2017 (9) TMI 1308 - SC - VAT and Sales Tax

Input tax credit - partial credit / rebate - sale of by-product which is exempt - Section 17 of the Karnataka Value Added Tax (Act), 2003 - credit on Sunflower oil cake, which is input - when the sunflower oil is extracted, by-product in the form of de-oiled sunflower oil cake also becomes available. This by-product is sold by the respondent but on the sale of this by-product, no VAT is payable as it is exempted item under the KVAT Act - the appellant - State has taken the view that the assessee would be entitled to only partial rebate of input tax because of the reason that though output tax is paid on sunflower oil, it is not paid on the sale of de-oiled cake - assessee, on the other hand, contends that Section 17 of the KVAT Act would not be applicable in the instant case because of the reason that sunflower oil cake, as an input, is used in its entirety in the extraction of sunflower oil. De-oiled cake is not the result of any manufacturing process but is only a by-product. Held that - The first mistake which is committed by the High Court is to ignore the plain language of sub-section (1) of Section 17. This provision which allows partial rebate makes the said provision applicable on the sales of taxable goods and goods exempt under Section 5. Thus, this sub-section refers to sale of the goods , taxable as well as exempt, and is not relatable to the manufacture of the goods. The High Court has been swayed by the fact that while extracting oil from sunflower, cake emerges only as a by-product. Relevant event is not the manufacture of an item from which the said by-product is emerging. On the contrary, it is the sale of goods which triggers the provisions of Section 17 of KVAT Act. Whether it is by-product or manufactured product is immaterial and irrelevant. Fact remains that de-oiled cake is a saleable commodity which is actually sold by the respondent assessee. Therefore, de-oiled cake fits into the definition of goods and this commodity is exempt from payment of any VAT under Section 5 of the KVAT Act. Thus, provisions of Section 17 clearly get attracted when sale of these goods takes place. Also, the High Court has not considered the import and effect of sub-rule (3) of Rule 131 of the KVAT Rules - After perusing Rule 131 in its entirety, it becomes clear that sub-rule (1) pertains to input tax directly relatable to sales of exempt goods which is non-deductible. Likewise, sub-rule (2) mandates that input tax directly relating to sale of goods shall be deductible. On the other hand, sub-rule (3) covers those cases where input tax is not directly relatable to exempt goods and taxable goods. It is therefore, applied in those cases where input tax relating to both sale and taxable goods and exempt goods is known. In that situation, formula is given under this sub-rule to work out the partial deduction. The High Court has neither take note of nor discussed sub-rule (3). Literal interpretation to Section 17 - there was no reason for departing from the principle of literal construction in a taxing statute. The entire scheme of the KVAT Act is to be kept in mind and Section 17 is to be applied in that context. Sunflower oil cake is subject to input tax. The Legislature, however, has incorporated the provision, in the form of Section 10, to give tax credit in respect of such goods which are used as inputs/ raw material for manufacturing other goods - 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. On literal interpretation of Section 17 it can be gathered that it does not distinguish between by-product, ancillary product, intermediary product or final product. The expressions used are goods and sale of such goods is covered under Section 17. Both these ingredients stand satisfied as de-oiled cakes are goods and the respondent assessee had sold those goods for valuable consideration - Section 17 gets attracted in the instant case and the view taken by the High Court is erroneous. Appeal allowed - decided in favor of revenue.

Summary

Issues Involved:
1. Interpretation of Section 17 of the Karnataka Value Added Tax (KVAT) Act, 2003.
2. Applicability of Rule 131 of the Karnataka Value Added Tax Rules, 2005.
3. Determination of whether de-oiled sunflower cake is subject to partial rebate of input tax.
4. Consideration of the High Court's interpretation and application of the KVAT Act and Rules.

Detailed Analysis:

1. Interpretation of Section 17 of the KVAT Act, 2003:
Section 17 of the KVAT Act deals with "Partial Rebate" and applies when a registered dealer sells both taxable and exempt goods. The provision allows for partial rebate of input tax in such cases. The Supreme Court emphasized that the relevant event is the "sale" of goods, not their "manufacture." The Court found that the High Court erred by focusing on the manufacturing process and treating de-oiled cake as merely a by-product. The Supreme Court clarified that the sale of de-oiled cake, which is a marketable commodity, triggers the application of Section 17, irrespective of whether it is a by-product or a main product.

2. Applicability of Rule 131 of the KVAT Rules, 2005:
Rule 131 prescribes the formula for apportioning input tax between sales of taxable and exempt goods. The Supreme Court noted that the High Court failed to consider sub-rule (3) of Rule 131, which is crucial for situations where input tax is not directly relatable to either taxable or exempt goods. Sub-rule (3) provides a formula to calculate partial deduction of input tax in such cases. The Supreme Court emphasized that the High Court's omission to discuss this sub-rule was a significant oversight.

3. Determination of whether de-oiled sunflower cake is subject to partial rebate of input tax:
The Supreme Court disagreed with the High Court's conclusion that the assessee was entitled to full input tax deduction. The High Court's reasoning was based on the premise that de-oiled cake is a by-product and not subject to manufacturing. However, the Supreme Court highlighted that de-oiled cake is a saleable commodity, generating substantial revenue (45% of the total sales) for the assessee, and thus, the provisions of Section 17 for partial rebate are applicable. The Court stressed that literal interpretation of Section 17 does not lead to absurd results but rather achieves the legislative intent of providing partial rebate in such cases.

4. Consideration of the High Court's interpretation and application of the KVAT Act and Rules:
The Supreme Court criticized the High Court for departing from the rule of literal construction of Section 17, arguing that such departure was unnecessary and led to an incorrect interpretation. The Court reiterated that taxing statutes should be interpreted literally unless such interpretation leads to absurdity, which was not the case here. The Supreme Court also pointed out that the entire scheme of the KVAT Act supports the application of Section 17 to sales of both taxable and exempt goods, including by-products like de-oiled cake.

Conclusion:
The Supreme Court set aside the judgment of the High Court, holding that Section 17 of the KVAT Act applies to the sale of de-oiled cake, and therefore, the assessee is entitled only to a partial rebate of input tax. The Court allowed the appeals with costs, emphasizing the importance of adhering to the literal interpretation of taxing statutes and the proper application of Rule 131 of the KVAT Rules.