VAT - Whether mere fact of incidental creation of small quantity of waste in form of byproduct which was sold as firewood, can form basis for holding that inputs purchased was not used fully for manufacture of specified product - NO: HC
By TIOL News Service
AHEMDABAD, AUG 18, 2016: THE issue is - Whether mere fact of incidental creation of a small quantity of waste in the form of by product which was sold as firewood, can form the basis for holding that the raw material purchased was not used fully for manufacture of the specified product. NO IS THE ANSWER.
Facts of the case:
The assessee during the subject year, had purchased timber for the purpose of manufacturing and selling logs or sawn timber of specified size. On such raw material, the assessee carried on the process of sawing during which process, in addition to the main product of sawn timber, sawn dust which was used as firewood, would come into existence by way of byproduct. The assessee sold the sawn timber which was also a taxable commodity. The assessee also sold the firewood which was by virtue of entry 23(i) in the First schedule to the Gujarat VAT Act, exempt from payment of tax. The proportion of firewood was about 1% of the raw material. In this background, the question of assessee taking full tax credit on the purchase of timber came up for consideration on an application filed by the assessee to the CCT u/s 80 of the VAT Act, who opined that by virtue of proviso to sub section 11(3)(a) and section 11(8)(a) the VAT Act to the extent the purchased timber was used for manufacturing the firewood, the assessee would not be entitled to tax credit.
Having heard the parties, the High Court held that,
1. It is not disputed that the assessee purchased timber which is taxable for the purposes of manufacturing sawn timber or logs which is also taxable. The process creates a waste of about 1% of sawn dust which is sold as firewood and which is exempt from payment of tax. In this context, we may notice statutory provisions applicable. Section 11 of the VAT Act pertains to tax credit. In terms of subsection (1) thereof, a registered dealer would be entitled to tax credit equal to the amount of tax collected from the purchasing dealer subject to fulfillment of certain conditions. As per subsection (2) of section 11, the registered dealer intending to claim the tax credit is required to maintain register and the books of accounts in such manner as may be prescribed. From the above statutory provisions, it can be seen that as per clause section 11(3)(a), tax credit under subsection (1) would be allowed to a purchasing dealer for his purchase of taxable goods which are intended for the purposes mentioned in clauses (i) to (vii). Clause (vi) thereof refers to use as raw material in the manufacture of taxable goods intended for clauses (i) to (v) or in the packing of the goods so manufactured. Thus in terms of clause (vi) of subsection (3)(a) of section 11 with respect to raw material for the manufacture of taxable goods intended for the purposes mentioned in clauses (i) to (v), tax credit would be allowed. Proviso to subsection (3) however, limits the scope for such tax credit by providing that if purchases are used partially for the purposes specified in the said section, the tax credit shall be allowed proportionately to the extent they are used for the purpose they are so specified.
2. In terms of proviso, thus if the purchases mentioned in clause (vi) namely, the raw material is used only partially for specified purposes, the tax credit would be restricted proportionate to the extent they are so used for such purpose. In other words, to the extent the raw material is used partially for the purposes other than those specified in the subsection, there shall be proportionate disallowance of available tax credit. However, for applicability of this proviso what has to be fundamentally seen is whether the purchases are used partially for the purposes specified. If the purchases are used fully for the specified purposes, the proviso would have no applicability and consequently the concept of proportionate allowance of tax credit would not apply.
3. In the present case, it is not even the case of the department that the entire timber purchased by the assessee was not used for the purpose of manufacturing sawn timber or logs. The department however, contends that howsoever unintentional, since the firewood came into existence as a byproduct, the proviso would apply. This begs the question of use of the raw material for the specified purpose. In our opinion, since the entire commodity purchased by the dealer was used for the specified purpose, namely, as a raw material in manufacturing of taxable goods, entire tax credit was required to be granted. The restriction or disallowance referred to in the said proviso, would not apply. Merely because in the process of manufacturing sawn timber or logs, a small quantity of waste incidentally is created by way of byproduct which is sold as firewood, would not mean that the raw material purchased was not used fully for manufacture of the specified product. For such reasons, the question is answered in favour of assessee.
(See 2016-TIOL-1761-HC-AHM-VAT)
