‘Dry Dock’ and ‘Fit Out Berth’ are Capital Goods under Gujarat VAT Act: Gujarat HC [Read Judgment]

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In a significant ruling, Gujarat High Court allowed Input tax credit on cement, sand, steel, greet, concrete etc used for construction of “Dry Dock” and “Fit Out Berth” and held that these are capital goods within the meaning of Gujarat Value Added Tax Act.

Assessee, M/s Pipavav Defense And Offshore Engineering Company Limited, a dealer under the Gujarat VAT Act and CST Act, is engaged in the business of ship building / manufacture and repairs of ship. For the relevant assessment year, assessee constructed the Dry Dock and Fit Out Berth for the purpose of its business and claimed it as capital goods since they were essential for its manufacturing activities viz. ship building. Accordingly, they caimed input tax credit in respect of cement, sand, steel, greet, concrete etc. used in construction of Dry Dock, Fit Out Berth. However, the AO rejected the claim. On appeal, the first appellate authority confirmed the order.

On second appeal, the Tribunal allowed the appeal and held in favour of the assessee by holding that Input Tax credit is available for purchase of cement, sand, steel, greet, concrete etc. that are used for manufacture of capital goods under the Gujarat VAT Act.

In another appeal for a different assessment year, the Tribunal held that the LPG and Acetylene gas are not fuel as per Section 11(3)(b)(iii) of the VAT Act.

Both the orders were challenged by the department before the High Court.

It was contended on behalf of the department that Dry Dock and Fit Out Berth cannot be said to be goods within the definition of section 2(13) of the VAT Act. they contended that the definition of “capital goods” contained in section 2(5) of the VAT Act means “plant and machinery” meant for use in manufacture of taxable goods and accounted as capital assets in the books of accounts. It is therefore, submitted that cement, sand, steel, greet, concrete etc. cannot be said to be “capital goods” and therefore, on such purchase the Input Tax Credit is not allowable. They submitted that the immovable structure viz. Dry Dock and Fit Out Berth cannot be categorized as capital goods under the VAT Act.

The bench comprising Justices M.R shah and B.N Karia relied on its decision in Sales India Corporation and observed that “the definition of the term “Capital Goods” contained in section 2(5) of the VAT Act is worded as to mean “plant and machinery” used for manufacture of taxable goods and the word “and” in the said definition it seems to have been used to convey the expression “as well as” and therefore, a plant as well as machinery would therefore be capital goods if it is meant for manufacture of taxable goods. Accordingly, held that Dry Dock and Fit Out Berth are plant / capital goods.

Following the Apex Court rulings, the bench observed that “as cement, sand, steel, greet, concrete etc. are required to be used in manufacturing of “Capital Goods” viz. Dry Dock and Fit Out Berth, which is an integral part of the final product of the Dealer are without the Dry Dock and Fit Out Berth, it is not possible for the Dealer to carry on his business which is of ship building / manufacture and repairs of ship and that the Dry Dock and Fit Out Berth are specialized in nature which are required to be constructed specially and specifically for the purpose of business of the Dealer i.e. ship building / manufacture and repairs of ship, applying the “User Test” it is to be held that on purchase of cement, sand, steel, greet, concrete etc. which are used in Dry Dock and Fit Out Berth (Capital Goods), Dealer shall be entitled to Input Tax Credit. Any other interpretation would defeat the object and purpose of granting Input Tax Credit and would defeat the grant of Input Tax Credit as per Section 11 of the VAT Act.”

Read the full text of the Judgment below.

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