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TMI Blog2023 (3) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... State legislature has under Section 19 (2) of the TNVAT Act identified circumstances under which the benefit of Input Tax Credit is granted. Importantly, Section 19(2) (ii) of the TNVAT Act provides that Input Tax Credit shall be allowed for purchase of goods made within the State from a registered dealer for use as input in manufacturing or processing of goods in the State - thus, any goods which qualifies as an input under Section 2(23) of the TNVAT Act and used in manufacture or processing of goods shall be entitled to Input Tax Credit. The object behind granting the benefit of Input Tax Credit in terms of Section 19 (2) (ii) of the TNVAT Act, is with a view to promote manufacturing activity within the State. The expressions damaged and destroyed in Section 19(9)(iii) of the TNVAT Act used to deny Input Tax Credit, must be understood to have been employed by the legislature in contradistinction to the expressions use in manufacturing or processing of goods employed in Section 19 (2) (ii) of TNVAT Act while allowing a dealer to claim Input Tax Credit. While the expression use in Section 19(2)(ii) of the TNVAT Act qualifies manufacturing or processing of goods , the expressions d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its absence the presence of the end product, as such, is rendered impossible. This quality should coalesce with the requirement that its utilisation is in the manufacturing process as distinct from the manufacturing apparatus. Applying the test of indispensability if the inputs are indispensable for the emergence of desired end product it is not open to disallow the claim of input tax credit on the ground of manufacturing/invisible loss. Test of Technical/Practical/Commercial inexpediency - HELD THAT:- Reliance made in the case of J.K.Cotton Spinning Weaving Mills Co.Ltd., Vs. The Sales Tax Officer, Kanpur and Another [ 1964 (10) TMI 2 - SUPREME COURT ] wherein the scope of the expression in the manufacture of goods employed in Section 8(3)(b) of the Central Sales Tax Act, while extending the benefit of concessional rate of tax was examined by Supreme Court. It was held that the expression in the manufacture of goods would encompass, the entire process carried on by the dealer for converting raw materials into finished goods. The Hon ble Supreme Court applied the test of commercial inexpediency to determine whether a process would fall within the expression in the manufacture of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 527 of 2015, 244 of 2016, 721, 722, 723, 724, 725 of 2018 and W.P.Nos.734,735,736 of 2016, 737, 738, 9562 of 2018, 11632 of 2019, 966, 971, 968, 970, 2478 of 2020 and C.M.P. Nos.6949 , 6950 , 6951 , 6952, 6953 , 6954 of 2018 and W.M.P.Nos.550, 551, 552, 553, 554 of 2016, 11867 of 2019, 1184, 1185, 1187, 1188, 2873 of 2020 W.A.No.1094 of 2015 THE HONOURABLE MR. JUSTICE S.VAIDYANATHAN AND THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ For the Appellant : Mr.N.Sriprakash For the Respondents : Mr.Haja Nazirudeen, Additional Advocate General assisted by Mr.Venkateswaran, Special Government Pleader (Taxes) Mr.V.Prashath Kiran, Government Advocate (Taxes) Mr.Hari Babu Government Advocate JUDGMENT MOHAMMED SHAFFIQ, J. The common question that arises for consideration in this batch of Writ Appeals/Petitions revolves around the construction/interplay of Section 19(2)(ii) vis-a-vis Section 19 (9) of the Tamil Nadu Value Added Tax Act, 2006 (hereinafter referred to as "the TNVAT Act"). Though the issue/question that arises for consideration is common in this batch of Writ Appeals/petitions, the facts and nature of products are different. However, that in our view it would not have any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 20.10.2011 as well. g. As stated above, the goods involved in this batch are not the same. However, in all the cases proceedings were initiated on the premise there was manufacturing/invisible loss attracting Section 19 (9) of the TNVAT Act, warranting reversal of credit. 3. Order of the learned Single Judge : In this batch of writ petitions before the learned Single Judge there were challenges to the proceedings proposing / directing reversal of Input Tax Credit on account of manufacturing / invisible loss. Apart therefrom there was also a challenge to the Circular dated 20.10.2011 by which instructions were issued stating that wastage at all levels must be considered taking into account the nature of commodity and that the credit was to be reversed in respect of manufacturing/invisible loss in terms of Section 19 (9) of the TNVAT Act. The following issues were framed: " (1) Whether the impugned Circular No.22/2011 dated 20.10.2011 is bad in law for want of jurisdiction to issue the same under the provisions of the TNVAT Act and the effect of such Circular on the assessments made by the Assessing Officer? (2) Whether Section 18 of the TNVAT Act is a Scheme by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to examine as to whether they fall within any of the restrictions contained in Section 19 of the VAT Act. The Assessing Officer has to conduct an exercise by which it is to be ascertained as to whether the representation made by the dealer is justified and is not hit by any of the restrictions and conditions contained in Section 19 and in particular Section 19(9) of the VAT Act. 4) It is held that the Assessing Authorities are not justified in adopting uniform percentage as invisible loss and calling upon the dealer to reverse the input tax credit availed to that extent. Consequently, all notices issued to the petitioner for reopening and all consequential order passed reversing the input tax credit to the extent of either 4% or 5% or on adhoc percentage stands set aside. However, liberty is granted to the concerned Assessing Officer to issue appropriate show cause notices to the petitioners clearly setting out under what circumstances they propose to revise or call upon the petitioner to reverse refund sanctioned and after inviting objections proceed in accordance with law. (5)The undertaking given by the dealer in Form W is with regard to information furnished for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 2015 Sanmar Foundries TIN / 33960920142 and Circular No.22/2011 VAT Cell/ ROC.No.37188/2011 Petitioner purchase Iron and Steel scrap for manufacturing of Steel Castings 6. W.A.No.721, 722, 723, 724 , 725 of 2018 OPG Metals Pvt. Ltd. Circular No.22/2011 VAT Cell/ ROC.No.37188/2011 Manufacturer of billets / ingots 7. W.P.No.2478 of 2020 TIN No.33792205728 Timber 8. W.A.No.1527 of 2015 Kanish Steel industries TIN No.33670740706 Manufacturer of TMT Bars, structural steels, Channels 9. W.P.No.11632 of 2019 TVL Shree Fateh Granites TIN No.33763364264 Manufacturer of granite 10. W.A.No.244 of 2016 Hi-Tech Mineral industries TIN No.33613244018 Manufacturer of Iron and Steel 4. Facts in W.A.Nos.1094 and 1095 of 2015: The appellant was engaged in the business of manufacture and sales of Hosiery Garments, inside the State of Tamil Nadu. For the purpose of manufacturing such garments, the appellant effected purchase of yarns among other inputs from registered dealers, inside the State of Tamil Nadu, after paying appropriate tax. The yarn purchased was converted into fabric and the fabric was further processed and garments were manufactured by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect. Moreover, the loss of input, in the process of manufacturing, is not visible in the finished products and not playing any roll in yielding the value addition. 5. Issues: Against the above background, two questions arise for consideration: a. Whether the validity of the Circular being non-statutory needs to be tested/examined. b. Whether inputs used in manufacture and necessary for the end product would constitute wastage or manufacturing/invisible loss though such loss is admittedly inevitable/unavoidable/inherent part of manufacturing process, on the ground that the inputs are not contained in the end product thereby attracting Section 19(9) of the TNVAT Act, warranting reversal of credit. 6. Case of the Assessees/Appellants: On behalf of the appellants, it was submitted by Mr. N. Sri Prakash and Mrs. Hemalatha, N.Murali as under: a. That yarn, iron and steel, timber, chemicals etc., purchased and used by the Appellants/Petitioners in the manufacture or processing of goods are admittedly inputs in terms of Section 2 (23) of the TNVAT Act. It is not in dispute that the activity carried on by the appellants would constitute manufacture. The appellants are thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thus the portion of input attributable to the manufacturing loss ought to be reversed. c. The extent of the assessee/dealers entitlement to credit ought to be tested on the basis of the existence / availability of inputs in the end product. d. The expression "destroyed" employed in Section 19(9) of the TNVAT Act, would take within its fold manufacturing / invisible loss. e. The provisions of a taxing statute must not be read in isolation but as a whole. Reliance was placed on the judgments of the Hon'ble Supreme Court in the case of Kailash Chandra, reported in (2002) 2 SCC 678 and ALD Automotive reported in (2019) 13 SCC 225. f. Input Tax Credit is in the nature of benefit / concession, the same would be subject to any restriction / limitation imposed by the statute. In this regard reliance was placed on the judgements of the Hon'ble Supreme Court in the cases of Godrej and Boyce (1992) 3 SCC 624 and Jayam & Co., (2016) 15 SCC 125. 8. DISCUSSION: Before proceeding further, to resolve the legality/validity of the impugned circular it may be necessary to extract the relevant portions of the Circular dated 20.10.2011, which reads as under: "13) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-statutory in nature would not make a material difference insofar as its impact on the independent discharge of quasi-judicial functions by the assessing officer.Once,the highest office has expressed its view on a particular aspect it would be puerile to expect the assessing officer to apply his mind in an independent and objective manner which is fundamental for a valid exercise of quasi judicial function. It is for this reason that Courts have repeatedly held that in such circumstances the validity of the Circular needs to be examined/tested. Filterco v. CST, (1986) 2 SCC 103 - Tvl. Pizzeria Fast Foods Restaurant (Madras) Pvt. Ltd. v. Commissioner of Commercial Taxes, 2005 (140) STC 97 Mad We are unable to persuade ourselves to think that the correctness of the above Circular need not be examined in view of its non-statutory character but instead would think that the correctness needs to be examined lest the entire assessment functions would be reduced to a mere ritual and an empty formality. Having said that we do not intend to deal with the correctness of the Circular independently as the answer to the second question would resolve the issue relating to the correctness of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilised by the assessee, whereas the input in the finished product was marginally less. The department proceeded to reverse the cenvat credit on the difference between the original quantity of input and the input in the finished product. 14. The Bench, noticing at paragraph 13 that some amount of consumption of the input was inevitable in the manufacturing process, held that cenvat credit should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product. They state at paragraph 13 as follows: 13. To say that what is contained in finished product is only a quantity of all the inputs of the same weight as that of the finished product would presuppose that all manufacturing processes would never have an inherent loss in the process of manufacture. The expression 'inputs of such finished product', 'contained in finished products' cannot be looked at theoretically with its semantics. It has to be understood in the context of what a manufacturing process is. If there is no dispute about the fact that every manufacturing process would automatically result in some kind of a loss such as eva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has under Section 19 (2) of the TNVAT Act identified circumstances under which the benefit of Input Tax Credit is granted. Importantly, Section 19(2) (ii) of the TNVAT Act provides that Input Tax Credit shall be allowed for purchase of goods made within the State from a registered dealer for use as input in manufacturing or processing of goods in the State. 12.2. Thus, any goods which qualifies as an "input" under Section 2(23) of the TNVAT Act and used in manufacture or processing of goods shall be entitled to Input Tax Credit. The object behind granting the benefit of Input Tax Credit in terms of Section 19 (2) (ii) of the TNVAT Act, is with a view to promote manufacturing activity within the State. While construing the scope of 19 (2) (ii) of the TNVAT Act it may be relevant rather necessary to take note of the following aspects: i. In view of the definition of ''manufacture'' under Section 2(27) of the TNVAT Act, the same would have to be applied while considering the expression "manufacturing of goods in the State" employed in Section Section 19 (2) (ii) of TNVAT Act. ii. Raw material has not been defined under the TNVAT Act. The ordinary common sense un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able] at the time of purchase of goods, if such- (i) goods are not sold because of any theft, loss or destruction, for any reason, including natural calamity. If a dealer has already availed input tax credit against purchase of such goods, there shall be reversal of tax credit; or (ii) inputs destroyed in fire accident or lost while in storage even before use in the manufacture of final products; or (iii) inputs damaged in transit or destroyed at some intermediary stage of manufacture." A close reading of Section 19(9) of the TNVAT Act would reveal the following: i. Section 19(9) of the TNVAT Act sets out certain circumstances under which Input Tax Credit shall not be available to a registered dealer. ii. Section 19(9)(i) of the TNVAT Act is not concerned with inputs used in manufacture but relates to inputs which are intended to be traded as would be evident from the expression "goods are not sold" thus it deals with a claim to input tax credit under Section 19(2)(i) of the TNVAT Act which covers inputs meant for the purpose of resale in the State. iii. Section 19(9)(ii) of the TNVAT Act deals with inputs intended to be used in manufacture but destroyed or lost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58), cl.7 The word 'use' means the employment or using a particular article or thing for profitable purpose in relation to a business or trade "Damage" as defined in various dictionary in the following manner: Black's Law Dictionary Loss, injury, or deterioration, caused by the negligence, design, or accident of one person to another, in respect of the latter's person or property. The word is to be distinguished from its plural, Merriam-webster: loss or harm resulting from injury to person, property, or reputation Collins To damage an object means to break it, spoil it physically, or stop it from working properly. To damage something means to cause it to become less good, pleasant, or successful. Damage is physical harm that is caused to an object. Damage consists of the unpleasant effects that something has on a person, situation, or type of activity. "Destroy" has defined in the following manner: Black's Law Dictionary As used in policies of insurance, leases, and in maritime law, and under various statutes, this term is often applied to an act which renders the subject useless for its intended purpose, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not entitled to the benefit of exemption holding that "manufacturing loss" forms part of raw material. The relevant portion of the judgment is extracted hereunder: "Though there was some dispute at an initial stage as to whether in the manufacture of pipes and tubes any quantity of raw material is lost or as a result of the said loss during the process of manufacture the weight of the final finished product did not represent the weight of the metal used as raw material, in view of the fact that the appellate authority, namely, the Collector of Central Excise has found that there was a manufacturing loss and that the claim of the appellant that the lost quantity was 6.97 per cent appears to be genuine, we proceed on the basis that there was certain manufacturing loss. The High Court was of the view that the notification granted exemption "only on pipes and tubes, which means that the exemption has to be calculated on the basis of the weight of the raw material actually used for the purpose of manufacture of pipes and tubes". 4. We have considered the rival contentions of the parties. It is seen from the facts as appear from the pleadings and the orders that due to cutting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment in Swadeshi Polytex Ltd. v. Collector of Central Excise (1990) 2 SCC 358. So understood we have no doubt that even the manufacturing loss will have to be taken into account in determining the relief to be provided under the said notification. We are also unable to understand the argument of the Revenue based on the difficulty in arriving at the manufacturing loss. If there is any difficulty it is for the manufacturer who claims the relief to prove the loss. There are also scientific methods of arriving at the loss." (emphasis supplied) b. Test of quantitative requirement of inputs to manufacture desired quantity of end product: i. In the case of M/s.Swadeshi Polytex Ltd., Vs Collector of Central Exercise AIR 1990 SC 301, rejecting the contention of the revenue that ethylene glycol not contained in the end product viz., polyester fiber but in other waste/ by-product ought to be denied the benefit of credit, the Hon'ble Supreme Court proceeded to hold that as long as it is not possible to use a lesser quantum of ethylene glycol to produce desired quantity of polyster fabric the same is entitled to the benefit of credit as having been used in the manufacture. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts. The relevant portion is extracted below: "14. The entire quantity of raw material, namely duty-paid aluminium ingots procured by the assessees from outside was used in the manufacture of aluminium sheets. It is nobody's case that the aluminium sheets which were manufactured by the assessees could have been manufactured out of a lesser quantity of aluminium ingots than what was actually used. In the process of manufacture, dross and skimmings had to be removed in order that aluminium sheets of the requisite quality could be manufactured. This does not mean that the entire quantity of aluminium ingots was not used for the manufacture of aluminium sheets. In the course of manufacture, a certain quantity of raw material may be lost because of the very nature of the process of manufacture or some small quantity of raw material may form part of wastage or ashes. This does not mean that the entire raw material was not used in the manufacture of finished excisable products. An exact mathematical equation between the quantity of raw material purchased and the raw material found in the finished product is not possible, and should not be looked for." (emphasis supplied) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remain uninfluenced and unaltered and remain independent of and outside the end products and those, as here, which might be burnt up or consumed in the chemical reactions. The question in the present case is whether the ingredients of the last mentioned class qualify themselves as and are eligible to be called "raw material" for the end product. One of the valid tests, in our opinion, could be that the ingredient should be so essential from the chemical processes culminating in the emergence of the desired end product, that having regard to its importance in and indispensability for the process, it could be said that its very consumption on burning up is its quality and value as raw material. In such a case, the relevant test is not its absence in the end product, but the dependence of the end product for its essential presence at the delivery end of the process. The ingredient goes into the making of the end product in the sense that without its absence the presence of the end product, as such, is rendered impossible. This quality should coalesce with the requirement that its utilisation is in the manufacturing process as distinct from the manufacturing apparatus" (emphasis sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pressed. All these processes would be regarded as integrated processes and included" in the manufacture" of cloth. It would be difficult to regard goods used only in the process of weaving cloth and not goods used in the anterior processes as goods used in the manufacture of cloth. To read the expression "in the manufacture" of cloth in that restricted sense, would raise many anomalies. Raw cotton and machinery for weaving cotton and even vehicles for transporting raw and finished goods would qualify under rule 13, but not spinning machinery, without which the business cannot be carried on. In our judgment, rule 13 does not justify the importation of restrictions which are not clearly expressed, nor imperatively intended. Goods used as equipment, as tools, as stores, as spare parts, or as accessories in the manufacture or processing of goods, in mining, and in the generation and distribution of power need not, to qualify for special treatment under section 8(1), be ingredients or commodities used in the processes, nor must they be directly and actually needed for "turning out or the creation of goods." In our judgment if a process or activity is so i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act so as to make a consistent enactment of the whole statue. A construction which produces incongruous results must be avoided. A construction which avoids inconsistency or repugnancy either within a section or between a section and other parts of the statue must be adopted. It is the duty of the Court to avoid "a head on clash" between two sections of the Act and construe it harmoniously. University of Allahabad v. Amritchand Tripathi AIR 1987 SC 57 A dealer is entitled to claim input tax credit in terms of Section 19(2)(ii) of the Act on inputs being used in the manufacture or processing of other goods in the State. Section 19(9) of the TNVAT Act does not touch upon/ whittle down/ impair the right of a dealer to claim input tax credit on being used in the manufacture of other goods. Section 19(9) of the TNVAT Act, gets attracted when the goods are damaged in transit or destroyed at an intermediary stage of manufacture, its field of operation or the acts mentioned/provided viz., "damaged" or "destroyed" are acts foreign to regular/normal manufacturing activity. Thus, Sections 19(2)(ii) and 19(9) of the TNVAT Act covers circumstances that are parallel/ diametrically opposite and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g discriminatory results apart from suffering from the vice of manifest arbitrariness. In this regard it is well settled that the Court will interpret a statute, as far as possible, agreeable to justice and reason and that in case of two or more interpretations, one which is more reasonable and just will be adopted, for there is always a presumption of constitutionality and that the law-maker never intended injustice and unreason. Madhav Rao Jivaji Rao Scindia v. Union of India, (1971) 1 SCC 85, Union of India v. B.S. Agarwal, (1997) 8 SCC 89, Westminster City Council V. Debenhams PLC. [1986] 3 WLR 1063, Paradise Printers v. Union Territory of Chandigarh, (1988) 1 SCC 440 On analysis of the scope and interplay between Sections 19(2)(ii) and 19(9) of the TNVAT Act, precedents dealing with manufacturing/invisible loss and the rules of construction referred above we find that Section 19(9) of the TNVAT Act would not get attracted to manufacturing/invisible loss which is inevitable and inherent part of manufacture and thus covered by Section 19(2)(ii) of the TNVAT Act. However, this would not preclude the assessing authority from enquiring if the claim of use of input in manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X
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