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2017 (9) TMI 1308

Head Note / Extract:
Input tax credit - partial credit / rebate - sale of by-product which is exempt - Section 17 of the Karnataka Value Added Tax (Act), 2003 - credit on Sunflower oil cake, which is input - when the sunflower oil is extracted, by-product in the form of de-oiled sunflower oil cake also becomes available. This by-product is sold by the respondent but on the sale of this by-product, no VAT is payable as it is exempted item under the KVAT Act - 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 - 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.

Held that: - The first mistake which is committed by the High Court is to ignore the plain language of sub-section (1) of Section 17. This provision which allows partial rebate makes the said provision applicable on the ‘sales’ of taxable goods and goods exempt under Section 5. Thus, this sub-section refers to ‘sale’ of the ‘goods’, taxable as well as exempt, and is not relatable to the ‘manufacture’ of the goods. The High Court has been swayed by the fact that while extracting oil from sunflower, cake emerges only as a by-product. Relevant event is not the manufacture of an item from which the said by-product is emerging. On the contrary, it is the sale of goods which triggers the provisions of Section 17 of KVAT Act. Whether it is by-product or manufactured product is immaterial and irrelevant. Fact remains that de-oiled cake is a saleable commodity which is actually sold by the respondent assessee. Therefore, de-oiled cake fits into the definition of “goods” and this commodity is exempt from payment of any VAT under Section 5 of the KVAT Act. Thus, provisions of Section 17 clearly get attracted when ‘sale’ of these goods takes place.

Also, the High Court has not considered the import and effect of sub-rule (3) of Rule 131 of the KVAT Rules - After perusing Rule 131 in its entirety, it becomes clear that sub-rule (1) pertains to input tax directly relatable to sales of exempt goods which is non-deductible. Likewise, sub-rule (2) mandates that input tax directly relating to sale of goods shall be deductible. On the other hand, sub-rule (3) covers those cases where input tax is not directly relatable to exempt goods and taxable goods. It is therefore, applied in those cases where input tax relating to both sale and taxable goods and exempt goods is known. In that situation, formula is given under this sub-rule to work out the partial deduction. The High Court has neither take note of nor discussed sub-rule (3).

Literal interpretation to Section 17 - there was no reason for departing from the principle of literal construction in a taxing statute.

The entire scheme of the KVAT Act is to be kept in mind and Section 17 is to be applied in that context. Sunflower oil cake is subject to input tax. The Legislature, however, has incorporated the provision, in the form of Section 10, to give tax credit in respect of such goods which are used as inputs/ raw material for manufacturing other goods - how much tax credit is to be given and under what circumstances, is the domain of the Legislature and the courts are not to tinker with the same.

On literal interpretation of Section 17 it can be gathered that it does not distinguish between by-product, ancillary product, intermediary product or final product. The expressions used are ‘goods’ and ‘sale’ of such goods is covered under Section 17. Both these ingredients stand satisfied as de-oiled cakes are goods and the respondent assessee had sold those goods for valuable consideration - Section 17 gets attracted in the instant case and the view taken by the High Court is erroneous.

Appeal allowed - decided in favor of revenue.

 


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