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) 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.