2014 (7) TMI 1266 - HC - VAT and Sales Tax

Input tax credit - full deduction - as the assessee has failed to maintain evidence to segregate non-deductible input tax relating to exempt transactions it has failed to establish the claim of deductible input tax on direct method as explained to segregate non-deductible input tax - Held that - it is clear that the input tax in relation to any registered dealer means tax collected or payable under this Act on the sale by him on any goods for use in the course of his business. Output tax in relation to any registered dealer means, the tax payable under this Act in respect of any taxable sale of goods made by the dealer in the course of his business. Sub-rule (3) of Rule 10 makes it clear that subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, net tax payable by the registered dealer in respect of each tax period shall be the amount of output tax payable by him for that period less input tax deductible by him, as prescribed in that period. Merely because the said de-oiled cake also has a value and he sells the same, there is no justification to deny the benefit of deduction to the assessee, because there is no direct nexus between the sunflower oil cake and the de-oiled cake. Sunflower oil cake was purchased for the purpose of extracting oil from the said cake and for the sale of the de-oiled cake, the assessee has not put-up a separate unit. Therefore, it is not the case that assessee has put-up a separate industry for the purpose of manufacture of de-oiled cake and merely because the de-oiled cake has some value and it is sold, that would not take away the benefit conferred on the assessee by the statute. A harmonious interpretation of Sections 10, 11(a)(1) and 17 of KVAT Act and Rule 131 of the Karnataka Value Added Tax Rules, 2005, makes it very clear that it is only when there is direct relationship to the taxable sales, the assessee is entitled to the benefit. The assessee is entitled to the benefit of Full Input Tax Deduction - appeal allowed - decided in favor of appellant.

Issues Involved:

1. Entitlement to full input tax credit for the assessee.
2. Application of Section 17 of the Karnataka Value Added Tax Act, 2003.
3. Interpretation of the terms "output tax," "input tax," and "net tax" under Section 10.
4. Restrictions on input tax under Section 11(a)(1).
5. Apportionment of input tax under Rule 131 of the Karnataka Value Added Tax Rules, 2005.

Issue-wise Detailed Analysis:

1. Entitlement to Full Input Tax Credit for the Assessee:

The assessee, a private limited company engaged in the extraction and sale of refined sunflower oil, filed returns of turnover and paid taxes for the periods from July 2005 to March 2006 and April 2006 to March 2007. The Deputy Commissioner of Commercial Taxes scrutinized these returns and determined that while sunflower oil was taxable, the de-oiled sunflower oil cake was exempt from tax. Consequently, the assessee was deemed eligible only for partial input tax rebate as per Section 17 of the Karnataka Value Added Tax Act, 2003. The Karnataka Appellate Tribunal upheld this decision, leading the assessee to appeal to the High Court.

2. Application of Section 17 of the Karnataka Value Added Tax Act, 2003:

The primary issue was whether Section 17, which deals with partial rebate, applies when a by-product (de-oiled cake) sold by the assessee falls within the category of exempted goods. The court examined the statutory provisions and concluded that Section 17 applies to cases where there is a direct nexus between the goods purchased and the goods sold or manufactured. The court emphasized that the assessee was engaged in the manufacture of sunflower oil, and the de-oiled cake was merely a by-product of this process. Therefore, the sale of the de-oiled cake, which is an exempted good, should not affect the entitlement to full input tax credit for the taxable sunflower oil.

3. Interpretation of the Terms "Output Tax," "Input Tax," and "Net Tax" under Section 10:

Section 10 of the Act defines "output tax" as the tax payable on taxable sales, "input tax" as the tax collected or payable on purchases used in the course of business, and "net tax" as the output tax minus the deductible input tax. The court noted that the input tax is deductible only if it directly relates to taxable sales. Since the sunflower oil is taxable, the input tax on the sunflower oil cake used to produce it should be fully deductible, despite the de-oiled cake being exempt from tax.

4. Restrictions on Input Tax under Section 11(a)(1):

Section 11(a)(1) restricts the deduction of input tax on purchases attributable to the sale or manufacture of exempted goods. The court highlighted that this provision was amended retrospectively to include the words "manufacture or processing or packing or storage," effective from April 1, 2005. The court interpreted this provision to mean that input tax is non-deductible only if it directly relates to the manufacture or sale of exempted goods. In this case, the input tax on sunflower oil cake should be deductible as it is primarily used to produce taxable sunflower oil.

5. Apportionment of Input Tax under Rule 131 of the Karnataka Value Added Tax Rules, 2005:

Rule 131 deals with the apportionment of input tax in cases where a dealer makes sales of both taxable and exempt goods. Sub-rule (1) states that input tax directly related to the sale of exempt goods is non-deductible, while sub-rule (2) allows the deduction of input tax directly related to taxable sales. The court concluded that there should be a direct nexus between the input tax paid and the taxable goods sold. Since the assessee's primary business was the manufacture and sale of taxable sunflower oil, the input tax on sunflower oil cake should be fully deductible, and the sale of the de-oiled cake should not affect this entitlement.

Conclusion:

The court allowed the revision petition, setting aside the impugned order. It held that the assessee is entitled to the benefit of full input tax deduction, as the statutory provisions were not properly appreciated by the authorities, and the legislative intent was defeated by denying this benefit. The court emphasized the importance of purposive construction in interpreting the statutory provisions to achieve the intended legislative objective.

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