2018 (2) TMI 1827 - HC - VAT and Sales Tax

Input tax credit - interpretation of statute - meaning of the expression input including raw material - capital goods used as Inputs in manufacturing of taxable goods - Whether in the facts and circumstances of the case, the Hon'ble Tribunal was right in law in holding that Input Tax Credit @ 2% is not required to be reduced on capital goods used as Inputs in manufacturing of taxable goods? - Notification No.(GHN 14) VAT 2010 S.11(6)(2)/TH dated 29.06.2010. Held that - In essence and substance input is what is put in the final product. Anything which goes into the manufacture of the final product is an input but not everything that is used for manufacturing the final product can be termed as input , as is sought to be canvassed on behalf of the appellant. In terms of sub- section (5) of section 2 of the GVAT Act, the expression capital goods is defined as plant and machinery (other than second hand plant and machinery) meant for use in manufacture of taxable goods and accounted as capital goods in the books of accounts. Insofar as the expression raw materials is concerned, the same is defined under sub- section (19) of section 2 of the Act, to mean goods used as ingredient in the manufacture of other goods and includes process materials, consumable stores and material used in the packing of the goods so manufactured but does not include fuels for the purpose of generation of electricity. It is difficult to comprehend as to how the capital goods component would be worked out qua the goods which are sold in the inter- State trade and commerce. In terms of the notification dated 29.06.2010, the input tax credit is required to be reduced when the goods are used as input including raw material in the manufacture of goods. Therefore, insofar as the raw material is concerned, even in its widest terms, it would include material which would be consumed in the manufacture of the final product, and the input tax credit availed in respect thereof would be required to be reduced. It is settled legal position that in a taxing statute, if something cannot be computed, the legislature never intended to tax such item. In the present case, since it would not be possible to compute the input tax credit component of the capital goods in terms of Entry No.2 of the notification, it can be safely presumed that there was no intention on the part of the State Government of including capital goods within the ambit of input including raw materials. The impugned order passed by the Tribunal do not suffer from any legal infirmity so as to give rise any question of law, much less, a substantial question of law, warranting interference - appeal dismissed.

Summary

Issues Involved:
1. Whether Input Tax Credit (ITC) @ 2% is required to be reduced on "capital goods" used as "inputs" in manufacturing of taxable goods.
2. Whether "capital goods" are considered "inputs" under the clauses of Notification No.(GHN-14) VAT-2010-S.11(6)(2)/TH dated 29.06.2010.

Issue-wise Detailed Analysis:

1. Reduction of ITC on "Capital Goods" Used as "Inputs":
The appellant, State of Gujarat, challenged the Tribunal's order which held that ITC @ 2% is not required to be reduced on "capital goods" used as "inputs" in manufacturing taxable goods. The respondent-dealer, engaged in manufacturing and selling pesticides and chemicals, claimed ITC on purchases of raw materials and capital goods. The assessing officer reduced the ITC on capital goods, treating them as inputs under the notification dated 29.06.2010. The first appellate authority accepted the calculation errors but upheld the reduction of ITC on capital goods. The Tribunal, however, allowed the dealer's appeal, leading to the present appeal by the State.

2. Definition and Interpretation of "Capital Goods" as "Inputs":
The State argued that the term "input including raw materials" in the notification should include capital goods, as they contribute to manufacturing final products. The respondent countered that "capital goods" and "raw materials" are distinct under the GVAT Act, and capital goods cannot be classified as inputs. The Tribunal agreed with the respondent, emphasizing that capital goods are durable and used repeatedly, unlike raw materials which are consumed in the manufacturing process.

Tribunal's Findings:
The Tribunal noted that the notification dated 29.06.2010 required ITC reduction for goods used as "input including raw materials" but did not explicitly include capital goods. It highlighted the distinct definitions of "capital goods" and "raw materials" under the GVAT Act. The Tribunal concluded that capital goods, being durable and used repeatedly, do not qualify as inputs consumed in the manufacturing process. Thus, the authorities erred in interpreting the notification to include capital goods as inputs.

Supporting Case Laws:
The Tribunal referred to Supreme Court decisions in TATA Engineering & Locomotive Company Ltd. and Hindustan Lever Ltd., which clarified that inputs are materials consumed in the manufacturing process, not durable capital goods. Another reference was made to Scientific Engineering House (P) Ltd., which defined plant and machinery as durable and not consumed in manufacturing.

Practical Considerations:
The Tribunal further reasoned that it is impractical to compute the ITC component of capital goods for goods sold in inter-State trade. Unlike raw materials, capital goods are not consumed in one manufacturing cycle, making it impossible to reduce ITC multiple times for the same capital goods.

Conclusion:
The High Court concurred with the Tribunal, stating that the notification did not intend to include capital goods within "input including raw materials." The appeal by the State was dismissed, affirming that the Tribunal's order did not suffer from any legal infirmity, and no substantial question of law warranted interference.

Final Order:
The appeal was summarily dismissed, upholding the Tribunal's decision that ITC @ 2% is not required to be reduced on capital goods used as inputs in manufacturing taxable goods.