2017 (4) TMI 6 - HC - VAT and Sales Tax

Input tax credit - manufacture of cement - Whether the tax paid by the assessee a manufacture of cement is entitled to claim input tax credit in respect of the tax paid by it on the purchase of cement prior to its commencement of commercial production and such cement being used for laying the foundation and erection of cement manufacturing plant and machinery in view of Sections 11 and 12 of the KVAT Act? Held that - though the cement is specified in item No.5 of Fifth Schedule since the cement in the present case was admittedly utilised for laying down of foundation and civil works for erection of cement manufacturing plant and machinery itself such cement along with the plant and machinery itself should be deemed to be used for the purpose of manufacturing of other goods for sale namely cement itself after the commencement of commercial production. Therefore it falls in exception of negative clause of Section 11 of the KVAT Act and the assessee would be entitled to input tax credit. While Section 11 of the KVAT Act provides for restriction on input tax credit in its exception carved out under Section 11(a)(2) as well as Section 12 of the KVAT Act providing for deduction of input tax credit in respect of the capital goods both would support the case of the present assessee. Reliance was placed in the case of Maruti Suzuki Limited Vs. Commissioner of Central Excise 2009 (8) TMI 14 - SUPREME COURT where it was held that installation of electrical and electronic goods which have nexus to the manufacturing process like the Speeder System used in that case to provide backup electricity in the manufacturing process the Court allowed the input tax credit in respect of the tax paid on such Speeder System under the provisions of KVAT Act dealing with Section 11(a)(2) and Fifth Schedule of the KVAT Act. The petitioner would be entitled to claim input tax credit in respect of the tax paid by it in respect of such cement purchased and used by it during the relevant period prior to the commencement of its commercial production for the purpose of erection of the plant and machinery - petition allowed - decided in favor of assessee.

Summary

Issues Involved:
1. Entitlement to input tax credit on cement used for laying foundation and erection of plant and machinery under Sections 11 and 12 of the KVAT Act.

Issue-Wise Detailed Analysis:

1. Entitlement to Input Tax Credit on Cement Used for Laying Foundation and Erection of Plant and Machinery:

The petitioner, M/s. J.K. Cement Works, challenged the Karnataka Appellate Tribunal's decision denying input tax credit on cement used for laying the foundation and erection of the cement manufacturing plant and machinery. The main question was whether the tax paid on such cement qualifies for input tax credit under Sections 11 and 12 of the Karnataka Value Added Tax Act, 2003 (KVAT Act).

The Tribunal ruled against the petitioner, stating that the cement used for construction purposes does not qualify as capital goods. It emphasized that the KVAT Act provides input tax credit on plant and machinery, which are movable goods, whereas cement used in construction is immovable and does not fall under the definition of capital goods. The Tribunal applied the principle of 'ejusdem generis' to conclude that immovable properties like factory buildings and silos cannot be considered capital goods for input tax credit purposes.

The petitioner argued that the cement used for constructing the plant should be considered part of the plant itself and thus eligible for input tax credit. They contended that the cost of cement should be included in the overall cost of the plant and machinery, which are capital goods under Section 2(7) of the KVAT Act. The petitioner relied on various case laws to support their claim.

The respondent, represented by the Additional Government Advocate, countered that cement is explicitly mentioned in the Fifth Schedule of the KVAT Act as a restricted commodity for input tax credit. Therefore, the petitioner cannot claim input tax credit on cement used for construction.

After considering the arguments, the court examined the relevant statutory provisions. Section 11(a)(2) of the KVAT Act restricts input tax credit on goods specified in the Fifth Schedule unless they are used for resale or manufacturing other goods for sale. Since the cement was used for laying the foundation and erecting the manufacturing plant, it falls within the exception of Section 11(a)(2) and qualifies for input tax credit.

The court also referred to other judicial precedents, including the case of Hindustan Uniliver Limited Vs. State of Karnataka, where input tax credit was allowed for goods having a direct nexus to the manufacturing process. The court concluded that the cement used for constructing the plant and machinery is integral to the manufacturing process and should be considered part of the plant.

Additionally, the court cited decisions under the Income Tax Act, where assets like dry docks, silos, and freezing chambers were treated as plant due to their functional role in the business. Applying the functional test, the court held that the cement used for foundation and erection of the plant qualifies as capital goods.

In conclusion, the court allowed the Revision Petitions, ruling that the petitioner is entitled to input tax credit on the cement used for constructing the plant and machinery. The authorities were directed to allow such input tax credit to compute the net tax payable by the petitioner.