Date of the Judgment: November 6, 2023
Citation: 2023 INSC 974
Judges: Dr. Dhananjaya Y. Chandrachud, CJI., J.B. Pardiwala, J., Manoj Misra, J.
Can a company manufacturing Rice Bran Oil (RBO) claim full Input Tax Credit (ITC) on the raw materials when a by-product is also generated? The Supreme Court of India recently addressed this question in a case concerning the Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act). The court clarified that the manufacturer is indeed entitled to full ITC, even when a by-product is produced during the manufacturing process. This judgment is significant for businesses in Uttar Pradesh dealing with similar manufacturing processes. The judgment was delivered by a three-judge bench comprising Dr. Dhananjaya Y. Chandrachud, CJI., J.B. Pardiwala, J., and Manoj Misra, J., with the opinion authored by J.B. Pardiwala, J.
Case Background
M/s Modi Natural S Ltd (referred to as “the assessee”) is a company that manufactures and sells Rice Bran Oil (RBO) and Physical Refined RBO. The assessee is registered under the UP VAT Act. During the manufacturing of RBO, the assessee procures Rice Bran as input and uses a solvent extraction process. This process also yields a by-product called “De-Oiled Rice Bran” (DORB), which is categorized as an exempted good under the UP VAT Act. The dispute arose concerning the assessment years 2013-14 and 2015-16.
For the assessment year 2013-14, the assessee purchased 8,21,935.71 quintals of Rice Bran for Rs. 93,69,53,404.00, paying a tax of Rs. 4,68,47,670.00. This process resulted in 1,13,180.54 quintals of RBO and 6,87,138.25 quintals of DORB. Out of the RBO, 93,241.15 quintals were further refined to produce 76,068.37 quintals of physical refined RBO. The assessee sold the refined RBO and the remaining RBO for a total of Rs. 55,51,78,151, with a tax liability of Rs. 2,77,58,908. The assessee claimed the full amount of tax paid as ITC, which was rejected by the Deputy Commissioner, leading to a dispute.
Timeline:
| Date | Event |
|---|---|
| 2013-14 | Assessment Year for which dispute arose. |
| 2015-16 | Assessment Year for which dispute arose. |
| 13.01.2015 | Letter from Additional Commissioner (Legal) Commercial Tax, UP, regarding ITC on rice bran oil. |
| 04.05.2016 | Order passed by the Commercial Tax Tribunal, Bareilly Bench, Bareilly. |
| 05.07.2017 | Order passed by the Commercial Tax Tribunal, Bareilly Bench, Bareilly. |
| 03.05.2019 | Judgment passed by the High Court of Judicature at Allahabad. |
| 06.11.2023 | Judgment passed by the Supreme Court of India. |
Course of Proceedings
The Deputy Commissioner rejected the assessee’s claim for full ITC, stating that ITC could only be availed in proportion to the taxable sales. The Additional Commissioner (Appeals) initially ruled in favor of the assessee for the assessment year 2015-16, allowing full ITC, but remanded the matter for 2013-14. The revenue appealed to the Commercial Tax Tribunal, which ruled in favor of the assessee for both assessment years. The revenue then filed revision applications before the High Court of Judicature at Allahabad. The High Court reversed the Tribunal’s decision, holding that the assessee was not entitled to full ITC. This led to the assessee appealing to the Supreme Court.
Legal Framework
The core legal provisions under consideration were:
- Section 2(m) of the UP VAT Act: Defines “goods” as “every kind or class of movable property and includes all materials, commodities and articles involved in the execution of a works contract, and growing crops, grass, trees and things attached to, or fastened to anything permanently attached to the earth which, under the contract of sale, are agreed to be severed, but does not include actionable claims, stocks, shares or securities.”
- Section 13(1)(a) of the UP VAT Act: Allows a registered dealer to claim ITC on taxable goods purchased within the State.
- Section 13(1)(f) of the UP VAT Act: States that if goods are sold at a price lower than the purchase or cost price, ITC shall be limited to the tax payable on the sale value.
- Section 13(3)(b) of the UP VAT Act: States that where during the 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 (iii) to Section 13 of the UP VAT Act: Clarifies that if exempt goods are produced as a by-product or waste product during the manufacture of taxable goods, it is deemed that the purchased goods have been used in the manufacture of taxable goods.
Arguments
Assessee’s Arguments:
- The assessee argued that the High Court erred in applying Section 13(1)(f) of the UP VAT Act, as their case was covered under Section 13(1)(a) read with S. No. 2 (ii) of the Table appended thereto and Section 13(3)(b) read with Explanation (iii) of the UP VAT Act.
- The assessee contended that the definition of “goods” under Section 2(m) of the UP VAT Act does not differentiate between exempt and taxable goods. Therefore, the term “goods” in Section 13(1)(f) should not be restricted to “taxable goods” only.
- They submitted that if the legislative intent was to limit the scope of “goods” to “taxable goods” in Section 13(1)(f), the legislature would have expressly used the term “taxable goods.”
- The assessee relied on the principle of strict interpretation of tax statutes, arguing that the law should not be interpreted beyond the legislature’s intent.
Revenue’s Arguments:
- The revenue argued that Section 13(3)(b) of the UP VAT Act applies only when exempt goods or non-VAT goods are produced as by-products or waste products, not as main products.
- They contended that since the cumulative sale price of RBO and DORB was more than the cost price, Section 13(3)(b) did not apply.
- The revenue argued that Section 13(1)(f) of the UP VAT Act has an overriding effect on Section 13(1)(a), restricting ITC to the extent of tax payable on the sale value of goods.
- The revenue relied on the Supreme Court’s decision in State of Karnataka v. M.K. Agro Tech Private Limited [(2017) 16 SCC 210], arguing that ITC is a concession and not a vested right.
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Applicability of Section 13(1)(a) read with S. No. 2 (ii) of the Table appended thereto and Section 13(3)(b) read with Explanation (iii) of the UP VAT Act | The High Court failed to consider that the case is squarely covered by these provisions. | Assessee |
| The provisions specifically carve out an exception for by-products and waste products, allowing ITC even if they are exempt or non-VAT goods. | Assessee | |
| These provisions are not applicable as the exempt goods are not produced as by-products or waste products. | Revenue | |
| Interpretation of “goods” under Section 13(1)(f) of the UP VAT Act | The definition of “goods” under Section 2(m) does not differentiate between exempted and taxable goods. | Assessee |
| The term “goods” in Section 13(1)(f) cannot be restricted to “taxable goods”. | Assessee | |
| The term “goods” in Section 13(1)(f) should be interpreted as “taxable goods” only. | Revenue | |
| Applicability of M.K. Agro Tech case | The statutory provisions under the Karnataka VAT Act and UP VAT Act are distinct and different. | Assessee |
| The High Court rightly relied on the M.K. Agro Tech case. | Revenue | |
| Interpretation of Section 13(3)(b) | Section 13(3)(b) is applicable only when the manufacturing of “VAT goods”, “exempt goods” and “non-VAT goods” are not being produced as the “by-product” or “waste product”. | Revenue |
Issues Framed by the Supreme Court
The Supreme Court framed the following issues for consideration:
- Whether the assessee is entitled to claim the full amount of tax paid on the purchase of raw Rice Bran as ITC based on Section 13(1)(a) read with S. No. 2 (ii) of the Table appended thereto and Section 13(3)(b) read with Explanation (iii) of Section 13 of the UP VAT Act?
- Whether the scope of the word “goods” as defined under Section 2(m) of the UP VAT Act and outlined in Section 13(1)(f) of the UP VAT Act should be limited to “taxable goods” only?
- Whether the decision of the Supreme Court in the case of M.K. Agro Tech (supra) applies to the present case?
Treatment of the Issue by the Court:
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the assessee is entitled to claim full ITC? | Yes | The court held that the assessee is entitled to claim full ITC as per Section 13(1)(a) read with S. No. 2 (ii) of the Table appended thereto and Section 13(3)(b) read with Explanation (iii) of Section 13 of the UP VAT Act. |
| Whether “goods” in Section 13(1)(f) is limited to “taxable goods”? | No | The court clarified that the term “goods” in Section 13(1)(f) is not limited to “taxable goods” and includes all types of goods as defined in Section 2(m) of the UP VAT Act. |
| Whether M.K. Agro Tech case applies? | No | The court distinguished the M.K. Agro Tech case, stating that the provisions under the Karnataka VAT Act are different from those in the UP VAT Act, particularly regarding the treatment of by-products. |
Authorities
The Court considered the following authorities:
| Authority | Court | How it was Considered | Legal Point |
|---|---|---|---|
| State of Karnataka v. M.K. Agro Tech Private Limited [(2017) 16 SCC 210] | Supreme Court of India | Distinguished | Applicability of ITC on by-products and interpretation of VAT laws. |
| CIT v. Kasturi and Sons Ltd. [(1999) 3 SCC 346] | Supreme Court of India | Relied upon | Principles of interpretation of taxing statutes. |
| State of W.B. v. Kesoram Industries Ltd. [(2004) 10 SCC 201] | Supreme Court of India | Relied upon | Principles of interpretation of taxing statutes. |
| Section 2(m) of the UP VAT Act | Uttar Pradesh Legislature | Interpreted | Definition of “goods”. |
| Section 13(1)(a) of the UP VAT Act | Uttar Pradesh Legislature | Interpreted | ITC on taxable goods. |
| Section 13(1)(f) of the UP VAT Act | Uttar Pradesh Legislature | Interpreted | ITC on goods sold at lower price. |
| Section 13(3)(b) of the UP VAT Act | Uttar Pradesh Legislature | Interpreted | ITC on by-products. |
| Explanation (iii) to Section 13 of the UP VAT Act | Uttar Pradesh Legislature | Interpreted | Deeming fiction for by-products. |
| Rule 23(6) of the Uttar Pradesh Value Added Tax Rules, 2006 | Uttar Pradesh Legislature | Interpreted | Computation of reverse ITC. |
| Section 2(ai) of the UP VAT Act | Uttar Pradesh Legislature | Interpreted | Definition of “taxable goods”. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| The assessee’s claim that their case is covered by Section 13(1)(a) read with S. No. 2 (ii) of the Table appended thereto and Section 13(3)(b) read with Explanation (iii) of the UP VAT Act. | Accepted. The Court held that the assessee’s case is indeed covered by these provisions, entitling them to full ITC. |
| The assessee’s argument that “goods” under Section 13(1)(f) should not be restricted to “taxable goods”. | Accepted. The Court agreed that the term “goods” in Section 13(1)(f) should not be limited to “taxable goods”. |
| The revenue’s reliance on M.K. Agro Tech case. | Rejected. The Court distinguished the M.K. Agro Tech case, stating that the provisions under the Karnataka VAT Act are different from those in the UP VAT Act. |
| The revenue’s argument that Section 13(3)(b) of the UP VAT Act applies only when exempt goods or non-VAT goods are produced as by-products or waste products, not as main products. | Rejected. The Court clarified that Explanation (iii) to Section 13 creates a deeming fiction that covers the production of by-products during the manufacturing of taxable goods. |
The Court held that the High Court erred in relying on the M.K. Agro Tech case. The Supreme Court emphasized that the definition of “goods” under Section 2(m) of the UP VAT Act does not differentiate between exempt and taxable goods. The court noted that the legislature would have used the term “taxable goods” in Section 13(1)(f) if that was the intent. The court also pointed out that Explanation (iii) to Section 13 of the UP VAT Act creates a deeming fiction, stating that if exempt goods are produced as a by-product during the manufacture of taxable goods, it is deemed that the purchased goods have been used in the manufacture of taxable goods.
The court observed that the 2010 amendment introducing Section 13(1)(f) aimed to address situations where goods were sold at a price lower than the cost price. The court stated, “The mischief that was sought to be addressed by virtue of introducing Section 13(1)(f) to the scheme of the UP VAT Act was one where the goods (including taxable, exempt goods, by-products or waste products) manufactured were being sold at a price lower than the cost price.”
The Court further noted, “Had the legislative intent of the 2010 Amendment been to limit the scope and ambit of ‘goods’ under Section 13(1)(f) solely to ‘taxable goods’, there was nothing that could have prevented the Legislature from expressly using the phrase ‘taxable goods’ in Section 13(1)(f) of the UP VAT Act.”
The Court also highlighted the difference between the Karnataka VAT Act and the UP VAT Act, noting that the Karnataka Act has specific provisions for apportionment of ITC when both taxable and exempt goods are produced. The UP VAT Act, on the other hand, provides a deeming fiction under Explanation (iii) to Section 13, which allows full ITC when exempt goods are produced as by-products during the manufacturing of taxable goods. The court concluded, “The scheme under the UP VAT Act therefore, is wholly distinct from the one provided in the Karnataka VAT Act.”
The Supreme Court allowed the appeals, set aside the High Court’s judgment, and restored the orders of the Commercial Tax Tribunal.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Legislative Intent: The Court emphasized that the legislature did not intend to limit the term “goods” in Section 13(1)(f) to only “taxable goods.” If that was the intention, the legislature would have explicitly used the term “taxable goods.”
- Deeming Fiction: The deeming fiction in Explanation (iii) to Section 13 of the UP VAT Act was crucial. This provision explicitly states that when exempt goods are produced as by-products during the manufacture of taxable goods, it is deemed that the purchased goods have been used in the manufacture of taxable goods, thus allowing full ITC.
- Distinct Schemes: The Court highlighted the differences between the ITC schemes under the Karnataka VAT Act and the UP VAT Act. The Karnataka Act has explicit provisions for partial rebate and apportionment of ITC when both taxable and exempt goods are produced, whereas the UP VAT Act provides a deeming fiction that allows full ITC in such cases.
- Strict Interpretation of Tax Statutes: The Court reiterated the principle that tax statutes should be interpreted strictly and that the benefit of any ambiguity should be given to the assessee.
| Sentiment | Percentage |
|---|---|
| Legislative Intent | 30% |
| Deeming Fiction | 35% |
| Distinct Schemes | 25% |
| Strict Interpretation of Tax Statutes | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning
Key Takeaways
- Manufacturers in Uttar Pradesh producing taxable goods along with by-products are entitled to full Input Tax Credit (ITC) on their raw materials.
- The term “goods” under Section 13(1)(f) of the UP VAT Act is not limited to “taxable goods” and includes all types of goods as defined in Section 2(m) of the Act.
- The deeming fiction in Explanation (iii) to Section 13 of the UP VAT Act is crucial for determining ITC eligibility when by-products are generated during the manufacturing process.
- This judgment clarifies the legal position and provides relief to manufacturers who were previously denied full ITC.
Directions
The Supreme Court set aside the High Court’s judgment and restored the orders of the Commercial Tax Tribunal, effectively allowing the assessee’s claim for full ITC.
Development of Law
The ratio decidendi of this case is that the term “goods” under Section 13(1)(f) of the UP VAT Act is not limited to “taxable goods,” and the deeming fiction in Explanation (iii) to Section 13 allows full ITC when exempt goods are produced as by-products during the manufacture of taxable goods. This judgment clarifies the legal position and reverses the High Court’s interpretation, which had incorrectly applied the principles from the M.K. Agro Tech case. This ruling provides a clear framework for manufacturers in Uttar Pradesh regarding ITC claims on by-products, ensuring they receive the full benefit of the tax credit.
Conclusion
The Supreme Court’s judgment in M/s Modi Natural S Ltd vs. The Commissioner of Commercial Tax UP clarifies that manufacturers in Uttar Pradesh are entitled to full Input Tax Credit (ITC) on raw materials, even when by-products are generated during the manufacturing process. The court interpreted the relevant provisions of the UP VAT Act, emphasizing that the term “goods” is not restricted to “taxable goods” and that the deeming fiction in Explanation (iii) to Section 13 allows full ITC in such cases. This decision provides much-needed clarity and relief to businesses in the state.
Category:
- Uttar Pradesh Value Added Tax Act, 2008
- Section 2(m), Uttar Pradesh Value Added Tax Act, 2008
- Section 13, Uttar Pradesh Value Added Tax Act, 2008
- Section 13(1)(a), Uttar Pradesh Value Added Tax Act, 2008
- Section 13(1)(f), Uttar Pradesh Value Added Tax Act, 2008
- Section 13(3)(b), Uttar Pradesh Value Added Tax Act, 2008
- Explanation (iii) to Section 13, Uttar Pradesh Value Added Tax Act, 2008
- Section 2(ai), Uttar Pradesh Value Added Tax Act, 2008
- Input Tax Credit
- ITC on By-products
- VAT on Manufacturing
- Tax Law
- Tax Interpretation
- Taxation of Goods
FAQ
Q: What is Input Tax Credit (ITC)?
A: Input Tax Credit (ITC) is a mechanism that allows businesses to reduce their tax liability by claiming credit for the taxes they have already paid on their purchases of inputs used for manufacturing or resale.
Q: What did the Supreme Court decide in this case?
A: The Supreme Court held that manufacturers in Uttar Pradesh are entitled to full ITC on raw materials even when by-products are generated during the manufacturing process. This is in contrast to the High Court’s decision, which had restricted the ITC.
Q: What is the significance of the deeming fiction in Explanation (iii) to Section 13 of the UP VAT Act?
A: The deeming fiction in Explanation (iii) states that if exempt goods are produced as a by-product during the manufacture of taxable goods, it is deemed that the purchased goods have been used in the manufacture of taxable goods. This allows manufacturers to claim full ITC even when by-products are generated.
Q: How does this judgment affect businesses in Uttar Pradesh?
A: This judgment provides clarity and relief to manufacturers in Uttar Pradesh who produce taxable goods along with by-products. They can now claim full ITC, which will reduce their tax burden.
Q: What was the main reason for the Supreme Court to overturn the High Court’s decision?
A: The Supreme Court overturned the High Court’s decision because the High Court had incorrectly applied the principles from the M.K. Agro Tech case, which was based on the Karnataka VAT Act. The Supreme Court clarified that the provisions of the UP VAT Act are different and provide for full ITC when by-products are generated during the manufacturing of taxable goods.