2012 (4) TMI 458 - HC - VAT and Sales Tax

Purchase of packing material against Form-H - Export of goods out of India - DVAT - assessee claimed input tax credit and asked for refund of the input tax on the ground that the packing material was used to pack rice which was exported out of India. - Section 9(1)(b) of DVAT - held that - Section 9(7)(b) of the Act, when it says that no tax credit shall be allowed for the purchase of goods which are used exclusively for the manufacture, processing or packing of goods specified in the First Schedule, refers only to the sale of exempted goods within the meaning of Section 6(1) of the Act and does not refer to sales which are not liable to tax at all by virtue of the provisions of Section 7. Tax credit under Section 9(1)(b) is available in the case of goods purchased and used by a dealer, directly or indirectly, for the purpose of making sale of goods in the course of export of the goods out of India. Article 286 of constitution of India - The appellant dealer is not liable to pay VAT on the sale of rice because the sale is in the course of export out of India. The same rice, if it is sold within the State, would become liable to tax, though no tax would be payable because of the exemption granted under Section 6(1) of the Act. It is competent for the State Legislature to make amendment or modify the entries in the First Schedule to the Act to either withdraw the exemption granted to the goods or add more items that would be exempt from tax or change the conditions and exceptions set out therein, subject to which the exemption is granted. Such modifications or amendments cannot, however, be made to Section 7(c) of the Act by the State Government to provide for levy of tax on the sale of the goods, even though they are mentioned in the First Schedule to the Act, if they are made in the course of export of the goods out of the territory of India, because of Article 286(1). - Decided in favor of the assessee

Summary

Issues Involved:

1. Entitlement to Input Tax Credit (ITC) under Section 9 of the Delhi Value Added Tax Act, 2004 for purchases used in exports.
2. Compliance of the Appellate Tribunal's order with Article 286 of the Constitution of India and Section 7 of the Delhi Value Added Tax Act, 2004.

Detailed Analysis:

Issue 1: Entitlement to Input Tax Credit (ITC) under Section 9 of the Delhi Value Added Tax Act, 2004 for purchases used in exports

The appellant, a recognized export house dealing in rice, claimed ITC on the purchase of packing material used for exporting rice. Initially, these purchases were made without sales tax using declarations (ST-1/ST-49/Form-H). Post the Act's enforcement from 1.4.2005, purchases were taxed (VAT), and the appellant sought refunds on the input tax paid, arguing that the packing material was used for tax-exempt exports under Section 9(1)(b) read with Section 7(c) of the Act.

The VATO rejected this claim, stating, "As per entry No. 46 of First Schedule of DVAT Act 2004, rice is a tax-free item and as per Section 9(7)(b) of said Act no input tax credit is allowed." The Joint Commissioner upheld this, emphasizing that Section 9(7)(b) disallows ITC for goods used exclusively for packing items listed in the First Schedule, which includes rice.

However, the High Court clarified that Section 9(1) grants ITC for purchases used in making sales not liable to tax under Section 7, which includes exports. The Court noted that Section 7(c) excludes export sales from tax, thus falling outside the Act's purview. Consequently, the appellant's purchase of packing material for exporting rice qualifies for ITC under Section 9(1)(b), as these sales are not merely exempt but constitutionally non-taxable.

Issue 2: Compliance of the Appellate Tribunal's order with Article 286 of the Constitution of India and Section 7 of the Delhi Value Added Tax Act, 2004

The Tribunal's order was challenged for allegedly violating Article 286 of the Constitution and Section 7 of the Act. Article 286(1) prohibits state laws from taxing sales or purchases occurring outside the state or in the course of import/export. Section 7(c) of the Act aligns with this constitutional mandate, exempting export sales from VAT.

The Court emphasized that sales in the course of export are constitutionally non-taxable and fall outside the Act's scope. The Tribunal's failure to recognize this distinction led to an erroneous dismissal of the appellant's ITC claim. The Court reiterated that Section 9(7)(b) pertains to goods exempted under the First Schedule, not to export sales, which are constitutionally non-taxable under Section 7(c).

Conclusion:

The High Court concluded that the appellant is entitled to ITC on the purchase of packing material used for exporting rice, as such sales are non-taxable under Section 7(c) and Article 286(1). The Tribunal's order was found to be inconsistent with these provisions, and the appeals were allowed with no order as to costs.