2016 (8) TMI 88 - HC - VAT and Sales Tax

Input tax credit - purchase of timber - emergence of firewood - section 80 of GVAT - Held that - it is not even the case of the department that the entire timber purchased by the assessee was not used for the purpose of manufacturing sawn timber or logs. The department however, contends that howsoever unintentional, since the firewood came into existence as a byproduct, the proviso would apply. This begs the question of use of the raw material for the specified purpose. In our opinion, since the entire commodity purchased by the dealer was used for the specified purpose, namely, as a raw material in manufacturing of taxable goods, entire tax credit was required to be granted. The restriction or disallowance referred to in the said proviso, would not apply. Merely because in the process of manufacturing sawn timber or logs, a small quantity of waste incidentally is created by way of byproduct which is sold as firewood, would not mean that the raw material purchased was not used fully for manufacture of the specified product. Entire credit allowed - Decided in favor of assessee.

Issues Involved:
1. Entitlement to full tax credit on the purchase of timber.
2. Application of proviso to Section 11(3)(a) and Section 11(8)(a) of the Gujarat Value Added Tax Act, 2003.
3. Proportionate reduction of tax credit due to the sale of byproduct (firewood).

Issue-wise Detailed Analysis:

1. Entitlement to Full Tax Credit on the Purchase of Timber:
The appellant assessee purchased timber, a taxable good, for manufacturing and selling sawn timber, which is also taxable. During the sawing process, a byproduct, firewood (exempt from tax), is generated. The assessee claimed full tax credit on the purchase of timber. The Tribunal initially dismissed the appeal, holding that the tax credit should be proportionately reduced due to the generation of tax-exempt firewood. The Tribunal's rationale was that if a taxable good is converted into a tax-free good at any stage, the entity responsible for the conversion must bear the tax for the proportion converted. The High Court, however, found that since the entire timber was used for manufacturing taxable goods, the full tax credit should be granted. The incidental creation of a small quantity of firewood (1%) does not justify proportionate disallowance of tax credit.

2. Application of Proviso to Section 11(3)(a) and Section 11(8)(a) of the Gujarat Value Added Tax Act, 2003:
Section 11(3)(a) allows tax credit for the purchase of taxable goods used as raw material in manufacturing taxable goods. The proviso to this section states that if purchases are used partially for specified purposes, tax credit should be proportionate. Section 11(8)(a) mandates reducing tax credit if goods intended for specified purposes are used for other purposes. The High Court interpreted these provisions to mean that if the raw material is used fully for the specified purpose (manufacturing taxable goods), the proviso does not apply. Consequently, the incidental creation of firewood does not invoke proportionate reduction of tax credit.

3. Proportionate Reduction of Tax Credit Due to the Sale of Byproduct (Firewood):
The Tribunal held that the tax credit should be reduced proportionately because the byproduct firewood, which is tax-exempt, was sold. The High Court disagreed, stating that the entire timber was used for manufacturing taxable goods, and the creation of firewood was incidental. The court referenced several precedents supporting the view that tax credit should not be proportionately reduced if the primary intention and use of the raw material are for manufacturing taxable goods. The court cited cases like State of Gujarat v. Jayant Agro Organics Ltd., Ruchi Soya Industries Ltd. v. State of MP, and M.K. Agro Tech (Private) Limited v. State of Karnataka, which held that byproducts or waste generated during manufacturing do not warrant proportionate reduction in tax credit.

Conclusion:
The High Court allowed the tax appeal, reversing the Tribunal's judgment and holding that the assessee is entitled to full tax credit on the purchase of timber. The incidental creation of firewood, a tax-exempt byproduct, does not justify proportionate disallowance of tax credit. The court emphasized that the entire raw material was used for manufacturing taxable goods, aligning with the legislative intent and statutory provisions of the VAT Act.

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