2016 (9) TMI 1161 - HC - VAT and Sales Tax

Proportionate dis-allowance of Input Tax Credit - Madhya Pradesh Value Added Tax Act, 2002 - by-product oil cake - commodity oil cake declared tax free under Section 16 by specifying in Entry No.3 of Schedule I of the Act - manufacture of oil - Input Tax for consumption or use of manufacture of oil, entitle the petitioners to Rebate of Input Tax (ITR) from the tax payable on sale of oil by such manufactures - explanation inserted, Sub Clause (6) of Clause (a) of Sub Section (1) of Section 14 of the Act stating where a manufacturing process results in the manufacture of Schedule I as well as Schedule II goods, Input Tax Rebate should be computed after apportioning the Input Tax in proportion to the value of Schedule I and Schedule II goods so manufactured - amendment then became an Act vide Madhya Pradesh Value Added Tax (Second Amendment) Act, 2014 with the modification that the explanation inserted in the Act by Ordinance has been given a retrospective effect from 01.04.2006. The effect of the above amendment is that the petitioners are deprived of the benefit of ITR in respect of Input Tax paid by them for purchase of raw material used or consumed by them for / in the manufacture of Schedule II goods, viz. oil from oil seeds, which was available to the petitioners in terms of Section 14 (1) (a) (2) of the Act - whether retrospective amendment introduced with retrospective effect is justified and holds good? It is well settled that by inserting an Explanation in statute, the main provision of the Act cannot be defeated or enlarged. Ordinarily, the purpose of Explanation is to clarify that it is already enacted and not to introduce something new. The 2014 amendment was obviously introduced for the purpose of rectifying the obvious error in Section 14. The object which cannot be introduced by Explanation since an Explanation cannot be read as changing or as interfering with the incidence of the levy. It is not done, particularly when legislative clarity is required since the statutory provision imposes a tax, to untangle the legislative confusion. Explanation to Section 14 of the M.P. VAT Act, as introduced by Amendment Act of 2014 and amended in 2015, would apply prospectively. However, the legislature has power to validate the judicial invalid levy retrospectively by bringing Validation Act. Explanation to amendment of Section 14 to apply prospectively - writ petition allowed - decided in favor of petitioner.

Summary

Issues Involved:
1. Eligibility for Input Tax Rebate (ITR) on raw materials used in manufacturing both taxable and tax-free goods.
2. Validity of retrospective amendment to the Madhya Pradesh Value Added Tax Act, 2002.
3. Constitutionality of the retrospective amendment under Articles 14 and 19(i)(g) of the Constitution.

Detailed Analysis:

1. Eligibility for Input Tax Rebate (ITR) on Raw Materials:
The petitioners, registered dealers under the Madhya Pradesh Value Added Tax Act, 2002, engaged in the manufacture and sale of cotton seed oil, claimed full ITR on purchases of raw materials (cotton seeds). The generation of "Oil Cake," a tax-free by-product, during the manufacturing process led to the rejection of their ITR claims by the respondent based on a circular from the Commissioner of Commercial Tax. The High Court had previously ruled in cases like Ruchi Soya Industries v. State of MP that the benefit of ITR is available on the entire amount of tax paid on raw materials without any deduction for the generation of tax-free commodities like "Oil Cake."

2. Validity of Retrospective Amendment:
The Madhya Pradesh Value Added Tax (Second Amendment) Act, 2014, introduced an explanation stating that ITR should be computed after apportioning the input tax in proportion to the value of Schedule I (tax-free) and Schedule II (taxable) goods. This explanation was given retrospective effect from 01.04.2006. The petitioners challenged this retrospective amendment, arguing that it effectively withdrew the benefit of full ITR available under Section 14(1)(a)(2) of the Act, which was not permissible in law. The court noted that an explanation in a statute is generally meant to clarify existing provisions, not to introduce new rules or change the incidence of tax.

3. Constitutionality under Articles 14 and 19(i)(g):
The petitioners argued that the retrospective amendment was arbitrary, unreasonable, and unconstitutional, violating Articles 14 (equality before the law) and 19(i)(g) (freedom to practice any profession or to carry on any occupation, trade, or business) of the Constitution. The court referenced several Supreme Court judgments, including D. Cawasji & Company v. State of Mysore, which held that amendments should not be used to nullify judicial decisions or impose new liabilities retrospectively without clear legislative intent.

Conclusion:
The court concluded that the explanation introduced by the 2014 amendment could not retrospectively alter the incidence of tax or the eligibility for ITR on raw materials. The amendment was deemed to apply prospectively, not retrospectively. The writ petition was allowed, and the explanation to Section 14 of the M.P. VAT Act was held to apply prospectively. The court emphasized that legislative clarity is required when imposing taxes and that explanations should not introduce new liabilities or change the nature of existing provisions.