2019 (12) TMI 1305 - HC - VAT and Sales Tax

Reopening of assessment - circular dated 20.10.2011 bearing reference No. VAT/Cell/Roc.No. 37188/2011/Circular No.22/2011 - HELD THAT - There is no provision under the TNVAT Act 2006 to call upon a dealer who is a manufacture to reverse credit on invisible loss of input in the course of manufacture of final product. TNVAT Rules 2007 also does not speak about input-output norm. Further Rules also do not contemplate 100% assimilation of inputs into final products. Section 19(9)(i) (ii) (iii) of TNVAT Act 2006 only deals with three situation when input tax is not available. The expression inputs destroyed at some intermediary stage of manufacture in sub Clause (iii) of Section 19(9)(iii) of TNVAT Act 2006 will not take within its fold those inputs consumed in the manufacture of final product. Only when inputs are destroyed at some intermediary stage of manufacture reversal of input tax credit is warranted. They would be instance of inputs which are withdrawn at an intermediary stage of manufacture and are incapable of being used further and are sold as scrap/waste or physically destroyed by an assessee having no residual value. Such inputs alone can be construed as inputs destroyed at some intermediary stage of manufacture - There is no scope for reversal of input tax credit on inputs which get consumed during the course of manufacture as invisible loss . Petition disposed off.

Summary

Issues:
Challenge to the impugned circular dated 20.10.2011, Interpretation of Section 18 and Section 19 of the TNVAT Act, Reopening of assessment, Input tax credit reversal, Conditions for claiming refund under Section 18(2), Uniform percentage as invisible loss, Reversal of input tax credit on "invisible loss", Scope of Section 19(9)(iii) of TNVAT Act, 2006.

Interpretation of Impugned Circular:
The Writ Petition challenges the circular dated 20.10.2011, arguing it is non-statutory and merely a guideline. The court rejects the prayer for quashing the circular, stating it is not necessary to challenge it. Section 18 of the TNVAT Act is discussed as not being an independent provision but subject to other provisions, including Section 19. The court emphasizes the duty of a dealer claiming refund under Section 18(2) to satisfy the Assessing Authority that the claim complies with Section 19 restrictions and conditions.

Reopening of Assessment and Input Tax Credit Reversal:
The judgment highlights that Assessing Authorities cannot adopt a uniform percentage as invisible loss for input tax credit reversal. Any notices issued for reopening and orders reversing input tax credit based on a fixed percentage are set aside. The court grants liberty to Assessing Officers to issue appropriate show cause notices, inviting objections before proceeding lawfully.

Conditions for Claiming Refund under Section 18(2):
The court emphasizes that merely showing payment of input tax on purchased goods used in manufacturing is insufficient. The dealer must prove that the claim complies with Section 19 restrictions and conditions, including Section 19(9) of the VAT Act. The Assessing Officer must conduct a fact-finding exercise to ascertain the loss of goods purchased, the goods manufactured, and ensure compliance with Section 19.

Scope of Section 19(9)(iii) of TNVAT Act, 2006:
The judgment clarifies that the phrase "inputs destroyed at some intermediary stage of manufacture" in Section 19(9)(iii) does not cover inputs consumed in the manufacturing process. Reversal of input tax credit is only warranted when inputs are physically destroyed or sold as scrap at an intermediary stage. The court instructs authorities to consider this distinction while issuing orders based on Show Cause Notices.

Conclusion:
The Writ Petition is disposed based on the court's decision, which establishes that there is no provision in the TNVAT Act to reverse credit for "invisible loss" during manufacturing. The judgment clarifies the interpretation of Sections 18 and 19, emphasizing the need for compliance with Section 19 restrictions and conditions. The court's detailed analysis provides guidance on input tax credit reversal, refund claims, and the scope of Section 19(9)(iii) regarding input destruction.