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TMI Blog2023 (3) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... e (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 Writ Appeals/petitions, the facts and nature of products are different. However, that in our view it would not have any bearing on the issue which needs to be resolved. 2. History of the litigation: This is the 2nd round of litigation. The learned Single Judge had recorded / traced the history of the litigation leading up to the writ petitions. The learned Judge has inter-alia recorded the following while dealing with the background to the present litigation: a. A representation was made by the Textile Exporters Association to the Joint Commissioner Taxes Enforcement as well as Joint Commissioner of Commercial Taxes, Coimbatore, in view of the fact that there was a slew of proceedings initiated whereby input tax credit on the portion treated as manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stage 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 the effect of such Circular on the assessments made by the Assessing Officer? (2) Whether Section 18 of the TNVAT Act is a Scheme by itself or whether the benefit to a dealer under Section 18 is subject to the conditions prescribed under Section 19 more particularly Section 19(9) of the TNVAT Act ? (3) Whether in the given facts and circumstances would it be sufficient for a dealer who claims refund under Section 18(2) of the TNVAT Act of the input tax paid on the purchase of the goods, to show that those goods are used in the manufacture and nothing more ? Whether the Assessing Authority should embark upon a fact finding exercise to ascertain the quantum of loss, if any? (4) If it is held that the relief under Section 18(2) of TNVAT Act is subject to Section 19 of TNVAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quential 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 after inviting objections proceed in accordance with law. (5)The undertaking given by the dealer in Form W is with regard to information furnished for the purpose of verification by the Assessing Officer under Rule 11(2) of the VAT Rules for being entitled to refund under section 18(2). Therefore, it is not as if the Act does not provide a remedy in the event of a wrong or erroneous refund sanctioned when Section 18 cannot be treated as an independent provision but subject to restrictions and conditions under Section 19 of the VAT Act." It is relevant to note that the learned Judge had recorded that the relief sought for in all the Writ Petitions was more or less identical and the grounds raised are common. That the revenue has advanced common arguments resisting the contention of the petitioner / assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineral industries TIN No.33613244018 Manufacturer of Iron and Steel 4. Facts in W.A.Nos.1094 and 1095 of 2015: The appellant was engaged in the business of manufacture and sales of Hosiery Garments, inside the State of Tamil Nadu. For the purpose of manufacturing such garments, the appellant effected purchase of yarns among other inputs from registered dealers, inside the State of Tamil Nadu, after paying appropriate tax. The yarn purchased was converted into fabric and the fabric was further processed and garments were manufactured by the appellant and exported. The above facts are not in dispute. It is also not in dispute that the process of conversion of yarn into fabric and fabric into garments would necessarily involve loss of loose fibers. This was treated as invisible/ manufacturing loss and the respondents proceeded to invoke Section 19(9) of the TNVAT Act, and directed reversal of credit. Apart from the above which is common in all the matters in this batch, Section 18 of the TNVAT Act an additional aspect/ feature is also involved in this Writ Appeal. To give an idea of the manner in which Section 19 (9) of the TNVAT Act has been applied / invoked by the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19(9) of the TNVAT Act, warranting reversal of credit. 6. Case of the Assessees/Appellants: On behalf of the appellants, it was submitted by Mr. N. Sri Prakash and Mrs. Hemalatha, N.Murali as under: a. That yarn, iron and steel, timber, chemicals etc., purchased and used by the Appellants/Petitioners in the manufacture or processing of goods are admittedly inputs in terms of Section 2 (23) of the TNVAT Act. It is not in dispute that the activity carried on by the appellants would constitute manufacture. The appellants are thereby entitled to credit in terms of Section 19(2)(ii) of the TNVAT Act. b. Admittedly, loss of input is an inevitable/necessary part of the manufacturing process undertaken by the appellants. In other words, without manufacturing/invisible loss the desired end product cannot be manufactured. The revenue has erred in treating the manufacturing / invisible loss, which is admittedly inevitable/inherent/necessary part of manufacture, as having been destroyed and thereby, invoking Section 19 (9) of the TNVAT Act and proposing/directing reversal of credit on the inputs constituting manufacturing/invisible loss. c. Revenue while admitting that manufacturin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Credit is in the nature of benefit / concession, the same would be subject to any restriction / limitation imposed by the statute. In this regard reliance was placed on the judgements of the Hon'ble Supreme Court in the cases of Godrej and Boyce (1992) 3 SCC 624 and Jayam & Co., (2016) 15 SCC 125. 8. DISCUSSION: Before proceeding further, to resolve the legality/validity of the impugned circular it may be necessary to extract the relevant portions of the Circular dated 20.10.2011, which reads as under: "13) ITC reversal on wastage u/s 19(9) of The TNVAT ACT, 2006:- In a manufacturing concern, wastage of raw materials, finished goods or intermediary products is inevitable. Further, the tax paid on them would have already claimed and availed as ITC at the stage of purchase itself. Therefore, reversal of ITC has to be made to that extent under Sec. 19(9) of the TNVAT Act, 2006. If the dealers maintain such accounts, input tax credit can be reversed accordingly on that basis. In cases where no such account is maintained for wastages, ITC to be reversed has to be estimated based on the sale of waste as per accounts. While making such estimation the sale value of wastage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, 2005 (140) STC 97 Mad We are unable to persuade ourselves to think that the correctness of the above Circular need not be examined in view of its non-statutory character but instead would think that the correctness needs to be examined lest the entire assessment functions would be reduced to a mere ritual and an empty formality. Having said that we do not intend to deal with the correctness of the Circular independently as the answer to the second question would resolve the issue relating to the correctness of the circular in the present batch of cases. Subsequent Decisions under Section 19(9) of the TNVAT Act relating to manufacturing / invisible loss:- 11. It may be relevant to note that subsequent to the impugned order of the learned Single Judge, which is the subject matter of challenge before this Court, there have been at least a couple of occasions when this Court has made a departure from the view expressed by the learned Single Judge in the impugned order insofar as reversal of credit on the ground of manufacturing/invisible loss. The relevant portions of the judgments are extracted hereunder: a. Ran India Steels (P) Ltd. v. Commercial Tax Officer, 2019 SCC OnLin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed product would presuppose that all manufacturing processes would never have an inherent loss in the process of manufacture. The expression 'inputs of such finished product', 'contained in finished products' cannot be looked at theoretically with its semantics. It has to be understood in the context of what a manufacturing process is. If there is no dispute about the fact that every manufacturing process would automatically result in some kind of a loss such as evaporation, creation of by-products, etc., the total quantity of inputs that went into the making of the finished product represents the inputs of such products in entirety.' 15. In the light of the discussion as above, I am of the view that the reversal of ITC involving Section 17(5)(h) by the revenue, in cases of loss by consumption of input which is inherent to manufacturing loss is misconceived, as such loss is not contemplated or covered by the situations adumbrated under Section 17(5)(h)." (emphasis supplied) We find that different views have been expressed on the above issue by this Court. Therefore there is a need to clarify with certitude the position on the issue raised. 12. Scope and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construing the scope of 19 (2) (ii) of the TNVAT Act it may be relevant rather necessary to take note of the following aspects: i. In view of the definition of ''manufacture'' under Section 2(27) of the TNVAT Act, the same would have to be applied while considering the expression "manufacturing of goods in the State" employed in Section Section 19 (2) (ii) of TNVAT Act. ii. Raw material has not been defined under the TNVAT Act. The ordinary common sense understanding of it is that, it is something from which another new or distinct commodity can be produced. Importantly, to constitute raw material it is not necessary that it must be contained in the end product. An ingredient which retains its identity in the end product is as much raw material as that which is consumed in manufacture. iii. The enquiry as to whether the goods are contained in the end product is wholly irrelevant to determine whether the input is a raw material. A fortiorari when entitlement to credit under Section 19(2)(ii) of the TNVAT Act, is founded on the "input being used in the manufacture or processing of goods in the State". iv. The enquiry to determine as to whether any goods are u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. Section 19(9)(i) of the TNVAT Act is not concerned with inputs used in manufacture but relates to inputs which are intended to be traded as would be evident from the expression "goods are not sold" thus it deals with a claim to input tax credit under Section 19(2)(i) of the TNVAT Act which covers inputs meant for the purpose of resale in the State. iii. Section 19(9)(ii) of the TNVAT Act deals with inputs intended to be used in manufacture but destroyed or lost even before use in manufacture of final products, this was meant to cover instances where the inputs are not available even being before the commencement of manufacturing process. In other words, the inputs are destroyed or lost even before it enters the manufacturing stream. iv. Section 19(9)(iii) of the TNVAT Act refers to inputs damaged in transit or destroyed at some intermediary stage of manufacture. 14. 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 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... caused to an object. Damage consists of the unpleasant effects that something has on a person, situation, or type of activity. "Destroy" has defined in the following manner: Black's Law Dictionary As used in policies of insurance, leases, and in maritime law, and under various statutes, this term is often applied to an act which renders the subject useless for its intended purpose, though it does not literally demolish or annihilate it. Merriam Webster: to ruin the structure, organic existence, or condition of to ruin as if by tearing to shreds Collins To destroy something means to cause so much damage to it that it is completely ruined or does not exist any more. Britannica to cause (something) to end or no longer exist : to cause the destruction of (something) to damage (something) so badly that it cannot be repaired From the above it would be clear that the expression "damaged" is used to convey loss or deterioration in value or an act which makes the product less efficient, similarly the expression "destroyed" is used to convey an act that renders the subject useless for its intended purpose. Manufacture is a process or series of process dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that the notification granted exemption "only on pipes and tubes, which means that the exemption has to be calculated on the basis of the weight of the raw material actually used for the purpose of manufacture of pipes and tubes". 4. We have considered the rival contentions of the parties. It is seen from the facts as appear from the pleadings and the orders that due to cutting the copper wire, melting in electric furnaces and remelting in the process of manufacture a portion of the copper and copper alloys in its crude form which was used as the raw material is permanently lost. We are not concerned as to the exact quantity of loss in this case but with a question of interpretation as to whether the duty referable to that portion which is lost also should get rebate while assessing for excise duty on the pipes and tubes of copper and copper alloys. The emphasis of the learned counsel for the Revenue was that the levy of excise duty was on pipes and tubes and the rebate related to that of copper and copper alloys content thereof and, therefore, only that quantity that was found forming the pipe or tube could get relief and not the entire quantity which was put in the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in the end product viz., polyester fiber but in other waste/ by-product ought to be denied the benefit of credit, the Hon'ble Supreme Court proceeded to hold that as long as it is not possible to use a lesser quantum of ethylene glycol to produce desired quantity of polyster fabric the same is entitled to the benefit of credit as having been used in the manufacture. The relevant portion is extracted below: "It is true that when in a fiscal provision, if benefit of exemption to be considered, this should be strictly considered. But the strictness of the construction of exemption notification does not mean that the full effect to the exemption notification should not be given by any circuitous process of interpretation... 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 (ie. 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 plycol was used in the manufacture of polyester fibre. It appears that methanol arises as a part and parcel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antity of raw material may form part of wastage or ashes. This does not mean that the entire raw material was not used in the manufacture of finished excisable products. An exact mathematical equation between the quantity of raw material purchased and the raw material found in the finished product is not possible, and should not be looked for." (emphasis supplied) In the case of Rupa & Co. Ltd. V. CESTAT, Chennai 2015 (324) ELT 295 (Mad.) the Hon'ble Supreme Court has observed as follows: "The expression 'inputs of such finished product', 'contained in finished products' cannot be looked at theoretically with its semantics. It has to be understood in the context of what a manufacturing process is. If there is no dispute about the fact that every manufacturing process would automatically result in some kind of a loss such as evaporation, creation of byproducts, etc., the total quantity of inputs that went into the making of the finished product represents the inputs of such products in entirety. 13. If the purport of Rule 9A is not understood in this manner, every manufacturer will have to pay excise duty on the quantity and value of inputs, which go to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he delivery end of the process. The ingredient goes 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" (emphasis supplied) 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. d. Test of Technical/Practical/Commercial inexpediency: It may be relevant to refer to the judgement of the Hon'ble Supreme Court in the case of "J.K.Cotton Spinning & Weaving Mills Co.Ltd., Vs. The Sales Tax Officer, Kanpur and Another" reported in 1965 AIR SC 1310 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. 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and distribution of power need not, to qualify for special treatment under section 8(1), be ingredients or commodities used in the processes, nor must they be directly and actually needed for "turning out or the creation of goods." In our judgment if a process or activity is so integrally related to the ultimate manufacture of goods so that without that process or activity manufacture may, even if theoretically possible, be commercially inexpedient, goods intended for use in the process or activity as specified in rule 13 will qualify for special treatment." (emphasis supplied) The above judgments leave no room for any doubt that quantitative tally between the raw material used and the end product manufactured is foreign to the concept of manufacture. The above requirement is contrary to technical/practical/commercial expediency involved in the activity of manufacture. It is clear that once input is used in the manufacture the mere fact that it is not contained in the end product may have no bearing on the dealers entitlement to input tax credit in terms of Section 19 (2) (ii) of the TNVAT Act. Thus applying any of the above tests viz., test of indispensability, quantita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stage of manufacture, its field of operation or the acts mentioned/provided viz., "damaged" or "destroyed" are acts foreign to regular/normal manufacturing activity. Thus, Sections 19(2)(ii) and 19(9) of the TNVAT Act covers circumstances that are parallel/ diametrically opposite and do not over lap. If Section 19 (2) (ii) of TNVAT Act and 19 (9) of the TNVAT Act are understood in the above manner both provisions could be effective and operate without conflict. II. Parliament is presumed not to give with one hand and not to take away with the other: Taking into account the admitted position that the alleged manufacturing / invisible loss is an inevitable part of manufacturing process the contention of the revenue that manufacturing/invisible loss would nevertheless be covered by Section 19(9) of the TNVAT Act, would result in negation/taking away the benefit of Input Tax Credit extended/granted under Section 19(2) (ii) on inputs used in manufacturing or processing of goods by invoking Section 19(9) of the TNVAT Act. This is again a construction which should be avoided for it should not be lightly assumed that "Parliament" had given with one hand what it took away with the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act would not get attracted to manufacturing/invisible loss which is inevitable and inherent part of manufacture and thus covered by Section 19(2)(ii) of the TNVAT Act. However, this would not preclude the assessing authority from enquiring if the claim of use of input in manufacture is genuine or otherwise. 16. For the above reasons, the impugned Circular dated 20.10.2011 insofar as it is contrary to the law declared by this Court with regard to manufacturing/invisible loss is set-aside. Wherever the challenge is to the notice it is open to the appellants/petitioners to submit their objections which shall be decided in accordance with the law declared by this Court after affording the appellants/ petitioners reasonable opportunity of being heard. Wherever the challenge is to orders of assessment the same insofar as manufacturing/invisible loss is set-aside and it is open to the revenue to redo the assessment in accordance with the law laid down by this Court after affording the appellants/petitioners reasonable opportunity of being heard. 17. With the above directions, the batch of writ appeals/ petitions stand disposed of. No costs. Consequently, connected miscellaneous petit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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