TMI Blog2023 (3) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... State legislature has under Section 19 (2) of the TNVAT Act identified circumstances under which the benefit of Input Tax Credit is granted. Importantly, Section 19(2) (ii) of the TNVAT Act provides that Input Tax Credit shall be allowed for purchase of goods made within the State from a registered dealer for use as input in manufacturing or processing of goods in the State - thus, any goods which qualifies as an input under Section 2(23) of the TNVAT Act and used in manufacture or processing of goods shall be entitled to Input Tax Credit. The object behind granting the benefit of Input Tax Credit in terms of Section 19 (2) (ii) of the TNVAT Act, is with a view to promote manufacturing activity within the State. The expressions damaged and destroyed in Section 19(9)(iii) of the TNVAT Act used to deny Input Tax Credit, must be understood to have been employed by the legislature in contradistinction to the expressions use in manufacturing or processing of goods employed in Section 19 (2) (ii) of TNVAT Act while allowing a dealer to claim Input Tax Credit. While the expression use in Section 19(2)(ii) of the TNVAT Act qualifies manufacturing or processing of goods , the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes into the making of the end product in the sense that without its absence the presence of the end product, as such, is rendered impossible. This quality should coalesce with the requirement that its utilisation is in the manufacturing process as distinct from the manufacturing apparatus. Applying the test of indispensability if the inputs are indispensable for the emergence of desired end product it is not open to disallow the claim of input tax credit on the ground of manufacturing/invisible loss. Test of Technical/Practical/Commercial inexpediency - HELD THAT:- Reliance made in the case of J.K.Cotton Spinning Weaving Mills Co.Ltd., Vs. The Sales Tax Officer, Kanpur and Another [ 1964 (10) TMI 2 - SUPREME COURT ] wherein the scope of the expression in the manufacture of goods employed in Section 8(3)(b) of the Central Sales Tax Act, while extending the benefit of concessional rate of tax was examined by Supreme Court. It was held that the expression in the manufacture of goods would encompass, the entire process carried on by the dealer for converting raw materials into finished goods. The Hon'ble Supreme Court applied the test of commercial inexpediency to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d - Petition disposed off. - W.A.Nos.1094, 1095, 1423, 1435, 1448, 1477, 1505, 1506, 1517, 1527 of 2015, 244 of 2016, 721, 722, 723, 724, 725 of 2018 and W.P.Nos.734,735,736 of 2016, 737, 738, 9562 of 2018, 11632 of 2019, 966, 971, 968, 970, 2478 of 2020 and C.M.P. Nos.6949 , 6950 , 6951 , 6952, 6953 , 6954 of 2018 and W.M.P.Nos.550, 551, 552, 553, 554 of 2016, 11867 of 2019, 1184, 1185, 1187, 1188, 2873 of 2020 W.A.No.1094 of 2015 THE HONOURABLE MR. JUSTICE S.VAIDYANATHAN AND THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ For the Appellant : Mr.N.Sriprakash For the Respondents : Mr.Haja Nazirudeen, Additional Advocate General assisted by Mr.Venkateswaran, Special Government Pleader (Taxes) Mr.V.Prashath Kiran, Government Advocate (Taxes) Mr.Hari Babu Government Advocate JUDGMENT MOHAMMED SHAFFIQ, J. The common question that arises for consideration in this batch of Writ Appeals/Petitions revolves around the construction/interplay of Section 19(2)(ii) vis-a-vis Section 19 (9) of the Tamil Nadu Value Added Tax Act, 2006 (hereinafter referred to as the TNVAT Act ). Though the issue/question that arises for consideration is common in this batch of W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Input Tax Credit at fixed rates as representing manufacturing/invisible loss. Writ Petitions were filed challenging the Circular dated 20.10.2011 as well. g. As stated above, the goods involved in this batch are not the same. However, in all the cases proceedings were initiated on the premise there was manufacturing/invisible loss attracting Section 19 (9) of the TNVAT Act, warranting reversal of credit. 3. Order of the learned Single Judge : In this batch of writ petitions before the learned Single Judge there were challenges to the proceedings proposing / directing reversal of Input Tax Credit on account of manufacturing / invisible loss. Apart therefrom there was also a challenge to the Circular dated 20.10.2011 by which instructions were issued stating that wastage at all levels must be considered taking into account the nature of commodity and that the credit was to be reversed in respect of manufacturing/invisible loss in terms of Section 19 (9) of the TNVAT Act. The following issues were framed: (1) Whether the impugned Circular No.22/2011 dated 20.10.2011 is bad in law for want of jurisdiction to issue the same under the provisions of the TNVAT Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scertain the quantum of loss of the goods which were purchased on which tax was paid vis-a-vis the goods manufactured from and out of the goods purchased and to examine as to whether they fall within any of the restrictions contained in Section 19 of the VAT Act. The Assessing Officer has to conduct an exercise by which it is to be ascertained as to whether the representation made by the dealer is justified and is not hit by any of the restrictions and conditions contained in Section 19 and in particular Section 19(9) of the VAT Act. 4) It is held that the Assessing Authorities are not justified in adopting uniform percentage as invisible loss and calling upon the dealer to reverse the input tax credit availed to that extent. Consequently, all notices issued to the petitioner for reopening and all consequential order passed reversing the input tax credit to the extent of either 4% or 5% or on adhoc percentage stands set aside. However, liberty is granted to the concerned Assessing Officer to issue appropriate show cause notices to the petitioners clearly setting out under what circumstances they propose to revise or call upon the petitioner to reverse refund sanctioned and af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 3. WP Nos 734 to 738 of 2016 M/S.Goyall Ispat Ltd. TIN/33100040437 for 5 AYs Manufacturer and dealer in iron and steel products 4. WP 9562/2018 M/S.Ellak Chem Industries TIN No. 33563341288 of 2013-2014 Chemical Industry purchased raw materials Brytes, pet coke, palm shell power from outside the state dealers. 5. WA 1423, 1435,1448, 1477, 1505, 1506, 1517 of 2015 Sanmar Foundries TIN / 33960920142 and Circular No.22/2011 VAT Cell/ ROC.No.37188/2011 Petitioner purchase Iron and Steel scrap for manufacturing of Steel Castings 6. W.A.No.721, 722, 723, 724 , 725 of 2018 OPG Metals Pvt. Ltd. Circular No.22/2011 VAT Cell/ ROC.No.37188/2011 Manufacturer of billets / ingots 7. W.P.No.2478 of 2020 TIN No.33792205728 Timber 8. W.A.No.1527 of 2015 Kanish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proposal list. 2. W.A.No.244 of 2016 The M.S.Scraps, M.S.ingots and other materials used are lost to some extent while in the process of manufacturing of end products due to heating and other process. This fact cannot be denied by the dealers. The quantity of loss at 10% seems to be high and therefore the manufacturing loss at 10% originally adopted is modified to 5 %. 3. W.P.No.734 to 738 of 2016 Their contention was carefully examined. Their entire argument is on the focus that the loss of input, occurring during the course of manufacture is not subject to the provisions of Section 19(9), but it would be applicable only in the case of destruction of input, during the course of manufacturing. Their contention is not correct. In the said section, it has been mentioned as during the course of manufacturing , which clearly means the happenings caused by the process of manufacturing. When they have admitted that there is loss of input, on their process of manufacturing, their contention that it would not be subject matter of Section 19(9) is not correct. Mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enquiry ought to be whether the inputs are used in the manufacture or processing of goods in the State and not whether they form part of or contained in the end product. f. The legality / correctness of the circular issued by the Commissioner insofar as it provides for reversal of Input Tax Credit on manufacturing/invisible loss irrespective of whether the circular is statutory or non-statutory circular ought to be examined. For irrespective of whether the circular is statutory or non-statutory the same having been issued by the Commissioner who is the highest officer in the hierarchy would influence the quasi-judicial function of assessment by subordinate authorities. g. That the provisions of a statute ought to be construed harmoniously and avoid conflict with each other. The interpretation/construction placed by the revenue would result in conflict between Section 19(2)(ii) and 19(9) of the TNVAT Act, and thus ought to be avoided. 7. The case of the Revenue: The learned Additional Advocate General representing the Revenue would submit as under: a. That the appellants having been in trade ought to be imputed with knowledge of the manufacturing loss. b. Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so should be estimated. Therefore, the Assessing Officer and the Refund issuing authority should be cautious in arriving at the quantum of wastage according to the prevailing trend and the resultant ITC due for reversal. Reversal of Input tax credit has to be carefully determined by the Assessing Authorities as mentioned above without any omission. The casual way of looking at things like this should be avoided. (emphasis supplied) 9. The learned Judge has rejected the challenge to the above Circular holding that the question of quashing the impugned circular is unnecessary in the light of the stand taken by the Respondents that the impugned circular is not statutory and at best could serve as guideline by adding a note of caution that the circular would not be blindly followed by the Assessing officer. 10. We would think that once the Commissioner has expressed his opinion on a question, though technically it may be open for an assessee to present/submit before the assessing officer a different perspective/contrary view, the same would be a futile exercise and an empty formality, for the officer would be influenced rather feel bound by the view expressed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of manufacture and are incapable of being used further and are sold as scrap/waste or physically destroyed by an assessee having no residual value. Such inputs alone can be construed as inputs destroyed at some intermediary stage of manufacture . There is no scope for reversal of input tax credit on inputs which get consumed during the course of manufacture as invisible loss . (emphasis supplied) b. The above view was reiterated by this Court in ARS Steels Alloys International Pvt Ltd v. The State Tax Officer, (W.P. Nos.2885 of 2020 etc., batch) 11. The situations as set out above in clause (h) indicate loss of inputs that are quantifiable, and involve external factors or compulsions. A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself. 12. In the case of Rupa Co. Ltd. V. Cestat, Chennai (2015 (324) ELT 295), a Division Bench of this Court decided a question of law in regard to the entitlement to Cenvat credit involving the measure of inputs used in the manufacturing process, in terms of the provisions of Section 9A and 2(g) of the CENVAT Credit Rules, 2002. 13. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax paid under this Act in the manner prescribed] by a registered dealer to another registered dealer on the purchase of goods including capital goods in the course of his business; 19. Input tax credit (1) There shall be input tax credit of the amount of tax paid Omitted[or Payable] under this Act, by the registered dealer to the seller on his purchases of taxable goods specified in the First Schedule : ... (2) Input tax credit shall be allowed for the purchase of goods made within the State from a registered dealer and which are for the purpose of (i) re-sale by him within the State; or (ii) use as input in manufacturing or processing of goods in the State; or (iii) use as containers, labels and other materials for packing of goods in the State; or (iv) use as capital goods in the manufacture of taxable goods. (v) sale in the course of inter-State trade or commerce falling under subsection (1) and (2) of section 8 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) (vi) Agency transactions by the principal within the State in the manner as may be prescribed (emphasis supplied) Input Tax Credit is in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the activity of manufacture. vi. While construing the expression use in manufacture courts have leaned towards a liberal construction and had applied the test of commercial inexpediency i.e., though manufacture may be theoretically possible but commercially inexpedient in the absence of a particular process, the said process and the goods involved in the said process would qualify as use in manufacturing or processing of goods . Now, with the scope, ambit and object of Section 19 (2) (ii) of TNVAT Act having been examined it leaves no room for doubt that if any inputs are used in manufacture the fact that the input so used may not form part of end product would have no bearing in determining the dealers entitlement to input tax credit in terms of Section 19 (2) (ii) of the TNVAT Act. 13. Scope and purport of Section 19(9) of the TNVAT Act: We shall now proceed to examine the scope and purport of Section 19(9) of the TNVAT Act, which is sought to be relied upon by the revenue to deny the claim of Input Tax Credit under Section 19(2)(ii) of the TNVAT Act with regard to alleged manufacturing/invisible loss. Section 19(9) of the TNVAT Act reads as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the dictionary meaning of the expressions use , damaged and destroyed , employed in Section 19 (2) (ii) and 19(9) (iii) of the TNVAT Act to appreciate its scope. Use as defined in Black Laws dictionary, 10th Edition by Bryan A. Garner Use: To employ for the accomplishment of a purpose; to avail oneself of To put into practice or employ habitually or as a usual way of doing something; To follow as a regular custom to avoid To do something customarily or habitually; To be wont or accustome Use as defined in Ramanatha Iyer's Advanced Law Lexicon, 5th Edition The Random House Dictionary defines the word use as 'to employ for some purpose' 'put into service' 'making use of'. In Oxford Dictionary, the word 'use' has been defined as 'using' 'employment' 'application to a purpose' 'availability' 'utility' 'purpose for which things can be used' Ravi Shankar Sharma vs. State of Rajasthan, AIR 1993 Raj 117, 125 The expression use in clause 7 suggests something done positively, for eg., utilisation or disposal. Mere non-use is not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformed towards / in the direction of achieving the intended purpose/desired result viz., manufacture / emergence of a different commodity / end product. The expressions ''use'' in manufacture on the one hand and damaged and destroyed are antithetical and irreconcilable with each other. If we keep the above aspect in mind it would be evident that manufacturing or invisible loss which is admittedly an inevitable/inherent part of manufacture would fall within the scope of expressions used in manufacturing or process of goods , thus entitled to input tax credit in terms of Section 19 (2) (ii) of TNVAT Act and cannot be stated to be either damaged or destroyed to attract Section 19(9) of the TNVAT Act. We are fortified in our conclusion that manufacturing /invisible loss is part of manufacturing process and would not attract Section 19(9) of the TNVAT Act by the following judgments: a. Manufacturing loss forms part of raw material: The Hon'ble Supreme Court in the case of Multimetals limited Vs. Assistant Collector, Central Exercise reported in, 1992 (57) E.L.T. 209 (S.C.) while examining the notification granting exemption from excise duty equiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s equivalent to the duty already paid under sub-item (1) and/or (2) of the said item of copper and copper alloys in any crude form or manufacture thereof . Duty-paid copper and copper alloys in crude form are used in the manufacture of pipes and tubes. Rebate is to be equivalent to the duty already paid on copper and copper alloys in its crude form, that is to say on the input. The idea seems to be that to the extent of the duty paid on the raw material used exemption has to be given and that has no reference to what ultimately formed part of the finished product. It is the duty paid on the input material that is relevant and not the duty referable to the ultimate component of the final product. So far as the manufacturer is concerned he has used copper and copper alloys of a particular quantity in the manufacture of pipes and tubes. The manufacturing loss forms part of the raw material used in the manufacture though not reflected in the final product. The relief, as we understand the notification, that has to be given to the manufacturer was in respect of the duty already paid on the raw material used in the manufacture of the final product. That is, the relief has to be given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methanol from arising for producing a certain quantity of polyester fibre. Thus, the quantity of ethylene glycol required to produce a certain quantum of polyester fibre is determined by the chemical reaction. It may be mentioned here that it is not as if the appel lants have used excess ethylene glycol wantedly (sic wantonly) 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 interacts with DMT also gives rise to methanol. This construction would frustrate the object of exemption if something which (sic) evidently arises out of the interaction. (emphasis supplied) ii. The Hon ble Supreme Court in the case of Union of India Vs. Indian Aluminium Company Ltd., had also applied the test of quantitative requirements of inputs for the purpose of manufacturing the desired quantity of output, to determine whether the inputs are used in the manufacture of other goods. It was held an exact mathemati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TEST OF INDISPENSABILITY:- The Hon'ble Supreme Court in the case of CCE V.Ballarpur Industries Ltd., reported in, (1989) 4 SCC 566 wherein while examining the question as to what would constitute raw material while rejecting the contention that to constitute raw material it is essential that the same must form part of the end product, held as under: 13. The question, in the ultimate analysis, is whether the input of sodium sulphate in the manufacture of paper would cease to be a raw material by reason alone of the fact that in the course of the chemical reactions this ingredient is consumed and burnt up. The expression raw material is not a defined term. The meaning to be given to it is the ordinary and well-accepted connotation in the common parlance of those who deal with the matter, 14. The ingredients used in the chemical technology of manufacture of any end product might comprise, amongst others, of those which may retain their dominant individual identity and character throughout the process and also in the end product; those which, as a result of interaction with other chemicals or ingredients, might themselves undergo chemical or qualitative chang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the manufacture of goods, while making it clear that the expression in the manufacture of goods should not be curtailed by some theoretical possibility over looking/disregarding commercial inexpediency while examining the scope of the expressions in the manufacture of goods . If manufacturing/invisible loss is tested applying the test of technical/practical/commercial expediency and found that it is incapable of manufacturing the end product without the input of the requisite/utilised quantity then there cannot be a denial of input tax credit alleging manufacture/invisible loss. The relevant portion of the judgment extracted below: The expression in the manufacture of goods should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular process is so integrally connected with the ultimate production of goods that but for that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would, in our judgment, fall within the expression in the manufacture of goods. For instance, in the case of a cotton textile manufacturing concern, raw cotton un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of manufacturing process cannot be denied the benefit of Input Tax Credit in terms of Section 19(2)(ii) of the TNVAT Act invoking Section 19(9) of the TNVAT ACT. 15. The contention of the revenue in treating manufacturing/invisible loss as attracting Section 19(9) of the TNVAT Act ought to be rejected also in view of the fact that it is contrary to the following rules of construction: I. Effort must be to give effect to all parts of the statue and avoid redundancy and conflict based on the rule on harmonious construction . Inconsistency and repugnancy to be avoided : While Section 19(2)(ii) of the TNVAT Act extends the benefit of input tax credit on goods used in manufacture, Section 19(9) of the TNVAT Act cannot be understood to curtail/whittle down the said benefit in respect of the portion of the input which is treated as manufacturing/invisible loss though the same is admittedly an inevitable/inherent part of the manufacturing process. If the contention of the revenue were to be accepted it would result in a head on collision between Section 19 (2) (ii) and Section 19(9) of the TNVAT Act. A construction which Courts have consistently held ought to be avoided. It is tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to defeat those of another. Sanjeevaya D. V Election Tribunal, Andra Prades, AIR 1967 SC 1211 III. Courts will avoid a construction which produces unjust/ unreasonable results: The construction placed by the revenue would result in two classes of Input Tax claimants viz., a. A dealer using inputs in manufacture or processing of goods which forms part of the end product and entitled to Input Tax Credit on the entire input. b. A dealer using inputs in manufacture or processing of goods and the nature of manufacturing activity is such that a portion of the input does not form part of the end product and treated as manufacturing / invisible loss resulting in reversal / denial of credit. Inputs constitute a single class, however the denial of Input Tax Credit on manufacturing/invisible loss would result in disparity in treatment on the basis of existence or otherwise of the input in the end product which is neither reasonable nor rational. In other words, the construction by the revenue if accepted would result in creation of two classes without any rational basis thereby producing unjust and unreasonable results through a process of interpretation. Such interpretat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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