2016 (6) TMI 859 - HC - VAT and Sales Tax

Input Tax Credit - correct amount of input tax rebate - scope of inputs - manufacturing activity - It was submitted that if there is failure on the part of the Assessee to get the specified formula through the Commissioner, the input tax credit is not permissible and has been rightly denied as per Rule 131 3 of the Karnataka Value Added Tax Rules, 2005. Held that - all electrical and electronic goods including air conditioners, air coolers, telephones, fax machines etc., used would fall in the category of the goods for which the input tax credit would be inadmissible for the purpose of input tax credit unless the goods are for resale or for manufacturing of any other goods for sale. To put it in other words, if the goods specified in Fifth Schedule are purchased and put to use for the purpose of resale or for manufacture or for the process of other goods for sale, the input tax credit would be available. Any input used for generation of electricity or steam, provided such electricity or steam is used within the factory for the manufacturing activity of the final product, the same would stand covered. - Decision in the case of MARUTI SUZUKI LIMITED 2009 (8) TMI 14 - SUPREME COURT It is also true that in the decision of the Apex Court, the matter was pertaining to consumable item, namely, naphtha and diesel for generation of electricity. But, in our view, once the goods are purchased in furtherance to or for aiding the manufacturing process, the same will have a direct nexus to the manufacturing activity and there is no reason why the same could be treated as an independent capital goods disentitling the benefit. As such, the matter cannot be segregated just on a mere ground that it would be capital goods. If the various items mentioned at Sl. No.3 in the description of goods are considered, it does include air conditioner, air cooler, fax machines which can be broadly considered as capital goods. Further, the language for all electrical or electronic goods is inclusive and not exhaustive. Therefore, when the other goods specified can also be considered as capital goods, but to be used in the manufacturing activity, there would not be any justifiable ground if the speeder system is purchased and used to back up the electricity in the manufacturing process to treat it differently for the purpose of input tax credit. - Decided in favor of assessee.

Summary

Issues Involved:
1. Computation of input tax credit based on books of account vs. Rule 131(3) of KVAT Rules.
2. Entitlement to rebate of input tax for purchases by the research division.
3. Entitlement to input tax credit for the purchase of an uninterrupted power supply system.

Issue-wise Detailed Analysis:

1. Computation of Input Tax Credit:
The primary issue was whether the petitioner could compute the input tax credit based on its books of account or if it should adhere to Rule 131(3) of the KVAT Rules. The Tribunal observed that the petitioner engaged in multiple activities, including manufacturing, processing, and trading, involving both taxable and exempt goods. Due to the complexity, the Tribunal concluded that the input tax credit must be calculated per Section 11, 14, and 17 of the KVAT Act, read with Rule 131(3). The Tribunal noted that the petitioner did not maintain day-to-day accounts separating exempt and taxable goods. Hence, the non-deductible input tax was calculated using the formula in Rule 131(3). The Court upheld this view, stating that the petitioner failed to seek approval for a special formula from the Commissioner and thus bore the risk of disallowance. Consequently, the Court ruled against the petitioner, affirming the Tribunal's decision.

2. Rebate of Input Tax for Research Division Purchases:
The second issue concerned whether the research division's purchases qualified for input tax credit. The Tribunal held that the research activities did not fit the definition of 'business' under the KVAT Act, as the goods purchased were not utilized in the course of business but for research purposes. The Tribunal relied on a Madras High Court decision, distinguishing it from the present case. The Court, however, found that the research activities were integral to the petitioner's manufacturing business. Since the research was directly related to the petitioner's products, it fell within the inclusive definition of 'business' under Section 2(6) of the KVAT Act. The Court concluded that the petitioner was entitled to input tax credit for the research division's purchases, overturning the Tribunal's decision.

3. Input Tax Credit for Uninterrupted Power Supply System:
The final issue was whether the petitioner was entitled to input tax credit for the purchase of an uninterrupted power supply system. The Tribunal denied the credit, categorizing the system as capital goods not used directly in manufacturing. The petitioner argued that the system ensured continuous power supply, crucial for manufacturing, and thus qualified for input tax credit under Section 11(a)(2) of the KVAT Act. The Court agreed, stating that goods aiding the manufacturing process should be eligible for input tax credit. The Court referenced the Supreme Court's decision in Maruti Suzuki Limited, which supported the inclusion of inputs used in electricity generation for manufacturing. Therefore, the Court ruled in favor of the petitioner, granting input tax credit for the power supply system.

Conclusion:
The Court addressed each issue comprehensively, ruling against the petitioner on the first issue while favoring the petitioner on the second and third issues. The Court emphasized the necessity of adhering to procedural requirements for input tax credit computation and recognized the integral role of research and uninterrupted power supply in the petitioner's manufacturing process. The petitions were disposed of with no order as to costs.