2017 (9) TMI 1307 - SC - VAT and Sales Tax

Input tax credit - Section 11 of the VAT Act - whether the tax credit is to be reduced at the rate of 4% under sub-clause (ii) and again at the same rate under sub-clause (iii) as well or deduction permissible is only once? Held that - The Assessing Officer had held that in respect of such goods tax credit is required to be reduced at the rate of 4% under sub-clause (ii) and again at the rate of 4% under sub-clause (iii) - the legislative intent of Section 11(3)(b) can be gathered from proviso thereto which provides that where the rate of tax of taxable goods is less than 4%, then the amount of tax credit in respect of such dealer shall be reduced by the amount of tax calculated at the rate of tax set out in the Schedule of such goods, meaning thereby, if the tax credit available to a dealer is less than 4%, the reduction should be limited to such credit and no more. From this, the High Court has observed that the Legislature envisaged that in no case reduction of tax credit under Section 11(3)(b) would accede 4%. It is a mega tax credit scheme which is provided under the VAT Act meant for all kinds of manufactured goods. The material in question, namely, furnace oil, natural gas and light diesel oil are admittedly subject to VAT under the VAT Act. The Legislature, however, has incorporated the provision, in the form of Section 11, to give tax credit in respect of such goods which are used as inputs/ raw material for manufacturing other goods. Rationale behind the same is simple. When the finished product, after manufacture, is sold, VAT would be again payable thereon. This VAT is payable on the price at which such goods are sold, costing whereof is done keeping in view the expenses involved in the manufacture of such goods plus the profits which the manufacturer intends to earn. Insofar as costing is concerned, element of expenses incurred on raw material would be included. In this manner, when the final product is sold and the VAT paid, component of raw material would be included again. Keeping in view this objective, the Legislature has intended to give tax credit to some extent. However, how much tax credit is to be given and under what circumstances, is the domain of the Legislature and the courts are not to tinker with the same. Reduction of 4% would be applied whenever a case gets covered by sub-clause (ii) and again when sub-clause (iii) is attracted - This, however, would be subject to one limitation. In those cases where VAT paid on such raw material is 4%, as in the case of furnace oil, reduction cannot be more than that. After all, Section 11 deals with giving credit in respect of tax that is paid. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Interpretation of Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003.
2. Whether tax credit should be reduced by 4% under both sub-clauses (ii) and (iii) of Section 11(3)(b) or only once.

Issue-wise Detailed Analysis:

1. Interpretation of Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003:
The core issue revolves around the interpretation of Section 11(3)(b) of the VAT Act, which stipulates the conditions under which tax credit is to be reduced. The section specifies that tax credit is to be reduced by 4% if the goods fall under the categories mentioned in sub-clauses (i), (ii), and (iii). The respondent, engaged in manufacturing and selling polymers and chemicals, claimed tax credit on VAT paid for raw materials such as furnace oil, natural gas, and light diesel oil used in manufacturing. The contention was whether the tax credit should be reduced by 4% under both sub-clauses (ii) and (iii) or only once.

2. Whether tax credit should be reduced by 4% under both sub-clauses (ii) and (iii) of Section 11(3)(b) or only once:
The Assessing Officer and the Joint Commissioner of Commercial Taxes held that tax credit should be reduced by 4% under both sub-clauses (ii) and (iii). However, the VAT Tribunal and the High Court ruled that the reduction should be made only once. The High Court reasoned that the reduction of tax credit by 4% should be applied only once, even if the goods satisfy the descriptions in both sub-clauses (ii) and (iii). The High Court emphasized that the legislative intent was not to exceed a 4% reduction in any case, as inferred from the proviso to Section 11(3)(b).

The Supreme Court, however, disagreed with the High Court's interpretation. It observed that the absence of the word "or" between sub-clauses (ii) and (iii) and the use of a full stop indicated that the legislature intended for the reduction to apply in both circumstances. The Court noted that sub-clauses (ii) and (iii) are event-based and pertain to different situations: sub-clause (ii) applies when taxable goods are used as raw material and dispatched outside the State, while sub-clause (iii) applies specifically to fuels used in manufacturing. The Court concluded that reduction of 4% should be applied whenever a case falls under sub-clause (ii) and again under sub-clause (iii).

However, the Court also clarified that the reduction cannot exceed the VAT paid. For instance, if VAT on furnace oil is 4%, the reduction cannot be more than 4%. Thus, for furnace oil, the tax credit reduction is limited to 4%, while for natural gas and light diesel oil, the reduction is 4% under both sub-clauses (ii) and (iii), totaling 8%.

Conclusion:
The appeals were allowed, and the Supreme Court held that tax credit should be reduced by 4% under both sub-clauses (ii) and (iii) of Section 11(3)(b), subject to the limitation that the reduction cannot exceed the VAT paid.