2015 (10) TMI 290 - HC - VAT and Sales Tax

Benefit of input tax credit (ITC) on Packing material - finished goods were stock transferred - Held that - Appellant cannot impugn the provisions contained in Section 6(3)(d) of the Act along with the proviso, as falling foul of Article 301 and Article 304. It may be an unwise move on the part of the State, which is also a criticism, which is levelled by Mr. C.S. Lodha that the States should encourage products from its own soil by giving concessions as are given all over the country by other States. Mr. Lodha would contend that the manufacturer in Uttarakhand is being put at a disadvantage as, in respect of stock transferred finished goods, if the interpretation is placed that it would not include right to ITC on packing materials, the result would be that the manufacturer would procure raw materials from other States. Likewise, when the manufacturer, after stock transfer, sells the product in the teeth of competition which he would face on account of higher prices, which it would have to demand on account of denial of ITC, it would suffer. Mr. C.S. Lodha would, in fact, submit that the complaint of the State would appear to have been that, when packing material is procured and the finished goods are stock transferred and sold in another part of the country, insofar as there is no inter-State sale, the State is not getting any revenue in the absence of an inter-State sale and the State, therefore, cannot forgo its revenue by way of ITC being given on the packing material. To allege lack of wisdom is beyond the province of the court to probe. The Court is concerned only with constitutionality of the statute. It is not concerned with the policy behind the law. All goods, which are manufactured, which otherwise fall within Section 6(3)(d), are treated equally. The State only wished to provide the benefit of ITC in a limited manner even in respect of raw materials used for production of finished goods, which are stock transferred. We cannot deny the right of the State with its plenary powers of legislation within the field of legislation, which is admittedly and legitimately exercised by it otherwise, the right to raise taxes. The Court must strike a balance between the right of the State to raise taxes, which forms the major source of revenue for it for carrying out various public purposes, no doubt, while it stands ever vigilant against any move to treat goods manufactured from or brought from other States in a discriminatory manner. States have provided for the benefit of ITC in respect of packing materials even on stock transferred products, or that the Committee of Ministers have provided for ITC on such transactions. We would think that none of these factors will detract from the width of the power of a sovereign Legislature exercising plenary legislative powers. - appellant has not made out any case for interfering with the judgment of the learned single Judge. We have set out the effect of Section 6. Appellant is not entitled to the benefit of ITC in respect of packing materials used for its finished goods, which were stock transferred. Even the Circular of 2008, in our view, does not as such clearly provide for the grant of such benefit. Lack of clarity and place for doubt in a stray sentence in a Circular cannot be seized upon by the appellant to claim that, contrary to the clear mandate of the Legislature, it should be given the benefit of ITC for the years 2008-2009, 2009-2010 and 2010-2011. - Decided against assessee.

Summary

Issues Involved:
1. Refusal to grant Input Tax Credit (ITC) on packing materials used in manufacturing goods stock transferred outside Uttarakhand.
2. Interpretation and validity of Circulars dated 28.06.2008 and 23.01.2013.
3. Compliance with Articles 301 and 304 of the Constitution of India.

Detailed Analysis:

Refusal to Grant ITC on Packing Materials:
The appellant company, engaged in manufacturing soaps, detergents, creams, and toothpaste in Uttarakhand, challenged the refusal to grant ITC on packing materials used in manufacturing goods that were stock transferred outside the state. The Uttarakhand Value Added Tax Act, 2005, under Section 6(3)(d), provides ITC for raw materials and packing materials used in manufacturing goods for intra-state sale or inter-state commerce. However, the proviso to Section 6(3)(d) restricts ITC for goods dispatched outside the state other than by way of sale (e.g., stock transfer), limiting ITC to tax paid in excess of 2% on raw materials only, excluding packing materials.

Interpretation and Validity of Circulars:
The appellant relied on the Circular dated 28.06.2008, which they interpreted as allowing ITC on packing materials for stock transferred goods. However, the court found that the Circular did not clearly provide for such benefit and was ambiguous. The subsequent Circular dated 23.01.2013 clarified that ITC on packing materials used in stock transfer/consignment sales was not permissible under Section 6(3)(d). The court upheld the 2013 Circular, stating it accurately reflected the statutory provisions.

Compliance with Articles 301 and 304:
The appellant argued that denying ITC on packing materials for goods stock transferred outside Uttarakhand violated Articles 301 and 304 of the Constitution, which ensure freedom of trade and commerce across India. The court examined precedents and concluded that the provisions of Section 6(3)(d) did not impose discriminatory restrictions on trade but were a legitimate exercise of the state's taxing powers. The court emphasized that the state legislature's decision to limit ITC for stock transferred goods did not contravene constitutional mandates, as it applied uniformly to all manufacturers within the state and did not discriminate against goods from other states.

Conclusion:
The court dismissed the appeals, affirming that the appellant was not entitled to ITC on packing materials for goods stock transferred outside Uttarakhand for the assessment years 2008-2009, 2009-2010, and 2010-2011. The judgment upheld the validity of the 2013 Circular and the statutory provisions of the Uttarakhand Value Added Tax Act, 2005, finding no violation of constitutional provisions.