability and also paid sales tax, additional sales tax etc. 44. The third possible scenario is where the goods or services produced by a unit located within the SEZ of a particular State, are sold to a purchaser located in yet another State. In such a case, the sale takes place within the scope of the Central Sales Tax Act, 1956. Therefore, the sell .....

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Tariff Area of the State, in which, the SEZ is located. 46. If we keep in mind all the above four different possible scenarios, the answer to the second question that has arisen for consideration before us, would not pose any great difficulty. In all the four different possible scenarios we have indicated above, there is certainly a removal of goods from the SEZ to the Domestic Tariff Area. In other words, a direct export from a unit located in a SEZ to a foreign country cannot take place witho .....

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oved" appearing under Section 15(a) is to be understood in the manner, in which, the State Government has argued before us, the following consequences would become inevitable: (i) whenever the goods are removed from the Special Economic Zone to the Domestic Tariff Area, they would have to pay sales tax etc., as stipulated in Section 15(a), since the contingency prescribed in Section 15(a) happens; (ii) whenever any goods are removed from a Special Economic Zone to the Domestic Tariff Area f .....

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be correlated to a taxable event. This is made clear by the rider contained in the last part of Section 15(a). This rider reads as "where applicable as leviable on such goods when imported" 48. Whenever an inter-state stock transfer takes place, the State, in which, the factory is located, cannot levy and collect the local sales tax, as no taxable event takes place in the State. This is why Section 15(a) uses the rider "where applicable as leviable". Take for instance a case .....

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respondents to Section 15(a) could be understood very easily by looking at it from another angle. The respondents agree that if an export takes place from a unit located in SEZ to a foreign country, Section 15(a) does not get attracted even if the goods are removed from the SEZ to a DTA. The respondents also agree that even in cases where an inter-state sales takes place from a unit located in a SEZ, Section 15(a) does not have any application, despite the goods being removed from the SEZ to a D .....

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r alone. 50. Therefore, we are of the considered view that Section 15(a) does not actually circumscribe Section 12(1)(a) of the Act. The argument of the respondents that appears to have weighed by the learned Single Judge was that a company like the appellant, after having availed the hospitality of a particular State, cannot deprive that State of its revenue, cannot at all be sustained. We have already indicated four possible scenarios. At least in two out of those four scenarios, namely in the .....

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empted all sales and transactions within the processing area of a SEZ, from sales tax, purchase tax, etc. Section 22 of the SEZ Act also conferred an overriding effect for the Gujarat SEZ Act upon all other enactments. But, the State relied upon certain provisions of the Gujarat Value Added Tax Act, which levied purchase tax even upon SEZ Units on zero rated sales. But, a Division Bench of the Gujarat High Court held that without there being any provision giving the prescriptions contained in Gu .....

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mil Nadu SEZ Act are not in pari materia, (ii) that the petitioners in Tulsyan were claiming input tax credit on the sales effected to the Units in Special Economic Zone, and (iii) that there is a marked and material difference with regard to zero rated sale as per Section 5-A of the Gujarat VAT Act and as per Section 18 of the TNVAT Act. 53. The distinguishing features pointed out by a learned Judge in Tulsyan Nec. Ltd., appealed to the learned Judge against whose orders the present appeals ari .....

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he cases on hand. 55. What are applicable to the cases on hand are Section 9 of the Gujarat VAT Act and Section 12 of the Tamil Nadu VAT Act. Section 12 of the Tamil Nadu Value Added Tax Act, 2006 seeks to levy purchase tax on every dealer, who, in the course of his business, purchases from a registered dealer or from any other person, any goods (the sale or purchase of which is liable to tax under this Act) in circumstances in which no tax is payable by that registered dealer on the sale price .....

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upon those purchases, which happened under circumstances in which no tax was payable on the sale of such goods. Therefore, Section 9 of the Gujarat VAT Act and Section 12 of the Tamil Nadu VAT Act may not be comparable. 57. But, what ought to have been seen was whether the provisions of Section 12(1) read with Section 28 of the Tamil Nadu SEZ Act would have overriding effect upon Section 12 of the Tamil Nadu VAT Act, 2006 or not. The Gujarat High Court was concerned in Torrent Energy Ltd., with .....

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f the Tamil Nadu SEZ Act vis-a-vis Section 12 of the Tamil Nadu VAT Act, 2006. We have already extracted Section 12 of the Tamil Nadu SEZ Act, 2005 in paragraph 34. Section 28 of the Tamil Nadu SEZ Act, 2005 reads as follows: "The provisions of this Act shall be in addition to and not in derogation of the Special Economic Zones Act, 2005 and shall have effect notwithstanding anything inconsistent therewith contained in any other State law for the time being in force." 59. Interestingly .....

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t;, as is used in Section 28 of the Tamil Nadu SEZ Act, 2005. Tamil Nadu VAT Act, 2006 is a subsequent legislation and hence, it is contended before us, as it was contended before the Gujarat High Court that the phrase "for the time being in force" cannot cover a subsequent legislation or a subsequent amendment. But, the Gujarat High Court overruled the said objection on the basis of three decisions of the Supreme Court in Thyssen Stahlunion v. Steel Authority of India [AIR 1999 SC 392 .....

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overriding effect conferred upon Section 28 of the Tamil Nadu SEZ Act, 2005, will cover even Section 12 of the Tamil Nadu VAT Act, 2006. Therefore, even if we independently analyse the provisions of Section 12(1) read with Section 28 of the Tamil Nadu SEZ Act, 2005 vis-a-vis Section 12 of the Tamil Nadu VAT Act, 2006, we would come to the very same conclusion as arrived at by the Gujarat High Court in Torrent Energy Ltd. 61. However, Mr.AL.Somayaji, learned Advocate General contended that the ve .....

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ction 12 of the TNVAT Act, 2006, which reads as follows: "Section 12: Levy of purchase tax.- (1) Subject to the provisions of sub-section (1) of section 3, every dealer, who in the course of his business purchases from a registered dealer or from any other person, any goods (the sale or purchase of which is liable to tax under this Act), in circumstances in which no tax is payable by that registered dealer on the sale price of such goods under this Act, and either - (a) consumes or uses suc .....

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purchase aforesaid at the rate specified in the Schedules to this Act. (2) Notwithstanding anything contained in clause (24) of section 2, the dealer who pays tax under sub-section (1) shall be entitled to input tax credit on the goods specified in the First Schedule." 63. The plain language of Section 12(1) indicates that purchase tax is leviable upon every dealer, who, in the course of business, purchases any goods in circumstances in which no tax is payable by that registered dealer on .....

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ing in Section 12(1), goes along with the activity of "purchase", as seen from the language employed therein. The said phrase does not go along with the word "dealer". 65. In other words, Section 12(1) becomes applicable when the activity of purchasing, happens in circumstances in which no tax is payable on the activity of selling. The leviability of the purchase tax under Section 12(1) focusses not on the actors, but on the activity. 66. In a Special Economic Zone, the actor .....

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the Tamil Nadu SEZ Act, 2005, it could be seen easily that the former seeks to cover activities, while the latter seeks to cover the actors. A developer or entrepreneur enjoys exemption from levy of all taxes listed under Clauses (a) to (h) of Sub-section (1) of Section 12 of TNSEZ Act, 2005, because of being located in a SEZ and because of being a developer or entrepreneur within the meaning of the said Act. A dealer located in a SEZ and selling goods to another dealer, does not enjoy the bene .....

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e levy of taxes both on the sale as well as the purchase of goods, under the Tamil Nadu General Sales Tax Act, 1959. Therefore, we are unable to sustain the objections of the learned Advocate General. 69. As a matter of fact, after the Government of India announced the concept of Special Economic Zones in the year 2000, through a revision in the EXIM Policy 1997-2002, with a view to provide an internationally competitive and hassle free environment for export production, the Government of Tamil .....

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