2018 (12) TMI 350 - HC - VAT and Sales Tax

Input tax credit - raw material purchased for generation of electricity - electricity is included as an exempted item under Schedule I of the Kerala Value Added Tax Act - prohibition u/s 11(5) under KVAT Act - Held that - In the present case, the said prohibition would have been applicable, if the manufactured electricity was sold by the assessee, on which there is no levy of tax. As far as the assessee is concerned, the entire electricity generated is captively consumed for manufacturing purposes and for electrifying the factory premises. Hence the proportion of the raw material employed in the production of electricity, used in the manufacturing process of newsprint, is an input used in the manufacture of the final product of the assessee being newsprint, which is assessable to tax under the KVAT Act. The assessee is entitled to claim input tax credit. In this context, it is also to be noticed that electricity though included under the First Schedule is specifically excluded from the definition of goods as available under Section 2(xx) of the KVAT Act. The assessee would also be liable to produce sufficient documents to prove the payment of tax on purchase of raw material for which input tax credit is claimed. The assessee should also produce sufficient materials before the Assessing Officer to segregate the percentage of electricity used for manufacturing purpose and for illuminating purpose. If the assessee is not able to produce such material to the satisfaction of the Assessing Officer, then on best judgment, the Assessing Officer could determine the proportion of the electricity used in the manufacturing process and in illuminating the factory premises. The input tax credit can be allowed only insofar as the raw materials used for production of electricity, employed in the manufacturing process. Decided against Revenue.

Summary

Issues:
1. Entitlement to claim input tax credit for raw material purchased for electricity generation when electricity is exempted under KVAT Act.

Analysis:

Issue 1: Entitlement to claim input tax credit for raw material purchased for electricity generation when electricity is exempted under KVAT Act

The case involved the question of whether the assessee was entitled to claim input tax credit for raw material purchased for electricity generation, considering that electricity was exempted under Schedule I of the Kerala Value Added Tax Act. The assessee, engaged in newsprint manufacturing, generated electricity through diesel and steam turbine generators for production activities and factory illumination. The assessing officer and the First Appellate Authority denied the input tax credit, citing Section 11(5) of the KVAT Act. However, the Tribunal allowed the claim to the extent of the percentage of electricity used for manufacturing activities. The State argued that there was no provision in the KVAT Act similar to CENVAT Credit Rules, and reliance on such decisions was misplaced. The Tribunal, based on the principle that electricity generation is integral to manufacturing activity, allowed the input tax credit claim for raw materials used in electricity generation.

The High Court agreed with the Tribunal's reasoning, emphasizing that electricity generation was an essential part of the manufacturing process in this case. The Court highlighted that the prohibition on input tax credit under Section 11(5) aimed to ensure proper functioning of the VAT regime and prevent tax loss on raw materials used in manufacturing exempted goods. Since the electricity generated was solely consumed for manufacturing purposes and factory illumination, the raw material used for electricity production was considered an input in manufacturing the taxable final product, newsprint. The Court endorsed the Tribunal's decision to remand the case for segregating raw materials used for electricity generation and factory illumination, requiring the assessee to provide sufficient documents to prove tax payment for the raw materials. Input tax credit was allowed only for raw materials used in the manufacturing process of newsprint.

In conclusion, the High Court ruled in favor of the assessee, rejecting the appeal by the State and upholding the entitlement to claim input tax credit for raw materials used in electricity generation for manufacturing activities, based on the integral connection between electricity generation and the manufacturing process.