2017 (10) TMI 185 - HC - VAT and Sales Tax

Reversal of input tax credit - Violation of Articles 14, 19(1)(g), 301 and 304(a) & (b) of the Constitution - petitioner has asserted that denial of ITC, in respect of bullion and raw material, purchased within the State of Tamil Nadu, which is converted into finished jewellery, albeit, outside the State and sold, thereafter, within the State of Tamil Nadu, is unlawful and violative of the provisions of Article 265 of the Constitution - petitioner s case is that upon payment of conversion charges, the final product, that is, jewellery, is returned to it for sale within the State of Tamil Nadu, once again, against tax invoices. The sale transaction within the State of Tamil Nadu is, thus, completed after paying the requisite tax, albeit, upon claiming set off qua tax paid on bullion and worn-out jewellery. Held that - The facts which obtain in the present case, clearly, demonstrate, that ITC is not made available by the respondents, to those assessees who have had tax suffered raw materials such as bullion and / or worn out jewellery converted into final products (i.e. jewellery) by having them manufactured / processed in units situate outside the State of Tamil Nadu, even though, the final product is sold, upon payment of tax within the State of Tamil Nadu - Consequently, the final product (i.e. jewellery) manufactured by the assessee within the State from tax paid raw materials purchased within the State upon sale, within the State, gets the benefit of ITC, whereas, those goods which are manufactured outside the State, though by use of tax suffered raw materials purchased, within the State, do not get that benefit. Clearly, if the impact test is applied, goods manufactured outside the State, upon being brought within the State, for sale, would be costlier, as against those, which are, manufactured within the State. Section 19(4) of the 2006 Act provides intrinsic evidence that ITC cannot be disallowed merely because transfer of goods takes place outside the State. Section 19(4) allows for ITC on tax paid or payable, albeit, (in excess of 3%) in respect of goods purchased in the State in two situations (i) First, where transfer takes the goods to a place outside the State, otherwise than by way of sale; or (ii) Second, where goods are used in manufacture of other goods and are transferred to a place outside the State, otherwise than by sale - The provision, recognises the fact that goods purchased within the State, on which tax has been paid, can be transferred outside the State, for reasons, other than sale. However, while recognising this aspect, the provision grants credit of tax to the extent it is in excess of 3%. In other words, tax paid on purchase of goods, within the State, as rightly pointed out by the respondents is retained by the State to the extent of 3%, while the tax collected over and above 3% is passed on to the assessee, by way of credit. ITC availed of need not be reversed merely because goods purchased are sent temporarily outside the State for the purposes of job work. Section 19(2)(ii) of the 2006 Act is invalid to the extent that it denies availment of ITC in respect of those units which despatch tax suffered raw materials i.e. bullion / worn-out jewellery for conversion into final product (i.e. jewellery) outside the State which upon conversion are received back and sold within the State of Tamil Nadu. Thus, according to us, the mere fact that the manufacturing unit is located outside the State of Tamil Nadu, cannot be the basis, for denial of ITC, under Section 19(1) of the 2006 Act. Clause (ii) of Sub-Section (2) of Section 19 of the 2006 Act is, thus, declared bad in law. The respondents cannot retain ITC on goods purchased within the State, by invoking provision of Section 19(4) of the 2006 Act to the extent of rate of tax provided therein i.e., 3% (which was the rate provided therein at the relevant point of time), as that would make the relief inefficacious since the subject goods i.e. bullion / worn-out jewellery on which tax credit was sought by the writ petitioner was imposed at the rate of 1% - petition allowed - decided in favor of petitioner.

Summary

Issues Involved:
1. Constitutionality of Sections 19(2)(ii) and 19(4) of the Tamil Nadu Value Added Tax Act, 2006.
2. Denial of Input Tax Credit (ITC) for goods sent outside the state for manufacturing and then brought back for sale within the state.
3. Violation of Articles 14, 19(1)(g), 301, and 304(a) & (b) of the Constitution.
4. Discrimination in tax treatment between goods manufactured within the state and those manufactured outside but sold within the state.

Issue-wise Detailed Analysis:

1. Constitutionality of Sections 19(2)(ii) and 19(4) of the Tamil Nadu Value Added Tax Act, 2006:
- The petitioner challenged Sections 19(2)(ii) and 19(4) of the 2006 Act, asserting these provisions violated Articles 14, 19(1)(g), 301, and 304(a) & (b) of the Constitution.
- The petitioner argued that these sections discriminated against goods based on where they were manufactured, which was unconstitutional.

2. Denial of Input Tax Credit (ITC) for goods sent outside the state for manufacturing and then brought back for sale within the state:
- The petitioner, a registered dealer, purchased bullion and worn-out jewellery within Tamil Nadu, paid the requisite tax, and sent these goods outside the state for conversion into finished jewellery.
- The petitioner claimed ITC on the tax paid for the raw materials. However, the respondents issued notices proposing to reverse the ITC, arguing that ITC could only be claimed if the manufacturing occurred within Tamil Nadu.
- The court examined the facts and found that the denial of ITC based on the location of manufacturing was discriminatory and violated Article 304(a) of the Constitution.

3. Violation of Articles 14, 19(1)(g), 301, and 304(a) & (b) of the Constitution:
- The court referenced several judgments, including Firm ATB Mehtab Majid & Co. Vs. State of Madras and Andhra Steel Corporation Vs. Commissioner of Commercial Taxes in Karnataka, to illustrate that discriminatory tax treatment based on the origin of goods or location of manufacturing violated Article 304(a).
- The court noted that the impugned provisions created an unfavourable bias against goods manufactured outside Tamil Nadu, thus impeding free trade and commerce.

4. Discrimination in tax treatment between goods manufactured within the state and those manufactured outside but sold within the state:
- The court observed that goods manufactured outside Tamil Nadu and brought back for sale within the state were at a disadvantage due to the denial of ITC, making them costlier compared to goods manufactured within the state.
- The court held that Section 19(2)(ii) of the 2006 Act was invalid to the extent that it denied ITC for goods sent outside the state for manufacturing and then brought back for sale within Tamil Nadu.
- It was also held that Section 19(4) of the 2006 Act could not be invoked to retain ITC on goods purchased within the state, as it would make the relief inefficacious.

Conclusion:
- The court declared Clause (ii) of Sub-Section (2) of Section 19 of the 2006 Act as unconstitutional and invalid.
- The respondents were directed not to deny ITC based on the location of the manufacturing unit.
- The writ petition was allowed, and parties were directed to bear their own costs.