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.

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 proceedings