The Supreme Court of India restored the order of the Commercial Tax Tribunal allowing Input Tax Credit (ITC) as there was no provision for calculation of ITC apportionment under Uttar Pradesh Value Added Tax Act, 2008 (‘the UP VAT Act’) as that of Karnataka Value Added Tax Act, 2003.
Modi Naturals Ltd, the assessee filed a petition under Section 17 of the Uttar Pradesh Value Added Tax Act, 2008 (‘the UP VAT Act’) challenging the common judgment and order passed by the High Court of Judicature at Allahabad in the Commercial Tax Revisions, by which the High Court allowed both the Commercial Tax Revisions filed by the revenue against the Orders passed by the Commercial Tax Tribunal and thereby took the view that the assessee is not entitled to the full benefit of Input Tax Credit (‘ITC’) claimed on the goods purchased by it for manufacturing its final product.
The assessee is a company engaged in the business of manufacture and sale of Rice Bran Oil (‘RBO’) and Physical Refined RBO. The RBO manufactured by the assessee falls within the ambit of “taxable goods” under the UP VAT Act. To manufacture RBO, the assessee procures Rice Bran (‘inputs’/‘purchased goods’) and follows the Solvent Extraction Process. During the manufacturing process of RBO, a byproduct in the form of “De-Oiled Rice Bran” (‘DORB’) is also produced. DORB falls under the exempted goods category under S. No. 4 of Schedule – I of the UP VAT Act.
In the case of M.K. Agro Tech, it was held that only partial ITC was permitted to the assessee as they were making taxable and exempted sales from the dutiable raw materials procured by them.
Section 11 of the Karnataka VAT Act states that where a sale of exempt goods takes place i.e., there is no output tax received on such sale, the input tax paid for manufacturing/processing such exempt goods cannot be credited while calculating the net tax. It is beyond any pale of doubt that the UP VAT Act does not provide for any such scheme or provision that aims at achieving the same.
Au contraire, Explanation (iii) to Section 13 read with Section 13(3)(b) UP VAT Act, as outlined above, seeks to create a deeming fiction where during the manufacture of any taxable goods any exempt goods are produced as by-product or waste product, it shall be deemed that the purchased goods have been used in the manufacture of taxable goods. The scheme under the UP VAT Act, therefore, is wholly distinct from the one provided in the Karnataka VAT Act.
A three-judge bench of Chief Justice of India Dr Dhananjaya Y. Chandrachud, Justice B Pardiwala and Manoj Misra observed that “the scheme under the UP VAT Act is not the same as in Karnataka and no such provision regarding the calculation of the apportionment etc., has been provided for under the UP VAT Act. The reliance by the High Court therefore on this decision is not correct. It does not apply to the facts of the present case, and could not have been relied upon to deny the full ITC to the assessee.”
The Court held that the High Court committed an error in passing the impugned judgment relying on the decision of this Court rendered in M.K. Agro Tech. The impugned common judgment and order passed by the High Court of Allahabad was set aside and the orders passed by the Commercial Tax Tribunal were restored.
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