2018 (5) TMI 1038 - HC - VAT and Sales Tax

Input Tax credit - inputs - Caprolactum - denial on the ground that such raw material is sent by the assessee to its factory situated at District Hoshiarpur, Punjab, for converting into nylon filament yarn before it is returned to the assessee in Gujarat, from where it is sold to its different customers within and outside the State - assessee contends that the tax credit is available in terms of section 11 of the VAT Act - Whether in facts and circumstances of the case, tax credit entitlement of the dealer was required to be reduced in terms of clause(b) of subsection (3) of section 11 of the Value Added Tax Act? Held that - The present is not a case either of branch transfer or transfer to a consignment agent. Undoubtedly, the raw material was transported to the assessee s branch situated outside the State but it can still not be treated as a branch transfer. It was transfer of the goods for manufacturing activity and the goods were returned back to the assessee s principal place of business in the form of finished product. It is this finished product which was eventually sold by the assessee either within the State or by way of interState sale and prescribed duty at the prescribed rates was paid - clause(b) of subsection( 3) of section 11 did not apply so as to allow the department to reduce the assessee s tax credit by prescribed percentage. Subclause (iii) of clause(a) of subsection( 3) of section 11 is made specifically subject to the provision of subclause( b). Correspondingly subclause( b) starts with a nonobstante clause providing, that notwithstanding anything contained in the said section, the amount of tax credit would be reduced in the manner provided therein. However, this would not change our opinion on the correct interpretation of the said provision. The question is answered in favour of the assessees and against the department.

Summary

Issues Involved:
1. Tax credit entitlement reduction under clause (b) of subsection (3) of section 11 of the Value Added Tax Act.
2. Applicability of tax credit reduction in cases of branch transfer or consignment outside the state.
3. Tribunal's authority to entertain appeals on merits when pre-deposit requirements are not met.

Issue-Wise Detailed Analysis:

1. Tax Credit Entitlement Reduction:
The primary issue revolves around whether the tax credit entitlement of the dealer should be reduced under clause (b) of subsection (3) of section 11 of the VAT Act. The court examined the facts of each case, noting that the raw materials were sent outside the state for processing and then brought back for sale. The Tribunal had previously ruled that such situations fall under clause (b), necessitating a tax credit reduction. However, the court found that the raw materials were used in manufacturing and returned as finished goods, which were then sold, thus not fitting the criteria for reduction under clause (b).

2. Applicability of Tax Credit Reduction for Branch Transfer or Consignment:
The court analyzed the definitions and contexts of branch transfer and consignment. It clarified that these terms are well understood in trade and involve transferring goods without an immediate sale, often awaiting orders from buyers. The court concluded that the present case did not involve branch transfers or consignment to agents, as the goods were sent for manufacturing and returned as finished products. Therefore, clause (b) of subsection (3) of section 11 did not apply, and the tax credit should not be reduced.

3. Tribunal's Authority to Entertain Appeals on Merits:
In Tax Appeal No. 730/2017, the court addressed whether the Tribunal could entertain the appeal on merits when the pre-deposit requirement was not met. The Tribunal had examined the merits despite the appellate authority dismissing the appeal for non-fulfillment of pre-deposit requirements. The court noted that ordinarily, the matter should be remanded to the Tribunal to consider the limited question of pre-deposit. However, given the peculiar facts and the finality provided to the law point in another assessment year for the same assessee, the court decided not to disturb the Tribunal's judgment as an exceptional case.

Conclusion:
The court ruled in favor of the assessees, overturning the Tribunal's judgment in Tax Appeal No. 1334/2007 and upholding the Tribunal's judgment in Tax Appeal No. 731/2017. In Tax Appeal No. 730/2017, the court dismissed the appeal without remanding it to the Tribunal, given the unique circumstances. The key takeaway is that tax credit reduction under clause (b) of subsection (3) of section 11 does not apply if the raw materials are sent outside the state for manufacturing and returned as finished goods for sale.