TMI Blog2013 (10) TMI 1553X X X X Extracts X X X X X X X X Extracts X X X X ..... periods of September 2007 to March 2009 and for the twelve tax periods of April 2009 to March 2010, dated 23rd September, 2011 and the said reassessment orders are concluded by the Deputy Commissioner of Commercial Taxes (Audit-33), DVO-3, Bangalore (for short as 'AA'). Brief facts of the case.--The appellant is a Private Limited Company registered under the Companies Act, 1956 engaged in the business inter alia in Software Development and Information Technology Enabled Services (for short as 'ITES') having operational units at various places within the country and one such branch or profit center is located in Bangalore and the same has come before us as the appellant. The appellant's unit is located in Manyata Embassy Business Park, Special Economic Zone (SEZ), Rachenahalli, Near Nagavara Junction, Bangalore, Karnataka. The company has branches throughout India and the unit situated in SEZ at Bangalore is one of the profit centers or branches of the company. The appellant-unit has been recognized as SEZ Unit by the Development Commissioner, Manyata EBP, Special Economic Zone, Ministry of Commerce and Industry, Government of India by the letter of approval i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption accorded to all purchases excluding purchase of petroleum products by the SEZ Units located in the processing areas from domestic tariff area or SEZ area for its set up, operation or maintenance or for use in manufacture, trading, production, processing, assembling, repairing, reconditioning, re-engineering or packing with the exception that when the SEZ Units sell the goods in the DTA with or without value addition and when sold so applicable state taxes are applicable. Similarly, the State of Karnataka has carved out specific provisions under the KVAT Act, itself namely sub-section (2) of Section 20 of the Act which provides for complete exemption by way of refund to all purchases of inputs by a SEZ Unit in the State of Karnataka for its Authorized Operations. The appellant also highlights the clarification issued by the Commissioner of Commercial Taxes when sub-section (2) of Section 20 is inserted under the Act and emphasizes that the intention of the Government is to grant relief to SEZ Units by allowing refund of VAT paid by the SEZ Units on the purchase of inputs. In this regard, the appellant points out the mechanism and regulations governing the scheme of refund pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ataka along with Chartered Accountant Certificate pertaining to the said SEZ Unit and Financial of the Company as a whole, Annual Performance Report, Sample copies of Softex Forms issued to evidence exports during the impugned tax periods and also acknowledged copy of the replies to the show-cause notice issued by the AA and the extract of purchase register submitted before the lower authorities. The learned Counsel for the appellant has not relied on any case-laws under commodity taxation or service tax by citing any of the judgments but rather has focused entirely on Rule 130-A(1)(b) of KVAT Rules. Perused the lower Court records and it is seen that the appellant has submitted compilation of documents in a spiral book which had been produced before the FAA and AA. In response to the advancement of arguments of the appellant, the learned State Representative submitted that the appellant-unit is not entitled for refund of tax on all the inputs purchased as the appellant has failed to demonstrate that such inputs purchased by paying VAT are actually used in the authorized operation or processing activity of the SEZ Unit. In this regard, the State Representative highlighted the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of other goods for sale. Since, the said sub-section allows exception only in case of 'goods', whether the 'output' generated by the appellant-unit can be considered as 'goods'. The appellant-unit is engaged in Information Technology Enabled Services (ITES) and specifically Software Development/Software Application Management. Such being the case, the appellant-unit is engaged in 'Service Activity' i.e., processing of data and software application management services as evident from the 'Softex' Forms submitted by the appellant-unit, wherein it has been clearly mentioned that appellant is engaged in Software Development and Software Application Management as per the prescribed Reserve Bank of India Codes enumerated therein. Therefore, it is necessary to look into the Special Economic Zone Scheme and also necessary to analyze Section 20(2) of the Act. 8. Special Economic Zone (SEZ) Scheme was introduced by the Union Government with effect from 1-4-2000 with the objective to provide an internationally competitive and hassle free environment for earning of foreign exchange, attracting Foreign Direct Investment (FDI), general employment and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 2 to the proviso to Section 3 of the Central Excise Act, 1944. Thus this is a legislation by reference. Section 3 of the Central Excise Act, 1944 is the charging section which reads as under.-- 3. Duties specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 to be levied.--(1) There shall be levied and collected in such manner as prescribed.-- (a) x x x x x (b) x x x x x: Provided................ Explanation 1.--x x x x Explanation 2.--In this proviso.-- (i) x x x x x (omitted by Finance Act 22 of 2007) (ii) x x x x x (iii) Special Economic Zone has the meaning assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005 (28 of 2005) . Thus, the Central Excise Act, 1944 once again assigns the meaning of Special Economic Zone by referring to Special Economic Zones Act, 2005. The relevant provisions namely, clause (za) of Section 2 of the Special Economic Zones Act reads as under.-- 2. Definitions.--In this Act, unless the context otherwise requires.-- (a) to (z) x x x x (za) Special Economic Zone means each Special Economic Zone notified under the proviso to sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t arise at all. Irrespective of the same, because of Section 20(2) of the Act, Section 11 is not applicable in case of SEZ Units which are authorised by the authorities of the Central Government to carry on authorised operations in the processing areas of the SEZ. Hence both FAA and AA have erred in arriving at the conclusion that Section 20 is dependent on Section 11 and thereby invoking Section 11 of the Act-is not correct. In view of the same, the impugned order of the FAA and AA are liable to be set aside. Hence, the appellant-unit is entitled for the availment of benefit under sub-section (2) of Section 20 of the Act. Hence, we answer Point Nos. 1 and 2 in the affirmative. 11. Point No. 3.--Since, sub-section (2) of Section 20 refers to the prescribed rule, the relevant rule for the purpose of these appeals is Rule 130-A of KVAT Rules, 2005. The same is reproduced hereunder.-- 130-A. (1) Any registered dealer being a developer of any Special Economic Zone or an unit located in any special economic zone shall be eligible for refund of tax paid on any inputs purchased by him or deduction of such tax from the output tax payable by him as specified in sub-section (2) of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merges out of raw materials/inputs shall be distinct commercial commodity in trade parlance or common parlance. Therefore, the expression manufacture has restrictive meaning when compared to production or processing. This expression manufacture has been analyzed by the Apex Court as well as various High Courts in many cases. There are several decisions in this regard and the landmark decision is Ujagar Prints v. Union of India and Others, (1989)74 STC 401 (SC) rendered by the Constitutional Bench. In the said decision, it has been decided that the prevalent and generally accepted test to ascertain that there is manufacture is whether the change or the series of changes brought about by the processes take the commodity to the point where commercially, it can no longer be regarded as the original commodity but is, instead, recognised as a distinct and new article that has emerged as a result of the process. The principles are clear. Thus, the 'manufacture' is distinct from 'process'. It is also to be noted that inspite of defining 'manufacture' to give wider meaning under the Bombay Sales Tax Act, 1959 to include production, making, extracting, altering, orn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocessed and enriched minerals and ores are produced which is not different from the original input. Similarly when water is converted into steam, the expression production is used rather than manufacture. It is only the change in phase of water from fluid state to gaseous state. Another example is that of generation of electricity using hydel power. In this case, the water from the higher altitude is drawn towards the lower altitude by which the potential energy of water is converted into kinetic energy which is used to run the turbine which generates electrical power. It is to be seen that there is no input or raw materials at all in the traditional sense for the generation of electricity but still the same is considered as production. Trading.--The expression trading generally implies tangible merchandise goods. However in case of intangible goods like software, patents, copy rights, even though intangible, still the same could be traded. Processing.--The expression processing generally implies the enrichment of the original input. For example, the iron ore is processed to have enriched iron content ore. The Hon'ble Apex Court in the case of Chowgule and Company Priv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... category and or genus followed by general words. In the Interpretation of Statutes by G.P. Singh, 12th Edition, pages 504 to 512, the rule is explained. The rule applies when the statute contains an enumeration of specific words; the subjects of enumeration constitute a class or category; that class or category is not exhausted by the enumeration, the general terms follow the enumeration; and there is no indication of a different legislative intent. The rule of ejusdem generis in interpreting the statute has been applied in taxation statute as well. In cases where the particular words can belong to a broad based genus it is not open to confine them to a narrower genus so as to limit the meaning of the general words. It is essential for application of the ejusdem generis rule that enumerated things before the general words must constitute a category or a genus or a family which admits of a number of species or members. In the case of State of Bombay v. Ali Gulshan AIR 1955 SC 810, it was held that specific word must form a distinct genus or category. 14. Similarly, in Maharashtra University of Health Sciences v. Satchikitsa Prasarak Mandal AIR 2010 SC 1325: (2010)3 SCC 786 : (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the each of the expressions used in Rule 130-A(1)(c) has attained different shades and colour over the time of period with the advancement of science and technology and legal precedents. The expression processing has wider connotation which implies the generation of output from certain inputs. The output or the input need not necessarily be the goods as per the doctrine of ejusdem generis as explained by the Hon'ble Apex Court in the cases discussed above. In case of Information Technology Industry, tangible as well as intangible goods are involved and also services. The appellant-unit processes the inputs of the foreign clients and after due process generates the output which is being exported. This activity of the appellant-unit is classified as Software Development/Software Application Management. In view of the same, the appellant-unit can also be considered as an unit engaged in processing activity located in the processing area of the Special Economic Zone and thus satisfies clause (c) of sub-rule (1) of Rule 130-A. In this context, it is necessary to rely on the decision of the Hon'ble High Court of Karnataka in Mportal India Wireless Solutions Private Limited v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant-unit being a SEZ Unit as certified by the concerned Development Commissioner as such by letter of authority dated 1st May, 2007 and as the financials/annual reports relating to the profit center of the appellant-company pertaining to the appellant-unit reveals that the business income is derived exclusively from exports of Software Development and Software Application Management Services, the appellant-unit is entitled for refund of tax paid on inputs. It is also necessary to look into the definition of input under the Act. Clause (19) of Section 2 of the Act defines 'Input' as under.-- 2. (19) Input means any goods including capital goods purchased by a dealer in the course of his business for re-sale of for use in the manufacture or processing or packing or storing of other goods or any other use in business. (emphasis supplied) It is to be noted that the expression input has wider meaning because of the expressions used for any other use in business in the definition of input. In this regard, the reliance is placed on the decision of the Hon'ble Delhi High Court reported in Wipro Limited v. Union of India (2013)61 VST 194 (Del.), wherein it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders of the FAA and AA are liable to be set aside and the matter has to be remitted to the AA for limited purpose to quantify the amount of tax paid on the purchase of inputs which are used in the business activity of the appellant-unit for the purpose of refund claim. However, we make it clear that if and only if there is any over statement of input tax as envisaged under Section 72(2) of the Act, the penal proceedings can be initiated by the AA in accordance with law. Therefore, we answer Point No. 5 in the affirmative. Point No. 6.--As all the Point Nos. 1 to 5 are answered in the affirmative and as the appellant-unit is eligible for refund of tax paid on inputs purchased used for Software Development/Software Application Management as a SEZ Unit and as the statement of purchases describing the each commodity purchased and the purpose of such purchase has to be adduced before the AA, the matter is remitted back to the AA for the limited purpose for the quantification of refund claim. The appellant-unit is directed to adduce the statements as envisaged under Rule 130-A(3) of KVAT Rules to claim refund. The AA is at liberty to examine each purchase and the purpose before granting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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