2021 (2) TMI 115 - HC - VAT and Sales Tax

Refund of tax paid on purchase of inputs - inputs disallowed included purchase of food and beverages, housekeeping and office maintenance, printing and stationery, maintenance of photocopying machine, sports goods and events, car lease etc. - tax periods May 2012 to December 2012 - HELD THAT - The sine qua non for exercise of power under Section 64(1) of the Act is that the Commissioner has to form an opinion that the order passed by any officer subordinate to him is erroneous or is prejudicial to the interest of the revenue. Thus, before exercising the powers under Section 64 of the Act, the Commissioner has to form an opinion that the order passed by any subordinate officer is either erroneous or is prejudicial to the interest of the revenue. In the light of the aforesaid facts, the order passed by the Joint Commissioner of Commercial Taxes may be seen - The Joint Commissioner of Commercial Taxes, in its order dated 15.07.2014, has considered the question whether the disallowance of income tax on food items, housekeeping and office maintenance, printing and stationery, maintenance of photocopying machine, sports goods and events, car lease rentals is proper. The Joint Commissioner of Commercial Taxes has taken note of Section 20(2) of the Act and has held that SEZ developer is eligible for input tax paid and does not stipulate any condition. It has further been held that it is not necessary that SEZ unit should be engaged in the activity of involving goods as output. The Joint Commissioner of Commercial Taxes has also taken note of Rule 130(A) of the Rules and has held that the aforesaid provision makes a SEZ unit or SEZ developer entitled to claim refund of input tax under Section 20(2) of the Act on the purchases made. It has also been held that no condition has been specified under Section 20(2) of the Act to claim refund. The appellant has satisfied the conditions mentioned in Rule 130(a)(1)(b) of the Rules. The Joint Commissioner of Commercial Taxes has also taken note of the definition of input in Section 2(19) of the Act and it has been held that the input means any goods including capital goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture or processing or packing or sorting of other goods or any other use in the business. It has also been held that use of expression 'any other use in business' in the definition of input, has wider meaning and certainly includes any purchases made which are for any other uses in the business carried out by the appellant. Thus, the appellant has been held entitled to claim refund of input tax paid on purchase of ₹ 7,06,435/-. In the result, the appeal has been allowed. The order passed by the Joint Commissioner of Commercial Taxes cannot be said to be erroneous. The Additional Commissioner of Commercial Taxes has proceeded on the assumption that the benefit of refund of tax paid on purchase of inputs can be granted only in respect of manufacture and processing of goods which is not prescribed under the law. Therefore, in the fact situation of the case, there was no justification on the part of the Additional Commissioner of Commercial Taxes in invoking the power under Section 64(1) of the Act - Appeal allowed - decided in favor of appellant.

Summary

Issues:
- Appeal against disallowance of refund on tax paid for inputs in a Special Economic Zone (SEZ)
- Interpretation of Section 20(2) of the Karnataka Value Added Tax Act, 2003
- Application of SEZ policy and rules for tax exemptions
- Consideration of inputs for operation and maintenance in SEZ
- Validity of the order passed by the Additional Commissioner of Commercial Taxes

Analysis:
1. The appellant, a unit in a Special Economic Zone (SEZ) engaged in software development, filed an appeal against the disallowance of a refund on tax paid for inputs. The appellant claimed entitlement to a refund under Section 20(2) of the Act for purchases made from May 2012 to December 2012. The dispute arose when the refund granted was reduced by the Joint Commissioner of Commercial Taxes, leading to the appellant's appeal against the disallowance.

2. The appellant argued that SEZs are duty-free enclaves under the SEZ Act and SEZ Rules, entitling units to exemptions from state taxes. The SEZ policy of the Government of Karnataka also exempts SEZ units from state and local taxes on purchases for various operational purposes. Section 20(2) of the Act allows for a refund on inputs purchased for operation and maintenance in an SEZ, as per Rule 130(A) of the Karnataka Value Added Tax Rules, 2005. The appellant contended that the definition of 'inputs' under Section 2(19) of the Act includes goods purchased for any use in business, not limited to manufacturing activities.

3. The Additional Commissioner of Commercial Taxes disallowed the refund on the grounds that the inputs lacked a direct connection with manufacturing activities. However, the Joint Commissioner of Commercial Taxes, in the earlier order, found the appellant eligible for the refund under Rule 130(A)(1)(b) for setting up, operation, or maintenance in the SEZ processing area. The Joint Commissioner interpreted the definition of 'inputs' broadly, including purchases for any use in the appellant's business, and relied on precedents to support the appellant's entitlement to the refund.

4. The High Court held that the Additional Commissioner's assumption that the refund benefit was restricted to manufacturing and processing activities was incorrect. The Court quashed the order of the Additional Commissioner, stating that there was no justification for invoking Section 64(1) of the Act in this case. Consequently, the appeal was allowed, affirming the appellant's entitlement to the refund on tax paid for inputs in the SEZ.

5. In conclusion, the judgment emphasized the broad interpretation of 'inputs' and the eligibility of SEZ units for refunds on purchases made for various operational purposes, not limited to manufacturing activities. The Court's decision upheld the appellant's right to claim the refund, highlighting the importance of adhering to the SEZ policy and rules for tax exemptions in such cases.