Rajasthan High Court rules on CST rate for small enterprises

The Rajasthan High Court ruled on 12 September 2023 that investments in two units of the same company cannot be combined to deny them a concessional Central Sales Tax (CST) rate. The ruling came from a Division Bench comprising Chief Justice Sanjay K. Agrawal and Justice Baljinder Singh Sandhu in Jodhpur.

The case involved a company that established a unit in Sri Ganganagar in 2009 and another in Alwar in 2012. Both units were registered as small enterprises, with each having investments in plant and machinery below Rs 5 crore (approximately USD 601,000). According to a state notification, micro and small enterprises can pay CST at a concessional rate of 0.25% on inter-State sales.

The tax department combined the investments of both units, finding the total exceeded the Rs 5 crore threshold, and subsequently denied the tax concession for three assessment years. The department imposed tax, interest, and penalties on the company. However, in 2018, the Rajasthan Tax Board ruled in favor of the company, stating that the law regarding small enterprises does not permit the clubbing of investments.

The Revenue argued before the High Court that an amendment to the notification in March 2017 justified the clubbing of investments, claiming that the Tax Board’s ruling was flawed. In contrast, the company pointed to state clarifications from 2011 and 2014, along with the 2017 explanation, which stated that investments in different enterprises under the same ownership should not be aggregated.

The central question was whether the Alwar unit constituted a different enterprise. The Bench noted that mutual dependence between the two units must be demonstrated for clubbing to be valid. The court referred to its previous ruling in Renu Tandon v Union of India, which emphasized the need for common funding or financial interdependence between the units.

In this case, the High Court found that the Revenue had failed to establish any mutual dependence or common funding between the two units. The mere fact that both units were owned by the same company was insufficient for clubbing the investments. The court also cited the Supreme Court’s ruling in State of Haryana v Bharti Teletech, which stated that exemption notifications should be interpreted liberally for those who meet their conditions, and no additional conditions should be imposed where none exist.

The High Court upheld the Tax Board’s decision, concluding that each unit should be treated separately and neither had exceeded the Rs 5 crore limit. The court dismissed the Revenue’s revisions, with both parties bearing their own costs.