2015 (1) TMI 854 - HC - VAT and Sales Tax

Input tax credit - Credit on residue Sunflower De-oiled Cake - Whether Section 17 which deals with partial rebate, of the Act is attracted to a case where by-product sold, falls within the category of exempted goods - Held that - The entire raw material named as Sunflower Cake purchased is for the manufacture of Sunflower Oil. But, in the process, after the entire Sunflower Oil is extracted, de-oiled cake remains. The said de-oiled cake also has a value. He cannot keep that de-oiled cake in his premises as it could occupy a large space and no purpose would be served by keeping the same. 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. The assessee cannot be denied the benefit, taking into consideration the sale of de-oiled cake which is an exempted goods. In that view of the matter, the authorities have not properly appreciated the said statutory provisions. The Legislative intent is defeated in denying the benefit of input tax deduction relying on Sections-11(a)(1) r/w. Section-17 of the Act. The impugned order is unsustainable - assessee is entitled to the benefit of Full Input Tax Deduction - Decided in favour of assessee.

Issues Involved: Entitlement to full input tax credit, applicability of Section 17 of the KVAT Act, interpretation of Section 11(a)(1) of the KVAT Act, and the relationship between taxable and exempt goods.

Issue-wise Detailed Analysis:

1. Entitlement to Full Input Tax Credit:
The core issue in the case is whether the assessee, engaged in the extraction and sale of refined Sunflower Oil and the incidental production of de-oiled Sunflower Cake, is entitled to full input tax credit. The Karnataka Appellate Tribunal had held that the assessee is not entitled to full input tax credit because the de-oiled Sunflower Cake is exempt from tax. The assessee argued that the incidental production of de-oiled cake, which is an exempt product, should not affect the entitlement to full input tax credit for the taxable product, i.e., Sunflower Oil.

2. Applicability of Section 17 of the KVAT Act:
Section 17 deals with partial rebate and is applicable when a dealer makes sales of both taxable goods and exempt goods. The Tribunal and First Appellate Authority invoked Section 17 to deny partial input tax credit to the assessee. The court examined whether Section 17 should apply to a case where a by-product, which is exempt from tax, is sold. The court concluded that Section 17 is not applicable in this scenario because the primary business of the assessee is the sale of taxable Sunflower Oil, and the de-oiled cake is merely an incidental by-product.

3. Interpretation of Section 11(a)(1) of the KVAT Act:
Section 11(a)(1) restricts input tax credit on purchases attributable to the sale or manufacture of exempt goods. The court noted that the words "manufacture or processing or package or storage" were inserted by an amendment with retrospective effect from 01.04.2005. The court interpreted that the tax paid on purchases attributable to the sale or manufacture of exempt goods is non-deductible. However, in this case, the de-oiled cake is an incidental by-product and not the primary product of manufacture.

4. Relationship Between Taxable and Exempt Goods:
The court emphasized the need for a direct nexus between the goods purchased and the goods sold or manufactured for input tax credit eligibility. The court found that the Sunflower Oil Cake was purchased solely for the extraction of Sunflower Oil, and the de-oiled cake was an incidental by-product. Therefore, there is no direct relationship between the input tax paid on the Sunflower Oil Cake and the exempt de-oiled cake. Consequently, the assessee is entitled to full input tax credit for the Sunflower Oil.

Conclusion:
The court concluded that the authorities had not properly appreciated the statutory provisions and that the legislative intent was defeated by denying the benefit of input tax deduction. The court allowed the revision petition, set aside the impugned order, and held that the assessee is entitled to the benefit of full input tax deduction.

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