2014 (9) TMI 141 - HC - VAT and Sales Tax

Denial of input tax credit - Whether the appellants-assessees, who are engaged in growing of tea/coffee plants and so also in manufacturing of tea/coffee as marketable commodity are entitled to take tax credit of inputs such as fertilizers, chemicals, pesticides, agricultural implements etc., used in the process of its growing/cultivation - Held that - tea plantation and coffee plantation are agricultural/horticultural activities and that it would not be correct to say that tea and coffee are either not agricultural/horticultural produce or its cultivation does not amount to agricultural activity. In fact, both are true. But, for the purpose of this Act agricultural produce namely tea , once made fit for consumption, stand excluded from being agricultural produce. A bare look at the definition of business , shows that the legislature has recognized the word business , wider than the words trade, commerce, or manufacture etc. . Any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture or adventure or concern is also business irrespective of the fact whether or not it makes any profit. The definition of business though has brought within its purview any trade, commerce, manufacture or any adventure or concern or any transaction in connection therewith, in our opinion, would not either directly or indirectly include agriculture/horticulture or agricultural/horticultural activity. From bare perusal of the provisions contained in Section 10 read with definition of input and the definition of business , it appears to us that unless agriculture/horticulture or agricultural/horticultural activity is held to be a business , an assessee, such as, the assessees in the present case, is not entitled for input tax credit. The basic requirement to seek input tax credit on purchases of goods, such as fertilizers, chemicals, pesticides, etc. is that they are purchased by a dealer in the course of his business for resale or for use in the manufacture or processing or packing or sorting of other goods or any other use in business. The agriculture/horticulture or agricultural/horticultural activity or the business as contemplated by the relevant definitions, it is clear that the word business as occur in Sub-section (6) of Section 2 is independent and therefore, input tax credit on the purchases such as fertilizers, chemicals, pesticides etc. used in agricultural/horticultural activity cannot be granted. Decided against assessee.

Issues Involved:
1. Entitlement of tax credit for inputs used in the cultivation of tea/coffee.
2. Classification of agricultural activities as business under the Karnataka Value Added Tax Act, 2003.
3. Distinction between agricultural produce and manufactured goods.
4. Applicability of input tax credit on fertilizers, chemicals, pesticides, and agricultural implements.

Detailed Analysis:

1. Entitlement of Tax Credit for Inputs Used in the Cultivation of Tea/Coffee:
The primary issue was whether the appellants, engaged in growing and manufacturing tea/coffee, are entitled to input tax credit for inputs like fertilizers, chemicals, pesticides, and agricultural implements. The Assessing Authority (AA) denied this credit, holding that inputs used for cultivation do not qualify as inputs for manufacturing under Section 2(19) of the Karnataka Value Added Tax Act, 2003.

2. Classification of Agricultural Activities as Business:
The court examined whether agricultural activities could be classified as "business" under Section 2(6) of the Act. The definition of "business" includes trade, commerce, manufacture, and any transaction incidental or ancillary to such activities. However, the court concluded that agricultural activities, such as growing tea/coffee plants, do not fall within this definition. The court emphasized that agriculture and manufacturing are distinct activities, and inputs used in agriculture cannot be considered as inputs for manufacturing.

3. Distinction Between Agricultural Produce and Manufactured Goods:
The court discussed the definition of "agricultural produce" under Section 2(3) of the Act, noting that tea, once subjected to any process to make it fit for consumption, ceases to be agricultural produce. Coffee, however, remains agricultural produce irrespective of processing. The court highlighted that the distinction between agricultural produce and manufactured goods is crucial for determining eligibility for input tax credit.

4. Applicability of Input Tax Credit on Fertilizers, Chemicals, Pesticides, and Agricultural Implements:
The court examined whether inputs like fertilizers, chemicals, and pesticides used in cultivation could be considered for input tax credit. It concluded that these inputs are necessary for cultivation but do not have a direct relationship with the manufacturing process. The court relied on the Supreme Court's judgment in Travancore Tea Estates Co. Ltd. v. State of Kerala, which distinguished between cultivation and manufacturing processes, to hold that such inputs do not qualify for tax credit under the Act.

Conclusion:
The court dismissed the appeals, holding that:
- Tea, once processed, ceases to be agricultural produce, while coffee remains agricultural produce.
- Agricultural activities cannot be classified as business under the Act.
- Inputs used in cultivation, such as fertilizers and pesticides, are not eligible for input tax credit as they do not directly relate to the manufacturing process.
- Companies engaged in both cultivation and manufacturing of tea/coffee are not entitled to input tax credit for inputs used in cultivation.

The court's decision was based on a detailed interpretation of the relevant provisions of the Karnataka Value Added Tax Act, 2003, and relied on precedents from the Supreme Court and High Courts. The judgment emphasized the distinction between agricultural and manufacturing activities and clarified the scope of input tax credit under the Act.

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