2025 (5) TMI 570 - HC - VAT / Sales Tax

Effect of delegated legislation of amendment to Rule 20 (2) (n) vide G.O.Ms.No.2201 Rev. (CT-II) Dept. dated 29.12.2005 introduced under section 13 (1) of the VAT act denying the ITC for coolers - retrospective effect or not - ITC on tax paid on breakages of glass bottles which occur in the manufacturing process and are sold as scrap. Input Tax Credit (ITC) on purchases of coolers and refrigerators made during the year 2004-05 in light of the retrospective amendment - HELD THAT - The Hon ble Apex Court in a case of Union of India and another Vs. Pradeep Kumari and others 1995 (3) TMI 489 - SUPREME COURT inter alia held that in relation to beneficial legislation the law is well-settled that while construing the provisions of such a legislation the Court should adopt a construction which advances the policy of the legislation to extend the benefit rather than a construction which has the effect of curtailing the benefit conferred by it. The Hon ble Apex Court in Girdhari Lal Sons Vs. Balbir Nath Mathur Others 1986 (2) TMI 253 - SUPREME COURT relying on the other decisions of the Hon ble Apex Court held that the object and purpose of the amendment to remove the mischief and defect for which the amendment was necessitated is required to be considered and borne in mind and the Parliament s intention is ascertained and the object and purpose of the legislation is known it then becomes the duty of the Court to give the statute a purposeful or a functional interpretation. According to a plain reading of Rule 20 (2) of the AP VAT Rules 2005 the revision petitioner M/s Pearl Beverages is entitled to and eligible for the Input Tax Credit (ITC) on refrigerators coolers and deep freezers purchased by manufacturers of soft drinks and ice cream. This is because the right was taken away due to an amendment made under Section 37 of the AP VAT Act which introduced provision (n) to the negative list without providing any justification. The amendment is not clarifying and since a vested cannot be taken away retrospectively it is unfair and arbitrariness applies. The right accrued to the revision petitioner/Assessee/Pearl Beverages Limited on the date when they paid tax cannot be taken away by way of amendment. As held by the apex court in several decisions that a rule cannot be applied retrospectively removing the accrued or vested right as the amendment has not given any reason for effecting retrospectively. ITC of tax paid on breakages of glass bottles which occur in the manufacturing process and are sold as scrap - HELD THAT - An Input Tax Credit can be claimed when a manufacturer buys a raw material and pays a certain amount of tax on those purchases. They can deduct that tax amount from the tax they need to pay when selling their finished products. Where in the case on hand the petitioner/ assessee who purchased glass bottles for not to use for manufacture to produce some other product by using the product purchased and petitioner is not the manufacturer of the bottles. The petitioner / assessee has purchased the bottles for storing of the liquid which does not fall under the manufacturing of another product. The contention of the petitioner / assessee is that FIFO (First in First out) method would be applicable. FIFO method is generally used to determine the value of any item moving out of a stock account and those remaining in stock at any point of time. When applied to an account holding dematerialised stock it implies that out of the existing holdings the item that first entered into the account is deemed to be the first to be sold out. There is no evidence the product moved of stock those remaining in stock and they are invoiced - the issue is answered against to the revision petitioner. Conclusion - The amount paid by the revision petitioner is refundable to the extent of input tax credit on the coolers and refrigerators. The revision petitioner is entitled to the input tax credit for the coolers and refrigerators while the rest of the claim is rejected. The Tax Revision Case is therefore allowed partly.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

(a) Whether the amendment introducing clause (n) to sub-rule (2) of Rule 20 of the Andhra Pradesh Value Added Tax (AP VAT) Rules, 2005, which places refrigerators, coolers, and deep freezers purchased by soft drink manufacturers not for use in their manufacturing premises in the negative list, operates retrospectively or prospectively;

(b) Whether the revision petitioner, a soft drink manufacturer, is entitled to claim Input Tax Credit (ITC) on purchases of coolers and refrigerators made during the year 2004-05, in light of the retrospective amendment;

(c) Whether the tax paid on breakages of glass bottles, which occur in the manufacturing process and are sold as scrap, is eligible for Input Tax Credit;

(d) The applicability of the FIFO (First In First Out) principle in determining eligibility of ITC on glass bottles considering breakages;

(e) The extent to which the definition of "use in business" under the AP VAT Act permits ITC claims on capital goods, consumables, and stores and spares used by the petitioner;

(f) The effect of the judgment in Asian Peroxide Limited vs. State of Andhra Pradesh on the retrospective operation of amendments to the AP VAT Rules.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Retrospective effect of amendment introducing clause (n) to Rule 20 (2) and entitlement to ITC on coolers and refrigerators

Relevant legal framework and precedents: Section 13(2)(a) of the AP VAT Act entitles a VAT dealer to claim ITC on stock held as of 1.4.2005 on goods purchased during 1.4.2004 to 31.3.2005, subject to eligibility. Rule 20(2) of the AP VAT Rules specifies a negative list of goods ineligible for ITC. Clause (n) was introduced by an amendment dated 29.12.2005, retrospectively effective from 1.4.2005, excluding refrigerators, coolers, and deep freezers purchased by soft drink manufacturers not used in manufacturing premises from ITC.

The petitioner contended that the retrospective amendment is invalid as it removes vested rights and relied on the judgment in Asian Peroxide Limited vs. State of Andhra Pradesh, where a similar retrospective amendment (clause (h)) was struck down.

The respondent argued that each clause has distinct meaning and the judgment on clause (h) is not applicable to clause (n), and that the retrospective amendment is valid.

Court's interpretation and reasoning: The Court examined the principles governing retrospective legislation as laid down by the Hon'ble Supreme Court, including the presumption against retrospectivity, the nature of the amendment (clarificatory, declaratory, or substantive), and the protection of vested rights.

The Court referred to authoritative rulings, including Union of India vs. Pradeep Kumari, Girdhari Lal & Sons vs. Balbir Nath Mathur, Koteswar Vittal Kamath vs. Rangapa Baliga, and A.A. Calton vs. Director of Education, which establish that retrospective amendments are permissible only if expressly or by necessary implication intended and must not impair vested rights unless clearly mandated.

The Court distinguished between clarificatory amendments (which may have retrospective effect) and declaratory or substantive amendments (which generally should not impair vested rights retrospectively). The amendment introducing clause (n) was held to be declaratory and substantive rather than clarificatory.

Applying these principles, the Court held that the petitioner had accrued a vested right to claim ITC on coolers and refrigerators purchased during 2004-05 under Section 13(2) before the retrospective amendment. The amendment removing this right retrospectively was held to be unfair and arbitrary, lacking justification for retrospective effect.

Key evidence and findings: The petitioner demonstrated purchase of coolers during the relevant period and that these goods were used in the business of soft drink manufacturing. The amendment was introduced after the purchase and claim.

Application of law to facts: The Court found that the amendment could not validly deprive the petitioner of the ITC already accrued on such purchases, as this would impair vested rights without clear legislative intent or justification.

Treatment of competing arguments: The Court rejected the respondent's argument that the judgment in Asian Peroxide Limited was inapplicable, holding that the principle against retrospective impairment of vested rights applies equally.

Conclusions: The Court set aside the amendment's retrospective operation to the extent it denied ITC on coolers and refrigerators purchased during 2004-05, allowing the petitioner's claim for ITC on these items.

Issue (c): Eligibility of ITC on tax paid on breakages of glass bottles sold as scrap

Relevant legal framework and precedents: Section 13(2) permits ITC on goods used in business. The petitioner argued that breakages are incidental to manufacturing, form part of cost of production, and tax paid on scrap sales should be eligible for ITC.

Court's interpretation and reasoning: The Court observed that breakages are not goods purchased during the relevant period but are losses occurring in the manufacturing process. The broken bottles were not reused or manufactured into other products but sold as scrap with tax paid on nominal value.

Key evidence and findings: The petitioner's stock records showed breakages worth Rs.1 crore. The tax authorities disallowed ITC on breakages, noting that breakages are not part of closing stock eligible for ITC.

Application of law to facts: The Court held that since breakages are not goods purchased and held as stock, but rather losses disposed of as scrap, the tax paid on such scrap does not qualify for ITC.

Treatment of competing arguments: The petitioner's argument that breakages form part of cost of production was rejected as breakages are not goods held in stock or used directly in manufacture.

Conclusions: The Court answered this issue against the petitioner, disallowing ITC on tax paid on breakages sold as scrap.

Issue (d): Applicability of FIFO principle in determining ITC eligibility on glass bottles considering breakages

Relevant legal framework and precedents: FIFO is a stock valuation method determining which goods are deemed sold or broken first.

Court's interpretation and reasoning: The tax authorities rejected the application of FIFO in this context, reasoning that breakages can occur randomly and unpredictably, not necessarily from the oldest stock.

Key evidence and findings: The petitioner claimed ITC on breakages from recent purchases, but the authorities held that breakages likely related to older stock.

Application of law to facts: The Court agreed with the authorities that FIFO principle was not applicable to breakages, as breakage is a chance event not linked to stock age.

Conclusions: The Court upheld the rejection of FIFO application for breakages, supporting the disallowance of ITC on breakages from recent purchases.

Issue (e): Definition of "use in business" and eligibility of ITC on stores, spares, and other goods

Relevant legal framework and precedents: Section 2(6) of the AP VAT Act defines "business" broadly to include trade, commerce, manufacture, and incidental transactions. Rule 20(2) lists goods ineligible for ITC.

Court's interpretation and reasoning: The petitioner claimed ITC on stores and spares used in business, arguing these are essential goods. The tax authorities disallowed ITC on certain items appearing in the negative list.

Key evidence and findings: The petitioner's claim included spares for transport and other items excluded by Rule 20(2).

Application of law to facts: The Court found that ITC is available on goods used in business except those specifically excluded by the negative list. The petitioner's claim on excluded items was rightly disallowed.

Conclusions: The Court upheld disallowance of ITC on stores and spares falling under the negative list, but recognized ITC on eligible goods used in business.

Issue (f): Applicability of Asian Peroxide Limited judgment to retrospective amendment clause (n)

Relevant legal framework and precedents: The Asian Peroxide Limited judgment struck down retrospective amendment clause (h) to Rule 20(2) as invalid for impairing vested rights.

Court's interpretation and reasoning: The petitioner argued that the same principle applies to clause (n) introduced retrospectively. The respondent contended that the clauses differ in scope and effect.

Key evidence and findings: The Court noted that the principle against retrospective impairment of vested rights applies generally and is not confined to clause (h).

Application of law to facts: The Court held that the retrospective amendment clause (n) is subject to the same legal principles and cannot validly deprive vested ITC rights.

Conclusions: The Court applied the Asian Peroxide principle to clause (n), holding the retrospective amendment invalid to the extent it impaired vested rights.

3. SIGNIFICANT HOLDINGS

"The amendment introducing clause (n) to sub-rule (2) of Rule 20 of the AP VAT Rules, 2005, which retrospectively denies Input Tax Credit on refrigerators, coolers and deep freezers purchased by soft drink manufacturers not for use in their manufacturing premises, cannot be given retrospective effect so as to impair or take away the vested right accrued under Section 13(2) of the AP VAT Act."

"A clarificatory amendment may have retrospective effect, but a declaratory and substantive amendment which removes an accrued right without express or necessarily implied legislative intent is arbitrary and unfair."

"Input Tax Credit is not available on breakages of glass bottles sold as scrap, as breakages are not goods purchased or held in stock but losses occurring in the manufacturing process."

"The FIFO principle is not applicable to breakages of glass bottles for the purpose of Input Tax Credit, as breakages occur randomly and cannot be attributed to stock in chronological order."

"Input Tax Credit is available on goods used in the business except those specifically excluded in the negative list under Rule 20(2). Stores and spares falling under the negative list are not eligible for ITC."

"The principle laid down in Asian Peroxide Limited vs. State of Andhra Pradesh applies to all retrospective amendments that impair vested rights, including clause (n) of Rule 20(2) of the AP VAT Rules."

Final determinations:

(i) The petitioner is entitled to Input Tax Credit on coolers and refrigerators purchased during 2004-05, notwithstanding the retrospective amendment clause (n).

(ii) The petitioner is not entitled to ITC on tax paid on breakages of glass bottles sold as scrap.

(iii) The FIFO principle does not apply to breakages for ITC claims.

(iv) ITC on stores and spares excluded by the negative list is disallowed.

(v) The retrospective amendment clause (n) is set aside to the extent it denies ITC on coolers and refrigerators purchased during the relevant period.