1. Manufacture of taxable edible oil and exempt de-oiled cake from common input — Dispute over eligibility for full versus partial input tax rebate under KVAT Act. (Para 1 , 2 , 5 , 6 )
Back
Next 
2017 Supreme(SC) 1336
SUPREME COURT OF INDIA
A.K. SIKRI, ASHOK BHUSHAN, JJ.
The State of Karnataka - Appellant
Versus
M/s. M.K. Agro Tech Pvt. Ltd. - Respondent
Civil Appeal Nos. 15049-15069 of 2017
Decided On : 22-09-2017
Advocates:
Advocate Appeared:
For the Appellant : Mr. V.N. Raghupathy, Mr. Chinmay Deshpande, Mr. Parikshit P. Angadi
For the Respondent: Mr. P. Chidambaram, Mr. Vivek Jain, Mr. Rishi Agarwala, Mr. Vikrant Pachnanda, Mr. E.C. Agrawala
Advocate Appeared:
For the Appellant : Mr. V.N. Raghupathy, Mr. Chinmay Deshpande, Mr. Parikshit P. Angadi
For the Respondent: Mr. P. Chidambaram, Mr. Vivek Jain, Mr. Rishi Agarwala, Mr. Vikrant Pachnanda, Mr. E.C. Agrawala
Important Points
The main legal point established in the judgment is the strict application of legislative provisions, such as the partial rebate of input tax under Section 17 of the KVAT Act, and the importance of literal interpretation in taxing statutes.
Subject
Taxation Law - Value Added Tax (VAT)
Act Referred
KARNATAKA VALUE ADDED TAX ACT: S.17, S.38(1), S.11(A)(1), S.29, S.30, S.10(3)
KARNATAKA VALUE ADDED TAX RULES: R.131, R.131(3)
KARNATAKA VALUE ADDED TAX RULES: R.131, R.131(3)
Headnote
KVAT Act - Construction of Section 17 - Summary of Acts and Sections: 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’)
Fact of the Case:
The case involves the construction of Section 17 of the Karnataka Value Added Tax (KVAT) Act, 2003, and Rule 131 of the KVAT Rules, 2005. The respondent, a manufacturer of sunflower oil, sold de-oiled cake, an exempted item under the KVAT Act. The appellant, the State, contended that the respondent was entitled to only partial rebate of input tax due to the sale of de-oiled cake. The High Court accepted the position of the assessee, granting full input tax deduction.
Finding of the Court:
The Court found that Section 17 of the KVAT Act applies to the sale of goods, whether they are by-products, ancillary products, intermediary products, or final products. The Court held that the de-oiled cake, being a marketable good exempt from VAT, falls within the definition of 'goods' and is subject to Section 17. The Court also noted that the High Court failed to consider the import and effect of sub-rule (3) of Rule 131 of the KVAT Rules.
Issues: The main issue was the applicability of Section 17 of the KVAT Act to the sale of de-oiled cake, an exempted item under the Act. The Court also addressed the failure of the High Court to consider sub-rule (3) of Rule 131 of the KVAT Rules.
Ratio Decidendi: The Court held that Section 17 of the KVAT Act applies to the sale of goods, including by-products, ancillary products, intermediary products, or final products. The Court also emphasized the importance of literal interpretation in taxing statutes and the strict application of legislative provisions, such as the partial rebate of input tax under Section 17.
Final Decision: The appeals were allowed, the judgment of the High Court was set aside, and the respondent was held to be entitled to only partial rebate of input tax due to the sale of de-oiled cake.
Legal Category Hierarchy
Table of Contents
2. State contends partial rebate applies due to sale of exempt by-products — Assessee argues full rebate as by-products do not involve a separate manufacturing process. (Para 3 , 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 )
3. Section 17 is triggered by the sale of goods, not their manufacture — Literal interpretation of taxing statutes prevails where no absurdity arises. (Para 27 , 28 , 29 , 30 , 31 , 32 )
4. Partial rebate under Section 17 of the KVAT Act applies to the sale of any exempt goods, regardless of whether they are primary products or by-products. (Para 28 , 32 )
5. Appeals allowed and High Court judgment set aside. (Para 34 )
6. Does Section 17 of the KVAT Act apply to the sale of by-products?
Yes. Section 17 is triggered by the sale of goods, regardless of whether they are primary manufactured products or by-products. If the by-product is a saleable commodity exempt from tax, the provision for partial rebate applies. (Para 28 , 32 )
7. How should taxing statutes be interpreted when the language is plain?
Taxing statutes must be interpreted literally. Purposive construction is only resorted to if a literal interpretation leads to absurdity or defeats the object of the Act, which was not the case in this instance. (Para 30 )
8. What is the application of Rule 131(3) of the KVAT Rules?
Rule 131(3) applies when input tax relates to both taxable and exempt goods but is not directly relatable to one or the other, providing a specific formula to calculate partial deduction. (Para 22 , 29 )
9. Is the distinction between manufacture and sale relevant for input tax rebate under Section 17?
Yes. The court held that the relevant event triggering Section 17 is the sale of exempt goods, not the process of manufacture used to create them. (Para 28 )
JUDGMENT :
A.K. Sikri, J.
In these appeals, a short but interesting question of law arises for 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 than one and output tax is payable on the sale of one such final product but other final product is exempted from payment of the said output tax. Since, no output tax is payable on the sale of exempted goods, the input tax credit in such cases is partially admissible. The manner in which partial exemption is given is provided in Rule 131 of KVAT Rules, 2005.
3. Keeping in view this provision, the appellant - State has taken the view that the assessee would be entitled to only partial rebate of input tax because of the reason that though output tax is paid on sunflower oil, it is not paid on the sale of de-oiled cake. The assessee, on the other hand, contends that Section 17 of the KVAT Act would not be applicable in the instant case because of the reason that sunflower oil cake, as an input, is used in its entirety in the extraction of sunflower oil. De-oiled cake is not the result of any manufacturing process but is only a by-product. Therefore, sale of such by-product, even when it is exempted from output tax, would not have any bearing. The High Court in its impugned judgment has accepted this position adopted by the assessee thereby giving full input tax deduction.
4. Having narrated the background in which the question of law arises for consideration, we may now recapitulate the factual background in some more detail.
5. The respondent is a private limited company registered under the provisions of the KVAT Act and also under the provisions of Central Sales Tax Act, 1956. The assessee carried on business of manufacturing and trading of various kinds of edible oil. For the purpose of manufacturing edible oil, the assessee has three units solvent extraction unit, refinery unit and a trading unit. It purchases oiled sunflower cake as an input (pays input sales tax on that), extracts oil out of it in the solvent extraction plant, the oil is then refined in the refinery and trading is carried on through the trading unit. Indisputably the assessee also sells de-oiled cake which is a marketable good in itself. De-oiled cake is a byproduct of solvent extraction process carried out in the solvent extraction plant in which oil is removed from the oiled cake and the remains are 88% de-oiled product and 12% oil. De-oiled cake is an exempt good and, therefore, it does not suffer any VAT. The other goods, viz., edible oils manufactured and sold by the assessee 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 procee
