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TMI Blog2017 (9) TMI 1308X X X X Extracts X X X X X X X X Extracts X X X X ..... istake which is committed by the High Court is to ignore the plain language of sub-section (1) of Section 17. This provision which allows partial rebate makes the said provision applicable on the sales of taxable goods and goods exempt under Section 5. Thus, this sub-section refers to sale of the goods , taxable as well as exempt, and is not relatable to the manufacture of the goods. The High Court has been swayed by the fact that while extracting oil from sunflower, cake emerges only as a by-product. Relevant event is not the manufacture of an item from which the said by-product is emerging. On the contrary, it is the sale of goods which triggers the provisions of Section 17 of KVAT Act. Whether it is by-product or manufactured product is immaterial and irrelevant. Fact remains that de-oiled cake is a saleable commodity which is actually sold by the respondent assessee. Therefore, de-oiled cake fits into the definition of goods and this commodity is exempt from payment of any VAT under Section 5 of the KVAT Act. Thus, provisions of Section 17 clearly get attracted when sale of these goods takes place. Also, the High Court has not considered the import and effect of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. It pertains to the construction of Section 17 of the Karnataka Value Added Tax (Act), 2003 [hereinafter referred to KVAT Act ] read with Rule 131 of the Karnataka Value Added Tax Rules, 2005 (hereinafter referred to as the KVAT Rules, 2005 ). 2) The respondent is the manufacturer of sunflower oil, which is extracted from sunflower cake by employing solvent extraction process. Sunflower oil cake, is, thus, used as input/raw material. On purchase of sunflower oil cake (input) VAT is payable under the KVAT Act. After the extraction of sunflower oil, on its sale again VAT is payable under the said Act. For this reason, provisions of KVAT Act provides for tax credit paid on the input. To this extent there is no issue. However, when the sunflower oil is extracted, by-product in the form of de-oiled sunflower oil cake (hereinafter referred to as the de-oiled cake ) also becomes available. This by-product is sold by the respondent (hereinafter referred to as the assessee) but on the sale of this by-product, no VAT is payable as it is exempted item under the KVAT Act. Section 17 of the KVAT Act takes care of those contingencies where the final products are more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee suffer output tax which the assessee collects. 6) Returns were filed by the assessee for the period from March, 2005 to March, 2007. The prescribed authority, after scrutinizing the returns filed by the assessee and after issuing proposition notice and also considering the objections filed, concluded the assessment proceedings under Section 38(1) of the Act holding that the assessee was eligible only for partial input tax rebate as per Section 17(1) of the KVAT Act read with Rule 131(3) of the KVAT Rules, 2005. It was observed by the prescribed authority that the assessee, while manufacturing/extracting sunflower oil from the sunflower cake, has also obtained de-oiled cake. Sunflower oil being liable to tax and de-oiled cake being exempted from tax under Section 5 of the Act vide Government Notification No. FD 197 CSL 2005(1) dated 30.04.2005, partial input tax rebate was allowed. 7) The assessee being aggrieved by the said order, filed appeals before the First Appellate Authority who dismissed the same confirming the order passed by the prescribed Authority. Undeterred by the said order, the assessee preferred second appeals before the Karnataka Appellate Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 10 - Output tax, input tax and net tax.- (1) Output tax in relation to any registered dealer means the tax payable under this Act in respect of any taxable sale of goods made by that dealer in the course of his business, and includes tax payable by a commission agent in respect of taxable sales of goods made on behalf of such dealer subject to issue of a prescribed declaration by such agent. (2) Subject to input tax restrictions specified in Sections 11,12,14, 1 [17 and 18], input tax in relation to any registered dealer means the tax collected or payable under this Act on the sale to him of any goods for use in the course of his business, and includes the tax on the sale of goods to his agent who purchases such goods on his behalf subject to the manner as may be prescribed to claim input tax in such cases. 1. Substituted by Act 6 of 2005 w.e.f. 19.3.2005. (3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 17 of the KVAT Act, 2003. This Rules is as under : Rule 131. Apportionment.- Apportionment of input tax in the case of a dealer falling under section 17 shall be calculated as follows.- (1) All input tax directly relating to sale of goods exempt under section 5 other than such goods sold in the course of export out of the territory of India, is non-deductible. (2) All input tax directly relating to taxable sales may be deducted, subject to the provisions of section 11. (3) Any input tax relating to both sale of taxable goods and exempt goods, including inputs used for non-taxable transactions, that is, the non-deductible input tax, may be calculated on the basis of the following formula: (Sales of exempt goods + non-taxable transactions) X Total input tax. (i) Non-deductible input tax = ------------------------------- Total sales (including non-taxable transactions) (4) For the purpose of clause (3).- (a) Sale of taxable goods would be the aggregate of the amounts specified in clauses (b), (c), (d), (e) and (f) of sub-rule (1) of Rule 3 relating to sale of goods other than those exempt under Section 5 which are not sold in the course of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace irrespective of the fact whether the goods are manufactured by the seller or not. Manufacture becomes an important point in excise law and not for the purpose of sales tax. However, manufacture does become important for this act for the limited purpose because a good will be called input if it is used for manufacturing or processing or packaging of any goods. 18) Section 10 defines input tax , output tax and net tax . Net tax with respect to a particular sale; output tax received on sale as such goods and input tax used for manufacturing/processing/ packaging such goods. 19) Section 11(a)(1) stipulates that where a sale of exempted goods is taking place, i.e., there is no output tax received on such sale, the input tax paid for manufacturing/processing etc such exempt goods cannot be credited while calculating net tax. The rationale behind such provision is simple, where the dealer has not received any output tax on sale, there does not arise any question of deducting input tax. If input tax is allowed to be deducted, it would necessarily lead to a situation where there will be no taxation on purchase of inputs nor on the sale of product manufactured by using such inp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a situation where input tax is not directly relatable to exempt goods and taxable goods. It is for this reason that the term directly is missing in sub-rule (3). It speaks of a situation where input tax relating to both sale of taxable goods and exempt goods is known. But it provides that such input tax may be deducted only after applying a formulae prescribed therein. The purpose of formulae is simply to attribute and apportion the quantum of input tax relating to exempt goods so that it may be excluded from the total input tax. The expression non-identifiable input tax clearly shows legislatures intention to cover even those situations where it is difficult to identify as to how much of input tax is attributable/apportioned for taxable goods and for exempt goods so that the extent of rebate/credit a dealer is entitled to may be calculated. 23) Attacking the judgment of the High Court, Mr. Patil submitted that the High Court has given emphasis on the aspect of manufacture in holding that insofar as sunflower cake is concerned it is used for the manufacture of sunflower oil and since it is consumed in the said manufacture and no manufacturing activity is involved for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that the assessee was liable to pay Excise Duty and CEGAT was wrong in interfering with the order-in-original. The order of the CEGAT, therefore, is liable to be set aside. 24) According to Mr. Patil, de-oiled cake and oiled cake are separate and distinct products having different marketability and commercial uses. The distinction between the two products had also been held by this Court in Ravi Prakash Refineries Private Ltd. v. State of Karnataka (2016) 12 SCC 193 in which it was held that they are two different commercial commodities. 25) He also referred to the case of State of Gujarat v. Raipur Manufacturing Co. Ltd. (1967) 19 STC 1; AIR 1967 SC 1066 holding that where a subsidiary product is turned out regularly and continuously in the course of a manufacturing business and is also sold regularly from time to time, an intention can be attributed to the manufacture to sell not only the main item manufactured but also the subsidiary product. 26) Putting an emphatic response, Mr. Chidambaram laid emphasis on the scheme contained in Section 10 of the KVAT Act dealing with output tax, input tax and net tax. His contention was that this Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods , taxable as well as exempt, and is not relatable to the manufacture of the goods. The High Court has been swayed by the fact that while extracting oil from sunflower, cake emerges only as a by-product. Relevant event is not the manufacture of an item from which the said by-product is emerging. On the contrary, it is the sale of goods which triggers the provisions of Section 17 of KVAT Act. Whether it is by-product or manufactured product is immaterial and irrelevant. Fact remains that de-oiled cake is a saleable commodity which is actually sold by the respondent assessee. Therefore, de-oiled cake fits into the definition of goods and this commodity is exempt from payment of any VAT under Section 5 of the KVAT Act. Thus, provisions of Section 17 clearly get attracted when sale of these goods takes place. 29) Secondly, as rightly pointed out by the learned counsel for the appellant, the High Court has not considered the import and effect of sub-rule (3) of Rule 131 of the KVAT Rules. We have already reproduced Rule 131, including sub-rule (3) thereof. After perusing Rule 131 in its entirety, it becomes clear that sub-rule (1) pertains to input tax directly relatable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxing statute. It is settled proposition of law that taxing statutes are to be interpreted literally {See Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 , State of Madhya Pradesh v. Rakesh Kohli Anr. (2012) 6 SCC 312 and V.V.S. Sugars v. Government of Andhra Pradesh Ors. (1999) 4 SCC 192 }. 31) Fourthly, the entire scheme of the KVAT Act is to be kept in mind and Section 17 is to be applied in that context. Sunflower oil cake is subject to input tax. The Legislature, however, has incorporated the provision, in the form of Section 10, to give tax credit in respect of such goods which are used as inputs/ raw material for manufacturing other goods. Rationale behind the same is simple. When the finished product, after manufacture, is sold, VAT would be again payable thereon. This VAT is payable on the price at which such goods are sold, costing whereof is done keeping in view the expenses involved in the manufacture of such goods plus the profits which the manufacturer intends to earn. Insofar as costing is concerned, element of expenses incurred on raw material would be included. In this manner, when the final product i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra. The State of Maharashtra gets nothing in respect of such sales effected outside the State. In respect of such sales, the rule-making authority could well have denied the benefit of set-off. But it chose to be generous and has extended the said benefit to such out-State sales as well, subject, however to deduction of one per cent of the sale price of such goods sent out of the State and sold there. We fail to understand how a valid grievance can be made in respect of such deduction when the very extension of the benefit of set-off is itself a boon or a concession. It was open to the rule-making authority to provide for a small abridgement or curtailment while extending a concession. Viewed from this angle, the argument that providing for such deduction amounts to levy of tax either on purchases of raw material effected outside the State or on sale of manufactured goods effected outside the State of Maharashtra appears to be beside the point and is unacceptable. So is the argument about apportioning the sale-price with reference to the proportion in which raw material was purchased within and outside the State. (emphasis added) To the same effect are the judgments in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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