CST & VAT : Gujarat VAT - Where assessee purchased
timber after payment of tax for manufacturing sawn timber, which was taxable,
and during process of sawing of timber also procured sawn dust, which was sold
as fire wood and which was exempt from payment of tax, since entire timber
purchased was used as a raw material in manufacturing of taxable goods,
assessee was entitled to credit of entire input tax paid on purchases of timber
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[2016] 72 taxmann.com 241 (Gujarat)
HIGH COURT OF GUJARAT
Arya Lumbers (P.) Ltd.
v.
State of Gujarat*
AKIL KURESHI AND A.J. Shastri, JJ.
tax appeal no. 216 of 2015†
JULY 28, 2016
Section 11 of the Gujarat Value Added Tax Act,
2003 - Tax credit - Assessee purchased timber, which was taxable, for purposes
of manufacturing sawn timber or logs, which was also taxable - During process
of sawing of timber, assessee also procured sawn dust, which was sold as
firewood, which was exempt from payment of tax - Joint Commissioner opined that
by virtue of proviso to sub-section (3)(a) of section 11 and section 11(8)(a)
to extent purchased timber was used for manufacturing firewood, assessee would
not be entitled to credit of input tax paid on purchases of timber - Whether
since entire commodity purchased was used for specified purpose, namely, as a
raw material in manufacturing of taxable goods, assessee was entitled to credit
of entire input tax paid on purchases of timber - Held, yes [Paras 13 and 19]
[In favour of assessee]
FACTS
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The assessee purchased timber, which was
taxable, for the purposes of manufacturing sawn timber or logs, which was
also taxable. During the process of sawing of timber, the assessee also
procured sawn dust, which was sold as firewood, which was exempt from payment
of tax. The proportion of firewood was about 1 per cent of the raw material.
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The Joint Commissioner, on an application
filed by the assessee under section 80, opined that by virtue of proviso to
sub-section (3)(a) of section 11 and section 11(8)(a) to the extent the
purchased timber was used for manufacturing the firewood, the assessee would
not be entitled to credit of input tax paid on purchases of timber.
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The Tribunal confirmed the view of the
Joint Commissioner.
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On appeal to High Court:
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HELD
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From the statutory provisions of section
11, it can be seen that as per clause (a) of sub-section (3) of section 11,
tax credit under sub-section (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
sub-section (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 sub-section (3)(a),
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. [Para 11]
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In terms of proviso to sub-section (3)(a)
of section 11, 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 sub-section, 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. [Para 12]
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In the instant case, it is not even the
case of the revenue 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 by-product, the proviso would apply. This begs the question of
use of the raw material for the specified purpose. Since the entire commodity
purchased by the assessee 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 by-product, which is sold as firewood, would not mean that the raw
material purchased was not used fully for manufacture of the specified
product. [Para 13]
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Clause (h) of sub-section (5) of section
11 merely clarifies and declares that notwithstanding anything contained in
the Act, tax credit shall not be allowed for purchases of goods which are
used in manufacture of goods specified in Schedule I, i.e., goods
which are exempt from payment of tax. Likewise sub-section (8)(a) of section
11 applies where the goods are purchased with intention for use of specified
purposes under sub-section (3) but are subsequently used or partially for
other purposes. On the same logic adopted for holding that proviso to
sub-section (3)(a) would not apply, neither clause (h) of sub-section (5) nor
sub-section (8)(a) of section 11 would apply. [Para 14]
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In view of the aforesaid, the assessee
was entitled to credit of entire input tax paid on purchases of timber. [Para
19]
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CASE REVIEW
State of Gujarat v. Jayant Agro Organics Ltd. [2016] 66 taxmann.com 236 (Guj.) (para
15); Ruchi Soya Industries Ltd. v. State of MP [2015] 56 taxmann.com 187/50 GST 747 (MP)
(para 16); M.K. Agro Tech (P.) Ltd. v. State of Karnataka [2014] 51 taxmann.com 6/48 GST 450 (Kar.)
(para 17) and Swadeshi Polytex Ltd. v. Collector of Central Excise 1989 taxmann.com 636 (SC) (para 18) followed.
CASES REFERRED TO
State of Gujarat v. Jayant Agro Organics Ltd. [2016] 66 taxmann.com 236 (Guj.) (para
5), CCE&C v. Sterling Gelatin 2011 (270) ELT 200 (Guj.) (para
5), Ruchi Soya Industries Ltd. v. State of MP [2015] 56 taxmann.com 187/50 GST 747 (MP)
(para 5), Swadeshi Polytex Ltd. v. Collector of Central Excise 1989 taxmann.com 636 (SC) (para 5) and
M.K. Agro Tech (P.) Ltd. v. State of Karnataka [2014] 51 taxmann.com 6/48 GST 450 (Kar.)
(para 5).
Uchit N. Sheth, Advocate for the Appellant. Pranav Trivedi,
AGP for the Respondent.
JUDGMENT
Akil Kureshi, J. - The appellant assessee has challenged
the judgement of the Value Added Tax Tribunal dated 12.12.2014 in the following
background.
2. Facts which are not in dispute are that
the assessee company purchased timber which are taxable goods, for the purpose
of manufacturing and selling logs or sawn timber of specified size. On such raw
material, the assessee carries on the process of sawing during which process,
in addition to the main product of sawn timber, sawn dust which is used as
firewood, would come into existence by way of by-product. The assessee sales
the sawn timber which is also a taxable commodity. The assessee also sales the
firewood which is by virtue of entry 23(i) in the First schedule to the Gujarat
Value Added Tax Act, 2003 ("VAT Act" for short), exempt from payment
of tax. The proportion of firewood is about 1% of the raw material.
3. 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 Commissioner of
Commercial Tax under section 80 of the VAT Act. The Joint Commissioner
(Ahmedabad) by order dated 31.12.2013 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. Aggrieved by the said order of the Joint
Commissioner, the assessee preferred appeal before the Tribunal. The Tribunal
by the impugned judgement dated 12.12.2014 dismissed the appeal and confirmed
the view of the Joint Commissioner. The Tribunal was of the opinion that :
"Further, the scheme of the Act, to
our mind is such that all the taxable goods carry tax until it reaches the last
customer for consumption. Thus, the last customer who would consume the goods
has to bear the ultimate burden of the tax. From production/manufacture to
market to agency, to sub-agency, stockiest, the whole seller, retailer and the
last consumer who purchases the goods for consumption, forms a long chain. And
in this chain the consumer is at the last point, who has to bear the tax which
is carried by the taxable goods.
Now, if in this chain, one link (who may be
manufacturer, or other person in the chain) converts any taxable goods into tax
free goods, that link, thereby becomes liable to pay tax for the proportion
which is converted from taxable goods to tax free goods. Because otherwise, the
entire goods has to be taxable goods till it reaches the ultimate consumers. In
this view of the facts also, the appellant becomes liable pay tax. . . . . by
reduction of the input tax credit."
4. This judgement the assessee has challenged
in the tax appeal in which at the time of admission, following question of law
was framed :
"Whether in the facts and
circumstances of the case the learned Gujarat Value Added Tax Tribunal is
justified in holding that input tax credit of tax paid on purchases of timber
logs is required to be proportionately reduced under the proviso to Section
11(3)(a) or Section 11(8)(a) of the Gujarat Value Added Tax Act, 2003 to the
extent the waste product generated during the process of sawing of timber is
sold as firewood which is exempt from tax?"
5. Learned counsel Shri Uchit Sheth for the
appellant submitted that in terms of section 11(8)(a) of the VAT Act, the
assessee was entitled to tax credit on purchase of the goods since the entire
quantity was used as raw material in manufacture of taxable goods. He submitted
that proviso to sub-section (3)(a) of section 11 in such a situation would not
apply. Merely because a small portion of the timber by way of waste was sold as
firewood, would not mean that the entire quantity purchased by the assessee was
not used for manufacturing of taxable goods. He highlighted that the scrap generated
during such process was barely about 1% of the entire quantity of timber.
Counsel relied on the following decisions in support of his contentions :
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(1)
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In case of State of Gujarat v. Jayant Agro
Organics Ltd. [2016] 66 taxmann.com 236 (Guj.).
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(2)
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In case of CCE & C v. Sterling Gelatin
2011 (270) ELT 200 (Guj.).
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(3)
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On decision of Madhya Pradesh High Court in case of Ruchi
Soya Industries Ltd. v. State of MP [2015] 56 taxmann.com 187/50 GST 747.
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(4)
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In case of Swadeshi Polytex Ltd. v. Collector of
Central Excise 1989 taxmann.com 636 (SC).
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(5)
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On decision of Karnataka High Court in case of M.K.
Agro Tech (P.) Ltd. v. State of Karnataka [2014] 51 taxmann.com 6/48 GST 450
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6. On the other hand, learned AGP Shri Pranav
Trivedi opposed the appeal contending that the Tribunal has correctly applied
the statutory provisions. To the extent firewood was generated, the assessee
was not entitled to tax credit on purchase of timber since such firewood was
exempted from payment of tax. Proviso to section 11(3)(a) would therefore,
apply.
7. Facts are seriously not in dispute. The
appellant 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.
8. In this context, we may notice statutory
provisions applicable. Section 11 of the VAT Act pertains to tax credit. In
terms of sub-section (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 sub-section (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.
Relevant portion of sub-section (3) reads as under :
"(3)(a) Subject to the
provisions of this section, tax credit to be claimed under sub-section (1)
shall be allowed to a purchasing dealer on his purchase of taxable goods made
in the State, which are intended for the purpose of-
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(vi) use as raw material in the
manufacture of taxable goods intended for (i) to (v) above or in the packing of
the goods so manufactured.
Provided that if purchases are used
partially for the purposes specified in this sub-section, the tax credit shall
be allowed proportionate to the extent they are used for the purposes specified
in this sub-section".
9. Sub-section (5) of section 11 provides
that notwithstanding anything contained in this Act, tax credit shall not be
allowed for purchases in cases mentioned in clauses (a) to (p) thereof. Clause
(h) reads as under :
"(h) of the goods which are
used in manufacture of goods specified in Schedule I or the goods exempt from
the whole of the tax by a notification under sub-section (2) of section 5 or in
the packing of goods so manufactured;"
10. Sub-section (8) of section 11 reads as
under :
"8(a) If the goods purchased
were intended for the purposes specified under sub-section (3) and are
subsequently used fully or partly for purposes other than those specified under
the said sub-section or are used fully or partly in the circumstances described
in sub-section (5), the tax credit, if availed of, shall be reduced on account
of such use, from the tax credit being claimed for the tax period during which
such use has taken place and such reduction shall be done in the manner as may
be prescribed.
(b) Where the capital goods referred
to in sub-clause(vii) of clause (a) of sub-section (3) are not used
continuously for a full period of five years in the State, the amount of tax
credit shall be reduced proportionately having regard to the period falling
short of the period of five years."
11. From the above statutory provisions, it
can be seen that as per clause (a) of sub-section (3) of section 11, tax credit
under sub-section (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 sub-section (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 sub-section (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.
12. 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
sub-section, 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.
13. 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 by-product, 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 by-product which is sold as firewood, would not mean that the raw material
purchased was not used fully for manufacture of the specified product.
14. Clause (h) of sub-section (5) merely
clarifies and declares that notwithstanding anything contained in the Act, tax
credit shall not be allowed for purchases of goods which are used in
manufacture of goods specified in Schedule-I i.e. goods which are exempt from
payment of tax. Like-wise, sub-section (8)(a) of section 11 applies where the
goods are purchased with intention for use of specified purposes under
sub-section (3) but are subsequently used or partially for other purposes. On
the same logic adopted by us for holding that proviso to sub-section (3)(a)
would not apply, neither clause (h) of sub-section (5) nor sub-section (8)(a)
of section 11 would apply.
15. Division Bench of this Court in case of Jayant
Agro Organics Ltd. (supra) was considering a situation where the
assessee had purchased castor seeds for production of castor oil. After two
cycles of extraction of oil from the castor seeds, what was left was a residue
known as de-oiled cake which was used by the assessee for home consumption as
fuel. The department contended that the tax credit, to the extent the castor
seeds were used for production of de-oiled cake, would not be available in view
of the proviso to section 11(3). The High Court negatived the contention making
the following observations :
"19 Considering the above
observations, compared with the facts of the present case, it is clear that the
entire purchase made by the company is intended to manufacture castor oil and
oil based products. In the first phase, when crushing of the seeds takes place,
only some portion of the seeds turn into oil. After the first process of
crushing the seeds, most of the oil is extracted. The said castor oil cake is
again crushed and the remaining portion of the castor oil is extracted
therefrom in the second process leaving the waste, which is of no use to the
company and therefore the same is used in the furnace as a fuel in the
manufacture of castor oil as well as other products. Only the waste is used as
fuel and that too again in the manufacturing process of oil. Therefore, in our
opinion, it would not fall under proviso to Section 11(a) of the Act."
16. Similar view was expressed by the Division
Bench of Madhya Pradesh High Court in case of Ruchi Soya Industries Ltd.
(supra), making the following observations :
"13. From the aforesaid finding of the
honourable Supreme Court,it is clear that manufacturer is eligible the benefit
of set-off on the entire amount of tax paid on purchase of raw material and
principle of apportionment could not be invoked. In the facts and circumstances
of the present case, the judgement of the honourable Supreme Court is applicable
because the DOC, a by-product is tax-free and another by-product sludge and
main product oil are taxable. Hence, the authority cannot apportion the tax
liability after deducting the percentage of proportionate manufacture of DOC,
which has been done in the present case. "
17. The Karnataka High Court also in case of M.K.
Agro Tech (P.) Ltd. (supra) considered a similar situation as under
:
"10. In this case it is not in dispute
that the assessee is in the business of sale and manufacture of sunflower oil
from sunflower oil cake had applied solvent extraction process. He did not set
up any industrial unit for the purpose of manufacturing de-oiled cake. The
entire raw material named as sunflower cake purchased is for the manufacture of
sunflower oil. But, in the process, after the entire sunflower oil is
extracted, de-oiled cake remains. The said de-oiled cake also has a value. He
cannot keep that de-oiled cake in his premises as it could occupy a large space
and no purpose would be served by keeping the same. Merely because the said
de-oiled cake also has a value and he sells the same, there is no justification
to deny the benefit of deduction to the assessee, because there is no direct
nexus between the sunflower oil cake and the de-oiled cake. Sunflower oil cake
was purchased for the purpose of extracting oil from the said cake and for the
sale of the de-oiled cake, the assessee has not put-up a separate unit.
Therefore, it is not the case that assessee has put-up a separate industry for
the purpose of manufacture of de-oiled cake and merely because the de-oiled
cake has some value and it is sold, that would not take away the benefit
conferred on the assessee by the statute. A harmonious interpretation of
Sections 10, 11(a) (1) and 17 of KVAT Act and Rule 131 of the Karnataka Value
Added Tax Rules, 2005, makes it very clear that it is only when there is direct
relationship to the taxable sales, the assessee is entitled to the benefit. The
assessee cannot be denied the benefit, taking into consideration the sale of
de-oiled cake which is an exempted goods. In that view of the matter, the
authorities have not properly appreciated the said statutory provisions. The
legislative intent is defeated in denying the benefit of input tax deduction
relying on Section 11(a)(1) read with Section 17 of the Act. The impugned order
is unsustainable. Hence, we pass the following order. The revision petition is
allowed. The impugned order is hereby set aside. It is held that the assessee
is entitled to the benefit of 'Full Input Tax Deduction'. Ordered
accordingly."
18. In case of Swadeshi Polytex Ltd. (supra),
the Supreme Court considered as situation where set-off duty on inputs used for
manufacturing of final product was already paid. It was observed that such
set-off cannot be denied if non-excisable or fully exempted by-products,
materials waste or reside emerged at intermediate stage unless excess use of
input is proved.
19. For such reasons, tax appeal is allowed.
Question is answered in favour of the assessee and against the department.
Judgement of the Tribunal dated 12.12.2014 is reversed. Tax Appeal is disposed
of.
s.k.j.
*In favour of assessee.
†Appeal arising out of
judgment of Tribunal dated 12-12-2014.
