1. Dispute over eligibility for full input tax credit under the UP VAT Act where manufacturing taxable goods also produces exempt by-products. (Para 3 , 4 , 6 , 7 )
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2023 Supreme(SC) 1106
SUPREME COURT OF INDIA
DHANANJAYA Y. CHANDRACHUD, CJI., J.B. PARDIWALA, MANOJ MISRA, JJ.
M/s Modi Naturals Ltd. – Appellant
Versus
The Commissioner of Commercial Tax U.P. – Respondent
Civil Appeal Nos. 5822-5823 of 2023
Decided On : 06-11-2023
Important Points
The UP VAT Act permits input tax credit for both taxable goods and by-products, emphasizing strict interpretation of tax statutes and legislative intent.
Subject
Taxation Law - Value Added Tax
Act Referred
KARNATAKA VALUE ADDED TAX ACT: S.17, S.5, S.11
KARNATAKA VALUE ADDED TAX RULES: R.131, R.131(3)
UTTAR PRADESH VALUE ADDED TAX ACT: S.17, S.13(1)(a), S.28(2)(i), S.2(m), S.7(b)
UTTAR PRADESH VALUE ADDED TAX RULES: R.23(6)
KARNATAKA VALUE ADDED TAX RULES: R.131, R.131(3)
UTTAR PRADESH VALUE ADDED TAX ACT: S.17, S.13(1)(a), S.28(2)(i), S.2(m), S.7(b)
UTTAR PRADESH VALUE ADDED TAX RULES: R.23(6)
Headnote
(A) Uttar Pradesh Value Added Tax Act, 2008 - Sections 2(m), 13(1)(a), 13(1)(f), 13(3)(b) - Input Tax Credit (ITC) - Assessee claimed full ITC on goods purchased for manufacturing Rice Bran Oil, which was partially denied by the revenue. The High Court ruled that the term 'goods' in Section 13(1)(f) refers only to taxable goods, relying on State of Karnataka v. M.K. Agro Tech Private Limited. The Supreme Court found that the High Court misapplied the Karnataka Act provisions, determining that the UP VAT Act allows ITC for both taxable goods and by-products. (Paras 12, 70, 72)
(B) Taxation - Interpretation of Statutes - A taxing statute must be interpreted strictly, and the legislative intent should be discerned from the language used. The court emphasized that the definition of 'goods' under the UP VAT Act does not differentiate between taxable and exempt goods. (Paras 36-38)
(B) Taxation - Interpretation of Statutes - A taxing statute must be interpreted strictly, and the legislative intent should be discerned from the language used. The court emphasized that the definition of 'goods' under the UP VAT Act does not differentiate between taxable and exempt goods. (Paras 36-38)
Legal Category Hierarchy
Advocates appeared:
For the Appellant(s) : Mr. Arvind P. Datar, Sr. Adv. Saubhagya Agarwal, Adv. Mr. Arjun Sharma, Adv. Mr. Shreyas Maheshwari, Adv. Ms. Sukanya Das, Adv. M/s. Karanjawala & Co.
For the Respondent(s): Mr. R.K. Raizada, Sr. Adv. Mr. Bhakti Vardhan Singh, AOR Mr. Kavin Gulati, Sr. Adv. Mr. Avi Tandon, Adv. Mr. Santosh Kumar Gupta, Adv. Ms. Meghna Tandon, Adv. Mr. Anish Agarwal, AOR Ms. Vanshika Gupta, Adv. Mr. Ami Tandon, Adv. Mr. Mohit Shivakumar, Adv. Mr. Dushyant Sharma, Adv.
For the Appellant(s) : Mr. Arvind P. Datar, Sr. Adv. Saubhagya Agarwal, Adv. Mr. Arjun Sharma, Adv. Mr. Shreyas Maheshwari, Adv. Ms. Sukanya Das, Adv. M/s. Karanjawala & Co.
For the Respondent(s): Mr. R.K. Raizada, Sr. Adv. Mr. Bhakti Vardhan Singh, AOR Mr. Kavin Gulati, Sr. Adv. Mr. Avi Tandon, Adv. Mr. Santosh Kumar Gupta, Adv. Ms. Meghna Tandon, Adv. Mr. Anish Agarwal, AOR Ms. Vanshika Gupta, Adv. Mr. Ami Tandon, Adv. Mr. Mohit Shivakumar, Adv. Mr. Dushyant Sharma, Adv.
Table of Contents
2. Whether Section 13(1)(f) limits input tax credit to taxable goods or if Explanation (iii) allows full credit for inputs used in producing taxable goods and exempt by-products. (Para 14 , 15 , 16 , 17 , 19 , 20 , 21 , 22 )
3. The court analyzed the legislative intent of Section 13(1)(f) and the deeming fiction in Explanation (iii), distinguishing the UP VAT Act from the Karnataka VAT Act. (Para 26 , 27 , 28 , 29 , 30 , 31 , 32 , 33 , 34 , 35 , 44 , 45 , 47 , 48 , 49 , 50 , 59 , 61 , 62 , 64 , 65 , 66 )
4. Under the UP VAT Act, if exempt goods are produced as by-products during the manufacture of taxable goods, the inputs are deemed used for taxable goods, permitting full ITC. (Para 49 , 50 , 62 , 66 )
5. Appeals allowed; High Court judgment set aside and Commercial Tax Tribunal orders restored. (Para 70 , 71 )
6. Does the term goods in Section 13(1)(f) of the UP VAT Act refer only to taxable goods?
No. The court held that the definition of goods under Section 2(m) does not differentiate between exempt and taxable goods, and Section 13(1)(f) does not qualify goods with the word taxable, unlike other specific provisions of the Act. (Para 29 , 30 , 31 , 32 , 35 )
7. What is the legal effect of Explanation (iii) to Section 13 of the UP VAT Act regarding exempt by-products?
It creates a deeming fiction: where exempt goods are produced as a by-product or waste-product during the manufacture of taxable goods, the purchased goods are deemed to have been used in the manufacture of taxable goods, thereby allowing the claim of input tax credit. (Para 49 , 50 , 62 , 66 )
8. Can precedents based on the Karnataka VAT Act be applied to determine ITC eligibility under the UP VAT Act?
Not necessarily. The court found the Karnataka VAT Act focuses on the sale of goods and uses a different apportionment mechanism, whereas the UP VAT Act focuses on manufacture and provides a specific deeming fiction for by-products. (Para 58 , 59 , 61 , 62 , 64 , 65 )
9. What is the general principle for interpreting taxing statutes when ambiguity exists?
Taxing statutes must be strictly construed. If the words are ambiguous and open to two interpretations, the benefit of the interpretation is given to the subject or taxpayer. (Para 37 , 38 , 39 , 40 , 41 , 42 , 43 )
JUDGMENT :
J.B. PARDIWALA, J.
1. Since the issues raised in both the captioned appeals are the same, the parties are also the same and the challenge is also to the self-same judgment passed by the High Court, those were taken up for hearing analogously and are being disposed of by this common judgment and order.
2. For the sake of convenience, the appellant shall hereinafter be referred to as the assessee and the respondent shall hereinafter be referred to as the revenue.
3. These appeals are at the instance of an assessee, duly registered under Section 17 of the Uttar Pradesh Value Added Tax Act, 2008 (for short ‘the UP VAT Act’) and are directed against the common judgment and order dated 03.05.2019 passed by the High Court of Judicature at Allahabad in the Commercial Tax Revisions Nos. 315 of 2017 and 148 of 2018 respectively, by which the High Court allowed both the Commercial Tax Revisions filed by the revenue against the Orders dated 04.05.2016 and 05.07.2017 respectively passed by the Commercial Tax Tribunal, Bareilly Bench, Bareilly and thereby took the view that the assessee is not entitled to the full benefit of Input Tax Credit (for short ‘ITC’) claimed on the goods purchased by it for manufacturing its final product.
FACTUAL MATRIX
4. The assessee is a company engaged in the business of manufacture and sale of Rice Bran Oil (for short ‘RBO’) and Physical Refined RBO. The assessee as stated above is a registered dealer under the UP VAT Act and the RBO manufactured by the assessee falls within the ambit of “taxable goods” under the UP VAT Act. For the purpose of manufacturing RBO, the assessee procures Rice Bran (for short ‘inputs’/‘purchased goods’) and follows the Solvent Extraction Process. During the manufacturing process of RBO a byproduct in the form of “De-Oiled Rice Bran” (for short ‘DORB’) is also produced. DORB falls within the category of exempted goods under S. No. 4 of Schedule-I of the UP VAT Act.
5. The dispute between the parties relates to the assessment years 2013-14 and 2015-16 respectively.
6. The assessee by processing Rice Bran in its solvent extraction plant produced 13.77% taxable goods i.e. RBO and 83.63% by-product i.e. DORB. As stated, aforesaid by further refining the RBO, the physical refined RBO is also produced. The record reveals that for the Assessment Year 2013- 14, the assessee purchased 8,21,935.71 quintals of Rice Bran for a sum of Rs. 93,69,53,404.00 and paid tax of Rs. 4,68,47,670.00. By processing the inputs, 1,13,180.54 quintals of RBO was produced and 6,87,138.25 quintals of DORB was produced. Out of 1,13,180.54 quintals of RBO, 93,241.15 quintals of RBO was further refined to produce 76,068.37 quintals of physical refined RBO. The said quantity of physical refined RBO and the balance quantity of RBO (19,939.40 quintals) was sold within the State of Uttar Pradesh for Rs. 45,91,66,611 and Rs. 9,60,11,540 respectively aggregating to a total of Rs. 55,51,78,151/-. The assessee’s tax liability on the said sales was calculated at Rs. 2,77,58,908/-.
7. On the basis of the statutory provisions of Section 13(1)(a) read with S. No. 2(ii) of the Table appended thereto and Section 13(3)(b) read with Explanation (iii) to Section 13 of the UP VAT Act, the assessee claimed full amount of tax paid as ITC i.e. a sum of Rs. 4,68,47,670/-. The claim of the assessee came to be rejected vide the Order of the Deputy Commissioner, Tax Fixation, Division-I, Pilibhit passed in terms of Section 28(2)(i) of the UP VAT Act. It is the case of the revenue that had the assessee been permitted to avail the full ITC, it would have led to a loss of Rs. 1,90,88,763.00 to the State exchequer.
8. In connection with both the Assessment Years i.e. 2013-14 and 2015-16, respectively vide two separate orders, the Deputy Commissioner took the view that in terms of Section 13(1)(f), the assessee could have availed the ITC on the inputs only vis-a-vis the taxable sales, as the sale price of the final goods was lesser than the
