Supreme Court clarifies tax credit reduction under Gujarat VAT Act: State of Gujarat vs. Reliance Industries Limited (22 September 2017)

Introduction

Date of the Judgment: 22 September 2017

Citation: (2017) INSC 781

Judges: A.K. Sikri, J. and Ashok Bhushan, J.

Can a company be subjected to multiple tax credit reductions on the same goods under the Gujarat Value Added Tax Act, 2003? The Supreme Court of India recently addressed this question, clarifying the interpretation of Section 11(3)(b) of the Act. This case revolves around whether tax credit for raw materials used in manufacturing should be reduced once or twice when those materials fall under multiple categories of the Act. The judgment was delivered by a two-judge bench comprising Justice A.K. Sikri and Justice Ashok Bhushan, with the opinion authored by Justice A.K. Sikri.

Case Background

The respondent, Reliance Industries Limited, manufactures and sells polymers and chemicals in Gujarat. These products are transferred to various branches across India for sale. The company purchases raw materials like furnace oil, natural gas, and light diesel oil, paying VAT at different rates. The Gujarat Value Added Tax Act, 2003, allows for tax credit on VAT paid on these raw materials when used in manufacturing. The dispute arose over how this tax credit should be calculated when goods are transferred outside Gujarat.

Timeline:

Course of Proceedings

The Assessing Officer initially ruled that the tax credit should be reduced by 4% under both sub-clause (ii) and sub-clause (iii) of Section 11(3)(b) of the Gujarat VAT Act, 2003. This decision was upheld by the Joint Commissioner of Commercial Taxes. However, the Gujarat Value Added Tax Tribunal overturned this decision, stating that the tax credit should only be reduced once by 4%. The High Court of Gujarat affirmed the Tribunal’s view, leading the State of Gujarat to appeal to the Supreme Court.

Legal Framework

The core of this case lies in the interpretation of Section 11 of the Gujarat Value Added Tax Act, 2003, which deals with tax credits. Specifically, Section 11(3)(b) outlines how tax credits are to be reduced. The relevant part of the section reads:

“11. Tax Credit. :
(1) (a) A registered dealer who has purchased the taxable goods (hereinafter referred to as the “purchasing dealer”) shall be entitled to claim tax credit equal to the amount of, –
(i)tax collected from the dealer by a registered dealer from who he has purchased such goods or the tax payable by the purchasing dealer to a registered dealer who has sold such goods to him during the tax period, or
(ii)tax paid by him during the tax period under sub-section (1), (2)(5) or (6) of section 9 or;
(iii)Tax paid by the purchasing dealer under the Gujarat Tax on Entry of Specified Goods into Local Area Act, 2001 (Gun. 22 of 2001);
(b) The tax credit to be so claimed under this sub-section shall be subject to the provisions of sub-sections (2) to (12); and the tax credit shall be calculated in such manner as may be prescribed.
(2) The registered dealer who intends to claim the tax credit shall maintain the register and the books of accounts in such manner as may be prescribed.
(3) (a) Subject to the provisions of this section, tax credit to be claimed under sub-section (1) shall be allowed to a purchasing dealer on his purchase of taxable goods which are intended for the purpose of –
(i)Sale or re-sale by him in the State;
(ii)sale in the course of inter-State and commerce;
(iii)branch transfer of consignment of taxable goods to other states (subject to the provision of sub-clause (b) below);
(iv)sales in the course of export out of the territory of India;
(v)sales to export oriented units or the units in Special Economic Zones for sale in the course of export out of the territory of India;
(vi)use as raw material in the manufacture of taxable goods intended for (i) to (v) above or in the packing of the goods so manufactured:
(vii)use as capital goods meant for use in manufacture of taxable goods intended for (i) to (vi) above subject to the condition that such capital goods are purchased after the appointed day;
Provided that if purchases are used partially for the purposes specified in this sub-section, the tax credit shall be allowed proportionate to the extent they are used for the purposes specified in this sub-section.
(b) Notwithstanding anything contained in this section, the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four per cent on the taxable turnover of purchases within the State
(i)of taxable goods consigned or dispatched for batch transfer or to his agent outside the State, or
(ii)of taxable goods which are used as raw materials in the manufacture, or in the packing of goods which are dispatched outside the State in the course of branch transfer or consignment or to his agent outside the State.
(iii)of fuels used for the manufacture of goods
Provided that where the rate of tax of the taxable goods consigned or dispatched by dealer for branch transfer or to his agent outside the State is less than four per cent, then the amount of tax credit in respect of such dealer shall be reduced by the amount of tax calculated at the rate of tax set out in the Schedule on such goods on the taxable turnover of purchases within the State”

Section 11(3)(b) states that the tax credit shall be reduced by 4% on the taxable turnover of purchases within the State under three conditions: (i) for goods sent for branch transfer, (ii) for goods used as raw materials in manufacturing and sent out of state, and (iii) for fuels used in manufacturing. The core issue is whether the 4% reduction applies once or twice when both conditions (ii) and (iii) are met.

Arguments

Arguments by the State of Gujarat (Appellant):

• The State argued that the High Court’s interpretation was incorrect. The tax credit should be reduced by 4% under sub-clause (ii) and again by 4% under sub-clause (iii) of Section 11(3)(b).
• The State contended that tax laws must be interpreted literally and that equity has no role in tax matters.
• It was argued that the legislature intended to give tax credit on raw materials but also had the power to determine the conditions under which such credit is admissible.
• The State argued that sub-clauses (ii) and (iii) apply in different situations. Sub-clause (ii) applies when taxable goods are used as raw material and dispatched outside the State. Sub-clause (iii) applies when fuel is used in manufacturing, regardless of where the goods are sold.
• The State emphasized that the absence of the word “or” between sub-clauses (ii) and (iii) indicates that the reduction should apply under both clauses.

Arguments by Reliance Industries Limited (Respondent):

• Reliance Industries conceded that the legislature had the power to frame the tax credit scheme and that tax laws should be interpreted strictly.
• The respondent argued that the High Court correctly interpreted Section 11(3)(b). They contended that clause (a) of Section 11(3) provides for tax credit, while clause (b) reduces it under certain conditions.
• Reliance argued that the reduction rate cannot exceed the tax credit allowed. If the State’s argument is accepted, the reduction could be 8% (4% under both sub-clauses) while the tax credit for furnace oil is only 4%.
• The respondent emphasized that the word “or” is used between sub-clauses (i) and (ii) indicating that the reduction of tax credit is applicable to any one of the three sub-clauses and not every time a particular class of goods falls in more than one category.

[TABLE] of Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the tax credit under Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003, should be reduced by 4% only once or twice when a case is covered under both sub-clauses (ii) and (iii)?

Treatment of the Issue by the Court

[TABLE] of Issue Treatment

Authorities

Cases Relied Upon by the Court:

• Jamshed N. Guzdar v. State of Maharashtra & Ors. [2005] 2 SCC 591 – Supreme Court of India: The court referred to this case to explain the principles of interpreting punctuation in statutes.
• Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana [2014] 6 SCC 444 – Supreme Court of India: This case was cited to support the principle that tax statutes are to be interpreted literally.
• State of Madhya Pradesh v. Rakesh Kohli & Anr. [2012] 6 SCC 312 – Supreme Court of India: This case was also cited to support the principle that tax statutes are to be interpreted literally.
• V.V.S. Sugars v. Government of Andhra Pradesh & Ors. [1999] 4 SCC 192 – Supreme Court of India: This case was cited to support the principle that tax statutes are to be interpreted literally.
• Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v. Commissioner of Sales Tax and Others [1992] 3 SCC 624 – Supreme Court of India: The court referred to this case to emphasize that tax credits are a concession, and the conditions for such credits are determined by the legislature.
• Hotel Balaji & Ors. v. State of Andhra Pradesh & Ors. [1993] Supp 4 SCC 536 – Supreme Court of India: This case was cited to support the principle that tax credits are a concession.
• Jayam and Company v. Assistant Commissioner and Another [2015] 15 SCC 125 – Supreme Court of India: This case was cited to support the principle that tax credits are a concession.

Legal Provisions Considered by the Court:

• Section 11 of the Gujarat Value Added Tax Act, 2003: This section deals with tax credits and was the core of the dispute.
• Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003: This specific provision outlines the reduction of tax credit under different scenarios.
• Section 2(19) of the Gujarat Value Added Tax Act, 2003: This section defines “raw materials” and clarifies that fuels used in manufacturing are considered raw materials, except those used for generating electricity.

[TABLE] of Authority Consideration

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Jamshed N. Guzdar v. State of Maharashtra & Ors. [2005] 2 SCC 591* to emphasize the importance of punctuation in interpreting statutes.
• The Court cited Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana [2014] 6 SCC 444*, State of Madhya Pradesh v. Rakesh Kohli & Anr. [2012] 6 SCC 312*, and V.V.S. Sugars v. Government of Andhra Pradesh & Ors. [1999] 4 SCC 192* to reinforce that tax statutes must be interpreted literally.
• The Court referred to Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v. Commissioner of Sales Tax and Others [1992] 3 SCC 624*, Hotel Balaji & Ors. v. State of Andhra Pradesh & Ors. [1993] Supp 4 SCC 536*, and Jayam and Company v. Assistant Commissioner and Another [2015] 15 SCC 125* to support the view that tax credits are a concession and the conditions for such credits are determined by the legislature.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by a literal interpretation of Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003. The absence of the word “or” between sub-clauses (ii) and (iii) was a key factor. The Court emphasized that sub-clauses (ii) and (iii) are event-based and apply to different situations. Sub-clause (ii) is triggered when taxable goods are used as raw materials and dispatched outside the State, while sub-clause (iii) is triggered when fuels are used in manufacturing, regardless of where the goods are sold. The court also highlighted that tax credits are a concession, and the conditions for such credits are determined by the legislature.

[TABLE] of Sentiment Analysis of Reasons

Fact:Law Ratio Table

Logical Reasoning:

The court considered the argument that the reduction could exceed the tax credit in the case of furnace oil (where VAT is 4%). The court clarified that the reduction cannot exceed the tax credit given. Therefore, in the case of furnace oil, the tax credit will be reduced by 4% only, even if both sub-clauses (ii) and (iii) are applicable.

The Court stated:

“It is a mega tax credit scheme which is provided under the VAT Act meant for all kinds of manufactured goods.”

“It is rightly pointed out by the appellant State that these are event based sub-clauses and two events are totally different.”

“Therefore, if some reduction is to be made from the said credit, it cannot be more than the credit given.”

Key Takeaways

• Tax credit under Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003, can be reduced by 4% under both sub-clause (ii) and sub-clause (iii) when the conditions of both are met.
• The reduction cannot exceed the tax credit given. For example, if the VAT paid on raw material is 4%, the reduction cannot exceed 4%.
• The judgment emphasizes the importance of literal interpretation of tax statutes and the legislative power to determine the conditions for tax credits.
• This ruling clarifies the application of tax credit reduction for manufacturers in Gujarat, especially those involved in branch transfers and use of fuels in manufacturing.

Directions

The Supreme Court allowed the appeals, setting aside the High Court’s judgment. The court clarified that tax credit reduction can be applied under both sub-clauses (ii) and (iii) of Section 11(3)(b), subject to the limitation that the reduction cannot exceed the tax credit.

Specific Amendments Analysis

There is no discussion of any specific amendments in the provided judgment.

Development of Law

The ratio decidendi of this case is that tax credit under Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003, can be reduced by 4% under both sub-clause (ii) and sub-clause (iii) when the conditions of both are met, but the reduction cannot exceed the tax credit given. This clarifies the interpretation of Section 11(3)(b) and provides guidance for manufacturers in Gujarat. This ruling clarifies that the reduction of tax credit is event-based and not limited to a single reduction when multiple conditions are met.

Conclusion

In the case of State of Gujarat vs. Reliance Industries Limited, the Supreme Court held that tax credit under Section 11(3)(b) of the Gujarat Value Added Tax Act, 2003, can be reduced by 4% under both sub-clause (ii) and sub-clause (iii) when the conditions of both are met. This decision clarifies that the reduction is event-based and not limited to a single reduction. The court emphasized literal interpretation of tax laws and legislative power to determine conditions for tax credits. The ruling provides clarity for manufacturers in Gujarat regarding tax credit reductions.