Credit can be claimed when exempted by-products are obtained while producing taxable goods under the UP VAT Act

The Hon'ble Supreme Court in the case of M/s. Modi Naturals Ltd. v. The Commissioner of Commercial Tax UP [Civil Appels No. 5822-5823 of 2023 dated November 6, 2023] allowed the appeal filed and held that, the Assessee can claim the full amount of Input Tax Credit ("ITC") on Rice Bran procured for manufacturing of Rice Bran Oil and exempted products under the provisions of the Uttar Pradesh Value Added Tax Act, 2008 ("the UP VAT Act"),thereby holding that Explanation (iii) to Section 13 of the UP VAT Act, forbids the Assessing Authority from raising any dispute with respect to allowing ITC in cases where the exempted goods are produced as by-product or waste product during the process of manufacturing.

Facts

M/s Modi Naturals Ltd. ("the Appellant") is engaged in the business of manufacture and sale of Rice Bran Oil ("RBO") and Physical Refined RBO, and is a registered dealer under the UP VAT Act and the Rice Bran Oil manufactured by the Appellant falls within the purview of ‘taxable goods' under the UP VAT Act. The Appellant for manufacturing Rice Bran Oil, the Appellant procures Rice Bran and follows the Solvent Extraction Process during which the by-product in the form of De-Oiled Rice Bran is also produced, which falls within the category of exempted goods under S. No. 4 of Schedule – I of the UP VAT Act.

The Appellant by way of processing Rice Bran produced 13.77 percent taxable goods i.e., Rice Bran Oil, and 83.63 percent by-product i.e., De Oiled Rice Bran was produced. The Physical Refined Rice Bran Oil is produced by further refining the Rice Bran Oil. As per Section 13(1)(a) read with S. No. 2(ii) of Table appended thereto, and Section 13(3)(b) read with Explanation (iii) to Section 13 of the UP VAT Act, the Appellant claimed the full amount of tax paid as ITC. However, the claim of the Appellant was rejected vide separate Orders of Deputy Commissioner, Tax Fixation, Div.-1, Pilbhit, for the Assessment Years ("AY") 2013-2014 and 2015-2016 on the ground that as per Section 13(1)(f) of the UP VAT Act, the Appellant was competent to avail ITC only with respect to taxable sales, as the sale price of final goods were less than the manufacturing cost of the purchased goods, and only taxable goods would be considered as goods under the UP VAT Act.

Aggrieved by the Orders passed by Deputy Commissioner, Pilbhit, the Appellant filed an appeal before the Additional Commissioner (Appeals), 2nd Commercial Tax, Bareilly. The Additional Commissioner, for AY 2015-2016, allowed the appeal of the Assessee, and held that the Appellant was entitled to claim the ITC on the ground the word "goods" in Section 13(1)(f) of the UP VAT Act cannot be restricted to only taxable goods. However, the Additional Commissioner, for AY 2013-2014 proceeded to remand the matter to the Tax Fixation Officer for passing the re-tax fixation order.

Aggrieved by the order passed by the Additional Commissioner, the Revenue Department ("the Respondent") filed an appeal for AY 2015-2016 and the Appellant filed an appeal for AY 2013-2014 before the Commercial Tax Tribunal wherein vide Orders dated May 04, 2016, and July 5, 2017, it was held that, the Appellant is entitled to benefit of ITC.

Aggrieved by the order passed by the Commercial Tax Tribunal, the Respondent filed a Sales Tax Revision Application No. 148 of 2018 and 315 of 2017 respectively before the Hon'ble Allahabad High Court.

The High Court formulated the following substantial question of law for consideration "Whether under the facts and circumstances of the case, the Commercial Tax Tribunal was legally justified in granting the benefit of ITC of Rs. 1,90,88,763.00 which was reversed by the Assessing Authority?"

The High Court relying upon the decision of State of Karnataka v. M.K. Agro Tech Private Limited [Civil Appeal No. 15049-15069 of 2017 dated September 22, 2017] took the view that a dealer has no vested right to seek the benefit of ITC as ITC is just a concession by virtue of provisions of the Act. The High Court further held that the case of the Appellant falls within the purview of Section 13(1)(f) of the UP VAT Act, not within the purview of Section 13(1)(a) read with S. No.(ii) of the Table appended and

Section 13(3)(b) read with explanation (iii) of the UP VAT Act. Therefore, the High Court vide order dated May 3, 2019, ("the Impugned Orders") allowed the revision applications filed by the Respondent and held that the Appellant is not entitled to claim full ITC on input.

Aggrieved by the Impugned Order, the Appellant filed two Civil Appeals before the Hon'ble Supreme Court of India.

Issue

Whether Assessee can claim the full amount of ITC on Rice Bran procured under the provisions of the UP VAT Act?

Held

The Hon'ble Supreme Court in the case of Civil Appeal No. 5822 and 5823 of 2023 held as under:

• Observed that, under Section 13 of the UP VAT Act, the registered dealers are entitled to claim ITC of the full amount when manufactured goods are sold within or outside the state in cases where the purchased goods are used in the manufacture of taxable goods except the non-VAT goods.
• Further Observed that, Section 13(3)(b) of the UP VAT Act, the concept of proportionality was introduced, providing that, when during the manufacturing of VAT goods, the exempt and non-VAT goods are produced, the ITC may be claimed and allowed in proportion to the extent the said goods are used or consumed in the manufacturing of goods other than non-VAT goods and exempt goods.
• Further Observed that, Section 13(3)(b) of the UP VAT Act, leaves a gray area, where the process of manufacturing results in the production of VAT goods and by-products or waste products. In order to address the said issue, the legislature introduced Explanation (iii) to Section 13 wherein it is provided that, if any exempt goods are produced as by-products or waste products during the process of manufacturing taxable goods, it should be deemed that the purchased goods have been used in the manufacture of taxable goods only.
• Further Observed that, the Court in the case of M.K. Agro Tech the Court held that only partial ITC was permitted as the Assessee was making both taxable and exempted sales of goods manufactured form procuring the taxable raw material under the Karnataka VAT Act, whereas no such scheme is provided under the UP VAT Act.
• Noted that, the decision of M.K. Agro Tech is not applicable in the present case as provisions under the Karnataka VAT Act are different in comparison to the UP VAT Act, with respect to the scheme of ITC.
• Further Noted that, Section 13(3)(b) read with Explanation (iii) of Section 13, forbids the Assessing Authority as well as Assessee from raising any dispute with respect to the allowability of ITC in cases where the exempted goods are produced as by-product or waste product during the process of manufacturing.
• Held that, the Impugned be set aside the orders passed by the Commercial Tax Tribunals be restored. Hence the Civil Appeal succeeds and thereby allows.

Relevant Provisions

Section 13 of the UP VAT Act

(3) (a) Where purchased goods are to be used or disposed of partially for the purpose specified in clause (a) of sub-section (1) or otherwise, the input tax credit may be claimed and be allowed proportionate to the extent they are used or disposed of for the purposes specified in such clause,

(b) Subject to the provisions of this section where during process of manufacture of vat goods, exempt goods and non vat goods except as by product or waste product are produced, the amount of input tax credit may be claimed and be allowed in proportion to the extent they are used or consumed in manufacture of taxable goods other than non vat goods and exempt goods

Explanation:- For the purpose of this subsection the "exempt goods" shall include taxable goods other than non vat goods, which are disposed of otherwise than by way of sale within the State or in the course of inter-State trade or commerce or sale in the course of export of goods out of the territory of India or sale out side the State."

Explanation:-For the purposes of this section, –

(i) goods for use in manufacture of any goods includes goods required for use, consumption or utilization in manufacture or processing of such goods or goods required for use in packing of such manufactured or processed goods;

(ii) manufacture of any goods includes processing of such goods and packing of such manufactured or processed goods; and

(iii) where during the process of manufacture of any taxable goods any exempt goods are produced as byproduct or waste-product, it shall be deemed that purchased goods have been used in the manufacture of taxable goods. Conversely, where during the process of manufacture of any exempt goods any taxable goods are produced as by-product or waste product; it shall be deemed that purchased goods have been used in the manufacture of exempt goods.

(iv) where during the process of manufacture of any vat goods any non-vat goods are produced as by-product or waste-product, it shall be deemed that purchased goods have been used in the manufacture of vat goods. Similarly, where during the process of manufacture of any non-vat goods any vat goods are produced as by product or waste-product, it shall be deemed that purchased goods have been used in the manufacture of non-vat goods. (w.e.f.01.01.2008)."