Supreme Court: In appeals filed by the assessee against the common judgment and order dated 03-05-2019 passed by the Allahabad High Court, wherein the Court allowed both the Commercial Tax Revisions filed by the ‘Commissioner of Commercial Tax UP’ (‘Revenue’) against the Orders dated 04-05-2016 and 05-07-2017 passed by the Commercial Tax Tribunal, viewing that the assessee is not entitled to the full benefit of Input Tax Credit (‘ITC’) claimed on the goods purchased by it for manufacturing its final product, the three judge bench of Dr. Dhananjaya Y. Chandrachud, J.B. Pardiwala* and Manoj Misra, JJ. while setting aside the impugned judgment, held that the charging Section of the UP-VAT Act, entitles the assessee to claim full amount of tax paid on the purchases as ITC. It also said that, in casethe legislative intent of the 2010 Amendment was to limit the scope and ambit of ‘goods’ under Section 13(1)(f) solely to ‘taxable goods’, there was nothing that could have prevented the Legislature from expressly using the phrase ‘taxable goods’ in Section 13(1)(f) of the UP-VAT Act. Further, it held that the High Court had committed an error in passing the impugned judgment relying on the decision in State of Karnataka v. M.K. Agro Tech. (P) Ltd., (2017) 16 SCC 210
Issues and Analysis:
Whether the assessee is entitled to claim full amount of tax paid towards the purchase of raw Rice Bran as ITC, based on the provisions of Section 13(1)(a) read with S. No. 2(ii) of the Table and Section 13(3)(b) read with Explanation (iii) of Section 13 of the Uttar Pradesh Value Added Tax Act, 2008 (‘UP VAT Act’)?
After interpreting Section 13 of the UP-VAT Act, the Court said that the legislative intent was never to limit or circumscribe the scope of ‘goods’ as outlined in Section 13(1)(f) to only ‘taxable goods’. The amendment was effected with some definite purpose. The mischief that was sought to be addressed by virtue of introducing Section 13(1)(f) to the scheme of the UP-VAT Act was one where the goods (including taxable, exempt goods, by-products or waste products) manufactured were being sold at a price lower than the cost price. It is in such cases that the extent of permissible or allowable ITC would be limited to the tax payable on the sale value of the goods or manufactured goods. Further, it said that the definition of “goods” under Section 2(m) of the UP-VAT Act, does not differentiate between ‘exempt’ and ‘taxable goods’ and equally, the word ‘goods’ under Section 13(1)(f) of the UP-VAT Act has also not been qualified by the word ‘taxable’.
The Bench also remarked that, had the legislative intent of the 2010 Amendment been to limit the scope and ambit of ‘goods’ under Section 13(1)(f) solely to ‘taxable goods’, there was nothing that could have prevented the Legislature from expressly using the phrase ‘taxable goods’ in Section 13(1)(f) of the UP-VAT Act. Further, it noted that the provisions of Rule 23(6) of the Uttar Pradesh Value Added Tax Rules, 2006 (‘UP VAT Rules’), which provides for the computation of reverse ITC in cases of a dealer other than a trader, wherein the word “goods” has not been qualified by “taxable” and rather has used the word “any” to expressly convey the unequivocal legislative mandate.
After applying the principles of interpretation, the Court rejected the case put up by the Revenue, as doing so would permit the assessing authority to do something indirectly what he cannot do directly i.e., get around the mandate of the exception carved out by Section 13(3)(b) read with Explanation (iii) by invoking Section 13(1)(f) of the UP VAT Act.
Further, the Court noted that the De-Oiled Rice Bran (‘DORB’) which is produced as part of the Solvent Extraction process is a by-product of the manufacturing process. Further, DORB falls within exempted goods under S. No. 4 of Schedule I of the UP VAT Act.
After perusing Section 13(1)(a), the Court said that in cases where the purchased goods (Rice Bran) are used in the manufacture of taxable goods (RBO and physically refined RBO) except the non-VAT goods, and where such manufactured goods are sold within the State or in the course of inter-state trade and commerce, the registered dealers are entitled to claim input tax credit of the full amount. The charging section of the UP-VAT Act, therefore, entitles the assessee to claim full amount of tax paid on the purchases as ITC.
Further, Section 13(3)(b) of the UP VAT Act, introduces the concept of proportionality in the scheme of the enactment and by means of a deeming fiction provides that, where during the manufacture of VAT goods, exempt and non-VAT goods (except as by-product or waste product) are produced, the amount of ITC credit may be claimed and may be allowed in proportion, to the extent they are used or consumed in manufacture of ‘taxable goods’ other than the non-VAT goods and exempt ‘goods’.
However, as per the Court, Section 13(3)(b) leaves a grey area with respect to cases where the process of manufacture results in the production of VAT goods and by-products or waste products. In such cases, the legislature has provided for another legal fiction in the form of Explanation (iii) to Section 13, wherein it is provided that during the manufacture of any taxable goods, any exempt goods are produced as by-product or waste product, it shall be deemed that the purchased goods have been used in the manufacture of taxable goods. Explanation (iii) to Section 13, therefore, forbids the Assessing Authority as well as the assessee from raising any dispute regarding the allowability of the ITC in cases where exempted goods are being produced as a by-product or waste product during the process of manufacture.
Whether the decision in State of Karnataka v. M.K. Agro Tech. (P) Ltd., (2017) 16 SCC 210 has any application to the case on hand?
After taking note of MK Agro Tech (Supra), wherein it was held that ITC was admissible to the extent of inputs used in the sale of taxable goods. Further, it was held that only partial ITC was permitted to the assessee as they were making taxable and exempted sales from the dutiable raw materials procured by them. The Court had permitted only partial ITC as the wording of the provision relates only with ‘sale’ and not ‘manufacture’. Therefore, the Court viewed that the decision of M.K. Agro Tech (supra), is not applicable to the case on hand as the provisions under the Karnataka VAT Act are quite different compared to that of the UP-VAT Act regarding the scheme of ITC.
It further said that the scheme under the UP-VAT Act is not the same as in Karnataka, and no such provision regarding calculation of the apportionment etc., has been provided under the UP VAT Act. Therefore, reliance by the High Court on this decision is not correct. It is not applicable to the facts of the present case and could not have been relied upon to deny the full ITC to the assessee.
After differentiating between the ITC scheme envisaged under the Karnataka VAT Act and the scheme under the UP VAT Act, the Court held that the High Court had committed an error in passing the impugned judgment relying on the decision in M.K. Agro Tech (supra).
[Modi Naturals Ltd. v. CCT, 2023 SCC OnLine SC 1424, Decided on 06-11-2023]
*Judgment Authored by: Justice J.B. Pardiwala