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2016 (2) TMI 767 - GUJARAT HIGH COURT

2016 (2) TMI 767 - GUJARAT HIGH COURT - TMI - Denial of Input Tax and Credit (ITC) and levy of penalty - Gujarat Value Added Tax (GVAT) - company was using the entire purchase of castor oil seeds for production of castor oil, it claims input tax credit - in the reassessment proceedings it was held by the AO that the company would not be entitled for input tax credit to the proportion of the waste used by the company or the manufacturer and would be liable to pay tax under Section 11(3)(b)(iii) s .....

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waste, which is of no use to the company and therefore the same is used in the furnace as a fuel in the manufacture of castor oil as well as other products. Only the waste is used as fuel and that too again in the manufacturing process of oil. Therefore, in our opinion, it would not fall under proviso to Section 11(a) of the Act.

As far as applicability of Section 11(3)(b)(iii) is concerned, the same would not be applicable since the entire purchase of castor seeds were used in the ma .....

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t of the Company to manufacture Deoiled cake so that the same can be used as fuel. - input tax credit allowed - Decided against the revenue. - TAX APPEAL NO. 1129 of 2013, TAX APPEAL NO. 1130 of 2013, TAX APPEAL NO. 1131 of 2013 - Dated:- 11-8-2015 - MR. A.J.DESAI AND MR. A.G.URAIZEE, JJ. For The Appellant : Ms Vacha Desai, Assistant Government Pleader For The Opponent : Mr Mihir Joshi, Senior Advocate, assisted by Mr Prakash Shah and Mr SN Thakkar COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTI .....

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d circumstance of the case the Tribunal has rightly quashed the penalty u/s. 12(7)(b) for disallowance of the input tax credit and the penalty u/s.34(12)? 2 The brief facts as arising from the record are that the respondent is a company registered under the provisions of the Companies Act, 1956 and it is engaged in the business of crushing of castor seeds and thereafter manufacturing castor oil and other waste products. The undisputed fact is with regard to process of getting castor oil from the .....

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11 of the Gujarat Value Added Tax Act, 2003 ('VAT Act', for short). 4 The Assessing Authority initially processed and adjusted the tax paid by the respondent company against the purchases of castor oil seeds. However, the reassessment was done on the ground that waste - de-oil cake, was used by the respondent-company as a fuel for the process of manufacturing the castor oil itself. After considering the submissions made by the company, the re-assessment orders were passed against the com .....

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ground that the order of pre-deposit for hearing the appeals was not complied with by the company. The said decision was challenged by the company by filing second appeal before the Gujarat Value Added Tax Tribunal, Ahmedabad. The respective parties appeared before the Tribunal and agreed for the matters to be decided on merits. Hence, the appeals were decided on merits in favour of the respondent company and the order passed by the Assessing Officer came to be quashed and set aside. Hence, the .....

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tax credit, has been partially used for the manufacture of the oil, the authority has rightly granted the tax credit proportionate to the extent the original purchase was used by the company. By taking us through the provisions of Section 11(3)(vi) read with proviso thereto, she would submit that deoiled cake, which is remaining part of the oilseeds, which were purchased by the company has not been used as raw-material for the manufacture of the goods as provided in clause (vi) of subsection (3) .....

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provisions of Section 11(3)(iii) of the VAT since part of the purchase was used as a fuel for the manufacture of the goods. She would submit that deoiled cake, though remains of castor seeds, it does remain part of the seeds and the same is made taxable, the Tribunal has erred in holding that deoiled cake cannot be treated as fuel as defined under the provisions of Section 11(3)(b)(iii) of the Act. 7 She would further submit that under the statute, if any benefit is expressly provided, the asses .....

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d, therefore, submit that the judgment and order of the Tribunal is required to be quashed and set aside. 8 On the other hand, Mr Mihir Joshi, learned Senior Advocate, assisted by Mr Prakash Shah and Mr SN Thakkar for the Respondents have vehemently opposed these appeals. 9 Mr Joshi would submit that it is not that the petitioner has not followed the provisions of the Gujarat Value Added Tax Act. It is not in dispute that the entire purchase of the castor oil seeds, for which register and accoun .....

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e Act. He would submit that the entire castor oil seeds which have been purchased by the company have been used for manufacturing oil and other oil based items and during the said process the final waste, which is known as deoiled cake, instead of throwing it in public dumping station, has been used as a fuel, again for manufacturing castor oil or other oil based items and therefore, it cannot be said that any part of the purchase was used for any other purpose provided under the said provision. .....

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fuel and therefore the Tribunal has rightly held in favour of the respondent-company which requires no interference by the High Court. He would further submit that the provisions of Section 11(3)(iii) are also not applicable in the present case since neither the purchase of castor seeds nor any part thereof was ever purchased to use the same as a fuel for manufacture of the goods. It is not the case of the State that the castor seeds themselves have ever been used by the respondent-company as a .....

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of M.P. and Others, [2014] 70 VST 40 (MP). 11 He would submit that in Swadeshi Polytex Limited (supra) it has been held by the Apex Court that any unintended byproduct during the course of manufacturing of a particular goods could not be said to be an intended one and would be subjected to any payment of excise, etc. By relying upon the observations made in paragraph 8 of the judgment in the case of Sterling Gelatin (supra) he would submit that when the entire quantity of input was used in the .....

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rchased. He, therefore, would submit that all these aspects have been dealt with by the Tribunal in detail which requires no interference by this Court and therefore the appeals may be dismissed. 13 We have heard learned advocates for the respective parties. It is an admitted fact that the respondent company is in business of manufacturing pure castor oil and other castor oil based products. The method of extracting oil from castor seeds purchased by the company is reproduced hereinbelow to unde .....

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Tax credit. (1) (a) A registered dealer who has purchased the taxable goods (hereinafter referred to as the purchasing dealer ) shall be entitled to claim tax credit equal to the amount of,- [(i) tax collected from the purchasing dealer by a registered dealer from whom he has purchased such goods or the tax payable by the purchasing dealer to a registered dealer who has sold such goods to him during the tax period, or;] (ii) tax paid by him during the tax period under [sub-section (1), (2) (5) .....

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) Subject to the provisions of this section, tax credit to be claimed under subsection (1) shall be allowed to a purchasing dealer on his purchase of taxable goods which are intended for the purpose of - (i) sale or re-sale by him in the State; (ii) sale in the course of inter-State trade and commerce, other than the sales in the course of export out of the territory in India; (iii) branch transfer or consignment of taxable goods to other States (subject to the provision of subclause (b) below); .....

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e purchased after the appointed day; Provided that if purchases are used partially for the purposes specified in this sub-section, the tax credit shall be allowed proportionate to the extent they are used for the purposes specified in this sub-section. (b) Notwithstanding anything contained in this section, the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four per cent on the [taxable turnover of purchases within the state]- (i) of t .....

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outside the State is less than four per cent., then the amount of tax credit in respect of such dealer shall be reduced by the amount of tax calculated at the rate of tax set out in the Schedule on such goods on the [taxable turnover of purchases within the state]- (4) The tax credit shall not be claimed by the purchasing dealer until the tax period in which he receives from a registered dealer from whom he has purchased taxable goods, a tax invoice (in original) containing particulars as may be .....

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f liability to pay tax as provided in sub-section (3) of section 3; [(dd) made prior to the date of registration;] (e) made in the course of inter-State trade and commerce; (f) [of the goods (not being taxable goods dispatched outside the State in the course of branch transfer or consignment)] which are disposed of otherwise than in sale, resale or manufacture; (g) of the goods specified in the Schedule I or the goods exempt from whole of tax by a notification under sub-section (2) of section 5; .....

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ts equipment, accessories or spare parts (expect when purchasing dealer is engaged in the business of sales of such goods) (k) [of the property] or goods not connected with the business of the dealer; (l) of the goods which are used as fuel in generation of electrical energy meant for captive use or otherwise; [(ll) of petrol, high speed diesel, crude oil and lignite unless such purchase is intended for resale;] (m) of the goods which are used as fuel in motor vehicles; (mm)of capital goods used .....

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nn) of the goods purchased during the period when the permission granted under clause (a) of sub-section (1) of section 14 has remained valid under clause (b) of that sub-section;] (o) where original invoice does not contain the details of tax charged separately by the selling dealer from whom purchasing dealer has purchased the goods; (p) where original tax invoice [or duplicate thereof duly authenticated in accordance with the rules made in this behalf] is not available with purchasing dealer .....

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conditions and in such manner as may be prescribed, a registered dealer shall be allowed to claim tax credit for the taxable goods held in stock on the date of registration which are purchased after 1st April, 2008 and during the period of one year ending on the date of registration. [(III)]Notwithstanding anything contained in clause (nn) in this sub-section and subject to such conditions and in such manner as may be prescribed, a registered dealer, whose permission to pay lump sum tax under s .....

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goods or the class of dealers that shall not be entitled to whole or partial tax credit. (7) Where a registered dealer without entering into a transaction of sale, issues to another registered dealer tax invoice, retail invoice, bill or cash memorandum with the intention to defraud the Government revenue or with the intention that the Government may be defrauded of its revenue, the Commissioner may, after making such inquiry as he thinks fit and giving a reasonable opportunity of being heard, d .....

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under this Act or any earlier law, into Government treasury: Provided that, where purchase tax is shown as payable in the return by the claimant dealer on the purchase of the said goods effected by him, it shall be deemed to have been paid into Government treasury for the purpose of this sub-section: Provided further that, where the tax levied or leviable under this Act or any earlier law is remitted or to be remitted or, deferred or is deferrable under any tax incentive scheme granted by the G .....

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x credit being claimed for the tax period during which such use has taken place; and such reduction shall be done in the manner as may be prescribed. [(b) Where the capital goods referred to in subclause (vii) of clause (a) of sub-section (3) are not used continuously for a full period of five years in the State, the amount of tax credit shall be reduced proportionately having regard to the period falling short of the period of five years. (9) The registered dealer may claim the amount of net ta .....

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f the tax period in which the credit note or debit note has been issued or goods are returned, subject to such conditions as may be prescribed. (11) A registered dealer shall apply fair and reasonable method to determine, for the purpose of this section, the extent to which the goods are sold, used, consumed or supplied, or intended to be sold, used, consumed or supplied. The Commissioner may, after giving the dealer am opportunity of being heard and for the reasons to be recorded in writing, re .....

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ame goods. (emphasis supplied) 15 The respondent company is purchasing castor seeds at the price including the tax charged by the registered dealer and it is maintaining the register and books of accounts under section 11(2) of the Act. It is not in dispute that the entire purchase of castor seeds is intended to be used for the purpose of extracting castor oil. Since the seeds are rawmaterial for the oil, which is taxable goods, the same would fall under Section 11 (3)(a)(vi) of the Act. 16 As f .....

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cted. However, some portion of the oil remains in the residue, which is known as castor oil cake. The said castor oil cake is again crushed and the remaining portion of the castor oil is extracted therefrom in the second process leaving the waste, which is of no use to the company and therefore the same is used in the furnace as a fuel in the manufacture of castor oil as well as other products. The said residue is known as deoiled cake, which is used in boilers of the company as a fuel. The comp .....

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lear that the clarification in the form of trade notice issued by the Pune Collectorate in respect of R. 56A was as much applicable to that rule as to notification No. 201/ 79. In the premises, it is clear that the Tribunal should have held that even though part of the ethylene glycol was contained in the by product methanol, yet the credit of duty could not be reduced to the extent of the ethylene glycol contained in the methanol as ineligible. It is true that when in a fiscal provision, if ben .....

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emption notification No. 201/ 79 properly and fully. The said notification exempted all excisable goods on which the duty of excise was leviable and in the manufacture of which any goods falling under Tariff Item 68 (i.e. inputs) had been used from so much of the duty of excise leviable thereon as was equivalent to the duty of excise already paid on the inputs. It is clear, however, that ethylene glycol was used in the manufacture of polyester fibre. It appears that methanol arises as a part and .....

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ethylene glycol wantedly to produce the methanol. It is clear that the appellants are not engaged in the production of methanol but in the production of polyester fibre. That position is undisputed. Therefore, it appears that the Tribunal erred when it held that the appellants were not entitled to a part of the credit of duty since ethylene glycol when it enteracts with DMT also gives rise to methanol. This construction would frustrate the object of exemption if something evidently arises out o .....

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not be available in case non-excisable goods arise during the course of manufacture. In fact, the Tribunal seems to have erred in not bearing in mind that exemption notification was pressed in service in respect of polyester fibre which is excisable goods and not in respect of methanol which arises as a by-product as a part and parcel of chemical reaction. It appears further on a comparison of the R. 56A and the notification No. 201/79 that these deal with the identical situation. 18 In case of .....

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ution commonly known as Mother Liquor is pumped out of the acidulation vats into precipitation tanks where lime solution is added which reacts with Mono Calcium Phosphate converting it into Di-Calcium Phosphate. Insofar as manufacture of Gelatin is concerned, after removal of Mother Liquor the demineralised bones are hydraulically transported to the washing section and thereafter processed further to manufacture Gelatin. The above manufacturing process shows that while soaking the bone chips in .....

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entire quantity of Hydrochloric acid in respect of which cenvat credit is availed of is used by the respondent for the manufacture of Gelatin. Considering the process of manufacture adopted by the respondent, it is not possible to manufacture Gelatin without corresponding production of Mother Liquor. This Mother Liquor which otherwise is in the nature of a waste product, is used by the respondent assessee for the manufacture of Di- Calcium Phosphate. 7. At this juncture, reference may be made to .....

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hargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take Cenvat Credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. Sub-rule (3) of rule 6 makes provision for the conditions which a manufacturer of goods optin .....

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umption and inventory of inputs. Examining the applicability of the aforesaid rules to the facts of the present case, as noted hereinabove, it is not as if more quantity of Hydrochloric Acid is used than that required for manufacturing Gelatin or that by using a smaller amount of Hydrochloric Acid, the production of Mother Liquor could be averted. In the manufacturing process adopted by the assessee, it is not possible to manufacture Gelatin without Mother Liquor coming into existence. Thus, whe .....

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otal price of the exempted goods would not arise. In the peculiar facts of the present case, sub-rule (1) of rule 6, itself would not come into play inasmuch the manufacturer does not deliberately use any quantity of the inputs, viz. Hydrochloric Acid for manufacturing Mother Liquor, the entire Hydrochloric Acid is used in the manufacture of Gelatin. Thus, when no input is specifically used for the purpose of manufacturing Di-Calcium Phosphate, there would be no question of maintaining separate .....

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