UP VAT Act | Assessee Entitled To Claim Full Input Tax Credit On Exempted Goods Produced As By-Products Or Waste Products During Manufacturing Of Taxable Goods : Supreme Court

The Supreme Court while relying on Explanation (iii) to Section 13 of Uttar Pradesh Value Added Tax Act, 2008 (“UP VAT Act”), has held that if during the manufacture of any taxable good any tax exempted goods are produced as by-product/waste product, then it shall be deemed that the goods purchased from within the State for such manufacturing have been used in manufacture of taxable goods alone. Thus, the Assessee would be entitled to claim full benefit of Input Tax Credit (“ITC”) in respect of taxable goods purchased from within the State.

The issue before the Bench was whether as Assessee is entitled to claim full Input Tax Credit (“ITC”) on by-products/waste products produced during the manufacturing process, if they are being used to manufacture taxable goods.

The Bench comprising the Chief Justice Dr. Dhananjaya Y. Chandrachud, Justice J.B. Pardiwala and Justice Manoj Misra, has held as under:

“Section 13(3)(b), however, leaves a grey area with respect to cases where the process of manufacture (such as in the present case) results in the production of VAT goods and by-products or waste products. In such cases, the legislature has done well to take care of the grey area by providing for another legal fiction in the form of Explanation (iii) to Section 13 wherein it is provided that during the manufacture of any taxable goods, any exempt goods are produced as by-product or waste product, it shall be deemed that the purchased goods have been used in the manufacture of taxable goods.”

BACKGROUND FACTS

Section 13(1) of UP VAT Act states that the dealers holding valid registration under the said Act shall be allowed credit of an amount as Input Tax Credit (“ITC”) in respect of taxable goods purchased from within the State. Section 13(1)(a) states that every dealer liable to pay tax, shall, in respect of all taxable goods except non-vat goods, be allowed credit of an amount as ITC to the extent provided by the Act.

The Explanation (iii) to Section 13(1)(a) provides that when during the manufacturing process of any taxable goods any exempt goods are produced as by-product or waste-product, it shall be deemed that purchased goods have been used in the manufacture of taxable goods.

M/s Modi Naturals Ltd. (“Assessee”) is a manufacturer of Rice Bran Oil (“RBO”) and Physical Refined RBO. The Assessee is a registered dealer under the UP VAT Act. The RBO so manufactured falls under “taxable goods” under the UP VAT Act.

For manufacturing of RBO, the Assessee procures Rice Bran (“Inputs/Purchased Goods”) and follows the Solvent Extraction Process. During manufacturing process, De-Oiled Rice Bran (“DORB”) is produced as a by-product, which is categorized as VAT exempted goods under S. No. 4 of Schedule – I of the UP VAT Act.

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.

During the Assessment Year 2013-2014, the Assessee purchased 8,21,935.71 quintals of Rice Bran for a sum of Rs. 93.6 Crores and paid tax of Rs. 4.6 Crores. Relying on Section 13, the Assessee claimed full amount of tax paid as ITC i.e., Rs. 4.6 Crores.

The Assessee’s claim was rejected by an order of Deputy Commissioner, Tax Fixation, Div. – I, Pilibhit, while holding that “goods” in Section 13(1)(f) of the UP VAT Act means only the taxable goods. In appeal, the Additional Commissioner, Bareilly held that the Assessee was entitled to claim full ITC.

The Revenue unsuccessfully contested the matter before the Commercial Tax Tribunal, Bareilly and ultimately filed Commercial Tax Revision before the High Court of Allahabad.

The High Court held that that the case stood covered by Section 13(1)(f) of the UP VAT Act and the Assessee is not entitled full benefit of ITC claimed on the goods purchased by it for manufacturing its final product.

The Assessee filed an appeal before the Supreme Court.

ISSUE

Whether Assessee is entitled to claim full amount of tax paid towards the purchase of raw Rice Bran as ITC on the basis 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) of Section 13 of the UP VAT Act?

SUPREME COURT VERDICT

The Bench opined that Section 13(1)(a) of UP VAT Act clarifies that in cases where the purchased goods (such as Rice Bran) are used in the manufacture of taxable goods (such as RBO and physically refined RBO) except the non-VAT goods, and where such manufactured goods are sold within the State or in the course of inter-state trade and commerce, the registered dealers (such as the Assessee herein) are entitled to claim Input Tax Credit (ITC) of the full amount. Therefore, the Assessee is entitled to claim full amount of tax paid on the purchases as ITC.

Further, Section 13(3)(b) introduces the concept of proportionality in the UP VAT Act and by means of a deeming fiction provides that where during the manufacture of VAT goods, exempt and non-VAT goods (except as by-product or waste product) are produced, the amount of ITC credit may be claimed and may be allowed in proportion to the extent they are used or consumed in manufacture of taxable goods other than the non-VAT goods and exempt goods.

The Bench held that as per explanation (iii) to Section 13, if during the manufacture of any taxable good any tax exempted goods are produced as by-product/waste product, then it shall be deemed that the purchased goods have been used in manufacture of taxable goods.

Thus, ITC is allowed in cases where exempted goods are being produced as a by-product or waste product during the process of manufacture.

“Explanation (iii) to Section 13, therefore, forbids the Assessing Authority as well as the assessee from raising any dispute in regard to the allowability of the ITC in cases where exempted goods are being produced as a by-product or waste product during the process of manufacture.”

The Bench has set aside the High Court order and affirmed the decision of Commercial Tax Tribunal.

Case details: M/S Modi Naturals Ltd v The Commissioner of Commercial Tax UP

Case No.: 2023 LiveLaw (SC) 976

Counsel for Appellant: Mr. Arvind P. Datar (Sr. Adv.), Saubhagya Agarwal, Mr. Arjun Sharma, Mr. Shreyas Maheshwari, Ms. Sukanya Das, M/s. Karanjawala & Co.

Counsel for Respondent: Mr. R.K. Raizada (Sr. Adv.), Mr. Bhakti Vardhan Singh (AOR). Mr. Kavin Gulati (Sr. Adv.), Mr. Avi Tandon, Mr. Santosh Kumar Gupta, Ms. Meghna Tandon, Mr. Anish Agarwal (AOR), Ms. Vanshika Gupta, Mr. Ami Tandon, Mr. Mohit Shivakumar, Mr. Dushyant Sharma.

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