2016 (2) TMI 767 - HC - VAT and Sales Tax

Denial of Input Tax and Credit (ITC) and levy of penalty - Gujarat Value Added Tax (GVAT) - company was using the entire purchase of castor oil seeds for production of castor oil, it claims input tax credit - in the reassessment proceedings it was held by the AO that the company would not be entitled for input tax credit to the proportion of the waste used by the company or the manufacturer and would be liable to pay tax under Section 11(3)(b)(iii) since the same was used as fuel. Held that - it is clear that the entire purchase made by the company is intended to manufacture castor oil and oil based products. In the first phase, when crushing of the seeds takes place, only some portion of the seeds turn into oil. After the first process of crushing the seeds, most of the oil is extracted. The said castor oil cake is again crushed and the remaining portion of the castor oil is extracted therefrom in the second process leaving the waste, which is of no use to the company and therefore the same is used in the furnace as a fuel in the manufacture of castor oil as well as other products. Only the waste is used as fuel and that too again in the manufacturing process of oil. Therefore, in our opinion, it would not fall under proviso to Section 11(a) of the Act. As far as applicability of Section 11(3)(b)(iii) is concerned, the same would not be applicable since the entire purchase of castor seeds were used in the manufacture of castor oil and only the waste product was used as a fuel, that too, in the manufacture of castor oil. It is not even the case of the appellant-State that the castor oil seeds or a part thereof was purchased for using them as fuel. Deoiled cake is a byproduct and therefore it cannot be said that the same was purchases for using as a fuel. Deoiled cake is an inevitable byproduct which the company can throw it away as waste or use it as a fuel. There is no deliberate attempt on the part of the Company to manufacture Deoiled cake so that the same can be used as fuel. - input tax credit allowed - Decided against the revenue.

Summary

Issues Involved:

1. Interpretation of Section 11(3) of the Gujarat Value Added Tax Act, 2003 regarding input tax credit for deoiled cake used in boilers.
2. Validity of penalty under Section 12(7)(b) and Section 34(12) for disallowance of input tax credit.

Issue-Wise Detailed Analysis:

1. Interpretation of Section 11(3) of the Gujarat Value Added Tax Act, 2003:

The respondent company, engaged in the business of manufacturing castor oil from castor seeds, claimed input tax credit under Section 11 of the VAT Act for the entire purchase of castor seeds. The Assessing Authority, however, disallowed the input tax credit proportionate to the deoiled cake used as fuel, invoking Section 11(3)(b)(iii). The Tribunal quashed this disallowance, interpreting that the deoiled cake, being a byproduct, should not affect the entitlement to full input tax credit.

The High Court upheld the Tribunal's decision, emphasizing that the entire purchase of castor seeds was intended for manufacturing castor oil, and the deoiled cake was merely a byproduct used as fuel. The Court referenced the Apex Court's decision in *Swadeshi Polytex Limited* and the Division Bench's decision in *Sterling Gelatin*, which held that unintended byproducts should not affect the entitlement to input tax credit. The Court concluded that the use of deoiled cake as fuel did not fall under the proviso to Section 11(3)(a) or Section 11(3)(b)(iii), as the seeds were not purchased with the intention to use them as fuel.

2. Validity of Penalty under Section 12(7)(b) and Section 34(12):

The Tribunal also quashed the penalties imposed under Section 12(7)(b) for disallowance of input tax credit and Section 34(12). The High Court agreed with the Tribunal, noting that the respondent company had maintained proper records and used the entire purchase of castor seeds for manufacturing castor oil. The deoiled cake was an inevitable byproduct, and its use as fuel did not constitute a breach of the VAT Act provisions warranting penalties.

Conclusion:

The High Court dismissed the appeals, affirming the Tribunal's interpretation that the respondent company was entitled to full input tax credit for the castor seeds used in manufacturing castor oil, despite the use of deoiled cake as fuel. The penalties imposed were also deemed unjustified, as the company's actions were in compliance with the VAT Act.