SC denies ITC Claim since Byproduct is Marketable and Fetches Good Price [Read Judgment]

Revised Return - Share Application Money - Supreme Court of India - Taxscan

A two-judge bench of the Supreme Court on last week held that the State cannot deny taxes when a byproduct is marketable as goods and can fetch considerable price.

While interpreting the provisions of the Karnataka Value Added Tax (KVAT), 2003, the bench held that an oil manufacturing unit can claim only partial input tax credit as, besides selling sunflower oil, it sells de-oiled cakes on which no VAT is payable for being an exempted item.

Assessee, in the instant case, is the manufacturer of sunflower oil, which is extracted from sunflower cake by employing solvent extraction process. Sunflower oil cake, is, thus, used as input/raw material for which the assessee pays VAT. After the extraction of sun flower oil, VAT is payable on such product and the assessee can claim input tax credit in respect of tax already paid.

The issue was that when the sun-flower oil is extracted, by-product in the form of de-oiled sunflower oil cake which is known as ‘de-oiled cake’, an exempted product under the VAT Act becomes available. Since the product is exempted, the department, by invoking section 17 of the Karnataka Value Added Tax Act, allowed partial credit to the assessee by stating that though output tax is paid on sunflower oil, it is not paid on the sale of de-oiled cake.

Under section 17 of the KVAT Act, where the final products are more than one and output tax is payable on the sale of one such final product but other final product is exempted from payment of the said output tax. Since, no output tax is payable on the sale of exempted goods, the input tax credit in such cases is partially admissible. The manner in which partial exemption is given is provided in Rule 131 of KVAT Rules, 2005.

Assessee however, contended that section 17 is not applicable to the instant case since sunflower oil cake, as an input, is used in its entirety in the extraction of sunflower oil. De-oiled cake is not the result of any manufacturing process but is only a by-product. Therefore, sale of such by-product, even when it is exempted from output tax, would not have any bearing.

The above contentions of the assessee was accepted by the High Court allowed full input tax deduction. Aggrieved by the order, the department knocked the doors of the Apex Court.

After hearing both sides, the bench noted that “Even after extracting the sunflower oil what remains is de-oiled cake which, no doubt, is a byproduct. However, it is not to be discarded as waste. Rather, it is not only marketable as “goods,” but fetches significant sale price,” the court said.

Allowing the departmental appeal, the bench said that the ratio of sale of sunflower oil and de-oiled cake is 55:45. Thus, the manufacturer is able to generate 45% revenue from the sale of de-oiled cake. However, no output tax is paid on the sale of this item since it is exempted from payment of VAT under Section 5 of the KVAT Act, the court said.

The bench further noted that for invoking section 17, the fact that whether the product is by-product or manufactured product is immaterial and irrelevant. “It is the sale of goods which triggers the provisions of Section 17 of KVAT Act. Fact remains that de-oiled cake is a saleable commodity which is actually sold by the respondent assessee. Therefore, de-oiled cake fits into the definition of “goods” and this commodity is exempt from payment of any VAT under Section 5 of the KVAT Act. Thus, provisions of Section 17 clearly get attracted when ‘sale’ of these goods takes place.”

The expressions used in section 17 are ‘goods’ and ‘sale’ of such goods is covered under Section 17. “Both these ingredients stand satisfied as de-oiled cakes are goods and the respondent assessee had sold those goods for valuable consideration.”

The bench further noticed the finding of the assessing authorities and the Tribunal that records and statement of accounts of the respondent assessee clearly stipulates that after solvent extraction is completed, 88% of de-oiled cake remains and only 12% remains is the oil which is further refined in the refinery. “This clearly shows that major outcome (88%) of the solvent extraction plant is de-oiled cake which in itself is a marketable good having market value.”

Read the full text of the Judgment below.

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