By TIOL News Service

NEW DELHI, SEPT 26, 2017: THE issue before the Apex Court is - Whether fuels and raw materials used for manufacture or packing of goods which are dispatched outside the State in the course of branch transfer, are totally separate categories and therefore, attract double reduction of input tax credit u/s 11(3)(b) of Gujarat VAT Act. And the verdict favours the Revenue.

Facts of the Case

The Assessee was engaged in the business of manufacturing and selling polymers and chemicals in its factory situated in the State of Gujarat. After the manufacture of those goods, same were transferred by the Assessee to its various branches located in different parts of the country from where those goods were sold. Obviously, in respect of goods transferred to places outside the State, the VAT was paid at the time of sale of those goods in those States, as per the local laws of the said States. The goods were sold in the State as well and in respect of those goods VAT is paid as per the Gujarat VAT Act. For the purpose of manufacturing the aforesaid goods, namely, polymers and chemicals, the Assessee purchases furnace oil, natural gas and light diesel oil from its registered dealers. Those fuels were used for the aforesaid manufacturing activities. On purchase of the raw material, VAT was paid at varying rates. On furnace oil, 4% VAT was payable as per the VAT Act, whereas on natural gas and light diesel oil rate of VAT prescribed and payable was 12.5%. Since those inputs were used for manufacturing of the final products, there was a provision in the VAT Act for giving credit on the VAT which was paid at the time of purchase of those inputs under Section 11 of the VAT Act.

As per the provisions the tax credit which is admissible to the purchasing dealer is subject to provisions of sub-section (2) of Section 12. Sub-section (3)(b), provides that if the goods are falling in the categories mentioned in sub-clauses (i), (ii) and (iii), the tax credit is to be reduced by the amount of tax calculated at the rate of 4% on the taxable turnover of purchases within the State. As noted above, the raw material/ inputs used in the instant goods were fuels. Sub-clause (ii) includes such goods in case the taxable goods are dispatched outside the State in the course of branch transfer. After the final product was produced, the Assessee transfers those goods to its various branch offices, many of which were located outside the State and, therefore, those goods which were so transferred would be covered by this sub-clause and in respect of such goods which were transferred outside the State and were taxable under the VAT Act, the tax credit was to be reduced by 4%. Since the raw material in the instant goods was in the nature of fuels used for the manufacture of goods, it gets covered by sub-clause (iii) as well.

The AO had held that in respect of such goods tax credit was required to be reduced at the rate of 4% under sub-clause (ii) and again at the rate of 4% under sub-clause (iii).On appeal, the JCCT the decision of the AO. On further appeal, the Tribunal held that the deduction can be at 4% only and there cannot be double reduction in tax credit admissible to the Assessee. On Revenue's appeal, the High Court had upheld the view of the Tribunal.

After hearing the parties, the Apex Court held that,

++ it is clear that the material used even in the packing of goods is treated as raw material and, therefore, this definition is to be treated as term of art. This definition also clarifies that fuels used in the manufacture of goods would be treated as raw material with the only exception of those fuels which are used for the purpose of generation of electricity. Section 11(3) (b) is a non-obstante clause as it starts with the word 'notwithstanding'. Another aspect which is to be necessarily kept in mind is that it is the 'amount of tax credit' which a dealer would be entitled to claim under clause (a) that is to be reduced at the rate of 4% and this reduction is to be effected in three eventualities provided under sub-clauses (i), (ii) and (iii). Insofar as sub-clause (i) is concerned, it pertains to trading activity and there is no question of any overlap between sub-clause (i) on the one hand and sub-clauses (ii) and (iii) on the other. Further, insofar as sub-clauses (i) and (ii) are concerned, same are disjunctive as the word 'or' is inserted between these two clauses. However, when one come to clauses (ii) and (iii), where there is a possibility of overlap (as it has happened in the instant case as well), there is no word 'or' used between clauses (ii) and (iii). Sub-clause (ii) finishes with the punctuation mark full stop and then sub-clause (iii) starts. This depicts the intention of the Legislature, namely, reduction is not confined to one of the aforesaid two sub-clauses and it can occur under both these provisions. It is rightly pointed out by the appellant State that these are event based sub-clauses and two events are totally different. Sub-clause (ii) is attracted in those cases where taxable goods are used as raw material (which may not necessarily be fuel but all raw materials are included) and also the other condition which is to be fulfilled is that these goods are dispatched outside the State in the course of branch transfer etc. Therefore, even if the taxable goods are used as raw material in the manufacture or in the packing of goods but they are consumed or sold within the State, sub-clause (ii) would not apply. On the other hand, sub-clause (iii) is referable to only fuels which are used for manufacture of goods. It is, thus, a totally separate category and the moment fuel is used in the manufacture of goods, this sub-clause gets attracted and it would be immaterial whether the goods are sold within the State or outside the Sate;

++ the material in question, namely, furnace oil, natural gas and light diesel oil are admittedly subject to VAT under the VAT Act. The Legislature, however, has incorporated the provision, in the form of Section 11, 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 is sold and the VAT paid, component of raw material would be included again. Keeping in view this objective, the Legislature has intended to give tax credit to some extent. However, how much tax credit is to be given and under what circumstances, is the domain of the Legislature and the courts are not to tinker with the same;

++ the reduction of 4% would be applied whenever a case gets covered by sub-clause (ii) and again when sub-clause (iii) is attracted. This, however, would be subject to one limitation. In those cases where VAT paid on such raw material is 4%, as in the case of furnace oil, reduction cannot be more than that. After all, Section 11 deals with giving credit in respect of tax that is paid. Therefore, if some reduction is to be made from the said credit, it cannot be more than the credit given. Thus, so far as furnace oil is concerned, tax credit shall be reduced by 4%. On the other hand, tax credit given in case of natural gas and light diesel oil (other fuels), it shall be reduced by 4% under sub-clause (ii) and 4% under sub-clause (iii) of clause (b) of sub-section (3) of Section 11.

(See 2017-TIOL-360-SC-VAT)