Supreme Court Upholds Denial of Input Tax Credit on Exempted Sales to Manufacturer-Exporters: Neha Enterprises vs. Commissioner, Commercial Tax (2025)

Introduction

Date of the Judgment: April 9, 2025

Citation: 2025 INSC 476

Judges: Pankaj Mithal, J., S.V.N. Bhatti, J.

Can a seller who benefits from a tax exemption on sales to manufacturer-exporters also claim input tax credit on those sales? The Supreme Court of India addressed this question in a recent case concerning the interpretation of the Uttar Pradesh Value Added Tax Act, 2008. The court examined whether a dealer, having exempted sales to manufacturer-exporters, is eligible for input tax credit on those transactions. Justices Pankaj Mithal and S.V.N. Bhatti delivered the judgment.

Case Background

Neha Enterprises, a registered dealer under the Uttar Pradesh Value Added Tax Act, 2008 (the Act), filed turnover returns for the assessment year 2010-11. The dealer reported sales of Rs. 1,89,35,100/- against the issuance of Form-E to a manufacturer-exporter and claimed an input tax credit of Rs. 6,42,260/-. Initially, the assessing officer allowed the input tax credit, but later, vide order dated 22.02.2013 under Section 28 of the Act, disallowed the claim.

Timeline:

Course of Proceedings

The assessing officer initially allowed the input tax credit but subsequently disallowed it, stating that the dealer was not entitled to input tax credit for the purchase tax paid on sales to the manufacturer-exporter. The assessing officer noted that while the turnover fell under Section 7(c) of the Act, the exception under Section 13(7) was attracted, denying the input tax credit.

Neha Enterprises appealed to the Additional Commissioner, who dismissed the appeal on 22.07.2013. The first appellate authority found that Notification dated 24.02.2010, corresponding to Section 7(c) of the Act, exempted direct sales of raw materials and spare parts to manufacturer-exporters upon filing Form-E, but did not provide input tax credit to sellers making such tax-exempted sales. The authority held that Section 13(7) constituted an embargo, disallowing input tax credit for transactions under Section 7(c) of the Act.

The Tribunal of Commercial Tax, Meerut, Uttar Pradesh, upheld the decisions of the assessing officer and the first appellate authority on 10.09.2013. The Tribunal reasoned that Section 13(1)(a) specifies which traders are allowed input tax credit, and Section 13(7) stipulates instances where input tax credit is not allowed. It concluded that notifications under Section 7(c) did not provide any input tax credit facility to the exporter-sellers, and thus, the law was against the appellant.

The dealer then filed a revision before the High Court, which was dismissed on 24.11.2014. The High Court stated that Section 13(7) clearly revealed that the applicant was not entitled to input tax credit for the sale of goods exempted under Section 7(c) of the Act. The High Court found no infirmity in the Tribunal’s order, answering the question of law in favor of the revenue.

Legal Framework

The legal framework for this case revolves around the interpretation and application of specific sections of the Uttar Pradesh Value Added Tax Act, 2008, along with related notifications. Key provisions include:

• Section 7(c): This section pertains to sales or purchases that are exempt from tax if specified in a government notification. It states:
  “No tax under this Act shall be levied and paid on the turnover of… such sale or purchase; or sale or purchase of such goods by such class of dealers, as may be specified in the notification issued by the State Government in this behalf.”
• Section 13(1): This section outlines the conditions under which dealers holding valid registration certificates can claim input tax credit on taxable goods purchased within the State:
  “Subject to provisions of this Act, dealers referred to in the following clauses and holding valid registration certificate under this Act, shall, in respect of taxable goods purchased from within the State and mentioned in such clauses, subject to conditions given therein and such other conditions and restrictions as may be prescribed, be allowed credit of an amount, as input tax credit, to the extent provided by or under the relevant clause.”
• Section 13(7): This section specifies exceptions where input tax credit cannot be claimed. It includes cases where the sale of goods is exempt from tax under Section 7(c):
  “Except where… goods are to be sold in the course of the export of the goods out of the territory of India, no credit of any amount of input tax shall be claimed by a dealer under sub-section (4) and no facility of input tax credit shall be allowed to a dealer in respect of purchase of any goods, where – (i) sale of such goods by the dealer is exempt from payment of tax under clause (c) of section 7…”

Notifications:

• Notification dated 24.02.2010: Issued under Section 7(c), this notification exempts manufacturer-exporters from tax on direct sales or purchases of raw materials, processing materials, consumable stores, spare parts, accessories, components, lubricants, fuel (other than petrol and diesel), and packing materials used in the manufacture of goods.
• Notification dated 25.03.2010: This notification outlines the procedure for claiming the benefit under the notification dated 24.02.2010, prescribing Form ‘E’ for declaration by the Commissioner.

Arguments

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the dealer, having exempted sales to manufacturer-exporters under Section 7(c) of the Uttar Pradesh Value Added Tax Act, 2008, read with notifications dated 24.02.2010 and 25.03.2010, is eligible for input tax credit on those transactions.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The Supreme Court considered the following legal provisions:

• Section 7(c) of the Uttar Pradesh Value Added Tax Act, 2008: This provision allows the State Government to issue notifications specifying sales or purchases that are exempt from tax.
• Section 13(1) of the Uttar Pradesh Value Added Tax Act, 2008: This section outlines the conditions under which dealers can claim input tax credit.
• Section 13(7) of the Uttar Pradesh Value Added Tax Act, 2008: This section specifies exceptions where input tax credit cannot be claimed, including cases where the sale of goods is exempt from tax under Section 7(c).
• Notification dated 24.02.2010: This notification, issued under Section 7(c), exempts manufacturer-exporters from tax on direct sales or purchases of specified materials.
• Notification dated 25.03.2010: This notification prescribes Form ‘E’ for claiming benefits under the notification dated 24.02.2010.

Authority Treatment Table:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision in Neha Enterprises vs. Commissioner, Commercial Tax was primarily influenced by the explicit provisions of Section 13(7) of the Uttar Pradesh Value Added Tax Act, 2008. The Court emphasized the statutory mandate that prohibits input tax credit when the sale of goods is exempt from tax under Section 7(c). This clear legal provision weighed heavily in the Court’s reasoning, leading to the conclusion that the dealer was not entitled to input tax credit. The Court also considered the policy implications but ultimately determined that the unambiguous language of the law must prevail.

Sentiment Analysis Ranking Table:

Fact:Law Ratio Table:

Logical Reasoning:

Issue: Whether the dealer is eligible for input tax credit on exempted sales to manufacturer-exporters.

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Step 1: Identify relevant legal provisions: Section 7(c) and Section 13(7) of the Uttar Pradesh Value Added Tax Act, 2008.

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Step 2: Interpret Section 13(7): Does it explicitly prohibit input tax credit for sales exempt under Section 7(c)?

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Step 3: Analysis: Section 13(7) clearly states that no input tax credit is allowed if the sale is exempt under Section 7(c).

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Step 4: Conclusion: The dealer is not eligible for input tax credit.

The Court found it difficult to give effect to the intent or policy made known through notifications to grant input tax credit, given the clear expression in Section 13(7) of the Act. The Court noted that the dealer availing Section 7(c) of the Act knows the extent to which the input tax credit could be claimed.

The Supreme Court quoted the following from the judgment:

“Plainly interpreting and applying section 7(c) provides that no tax under the Act shall be levied and paid on the turnover of sale or purchase of such goods by such class of dealers as may be specified in the notification.”

“Section 13(7) also sets out that no facility for input tax credit shall be allowed to a dealer with respect to the purchase of any goods where the sale of such goods by the dealer is exempt from tax under Section 7(c) of the Act.”

“The prohibition from allowing input tax credit is a statutory mandate, and the view taken by the orders impugned, in the facts and circumstances of this case, is available and correct.”

Key Takeaways

• Input Tax Credit Restrictions: Dealers making sales exempt under Section 7(c) of the Uttar Pradesh Value Added Tax Act, 2008, are not eligible for input tax credit on those sales due to Section 13(7) of the Act.
• Statutory Mandate: The prohibition on input tax credit in such cases is a statutory mandate, and the courts must adhere to the clear language of the law.
• Policy vs. Law: While the intent or policy behind notifications may be to encourage certain activities, the explicit provisions of the law take precedence.

Development of Law

The ratio decidendi of the case is that Section 13(7) of the Uttar Pradesh Value Added Tax Act, 2008, clearly prohibits input tax credit for sales exempt under Section 7(c), and this statutory mandate must be followed. There is no change in the previous position of the law; the Court simply reaffirmed the existing legal framework.

Conclusion

The Supreme Court dismissed the civil appeal, upholding the denial of input tax credit to Neha Enterprises. The Court’s decision reaffirms the importance of adhering to the explicit provisions of tax laws, even when policy considerations might suggest a different outcome. Section 13(7) of the Uttar Pradesh Value Added Tax Act, 2008, serves as a clear bar to input tax credit for sales exempt under Section 7(c), and this statutory mandate must be followed.

Category

• Uttar Pradesh Value Added Tax Act, 2008
  • Section 7(c), Uttar Pradesh Value Added Tax Act, 2008
  • Section 13(1), Uttar Pradesh Value Added Tax Act, 2008
  • Section 13(7), Uttar Pradesh Value Added Tax Act, 2008
  • Input Tax Credit
  • Tax Exemption
  • Manufacturer-Exporter

FAQ

1. What is input tax credit?

   Input tax credit is a mechanism that allows businesses to reduce their tax liability by claiming credit for the tax they have already paid on inputs used in their business.

2. What is Section 7(c) of the Uttar Pradesh Value Added Tax Act, 2008?

   Section 7(c) allows the Uttar Pradesh government to issue notifications exempting certain sales or purchases from tax.

3. What is Section 13(7) of the Uttar Pradesh Value Added Tax Act, 2008?

   Section 13(7) specifies situations where input tax credit cannot be claimed, including when the sale of goods is exempt from tax under Section 7(c).

4. What does the Neha Enterprises case say about input tax credit for sales to manufacturer-exporters?

   The Supreme Court held that if a dealer makes sales to manufacturer-exporters that are exempt from tax under Section 7(c), the dealer cannot claim input tax credit on those sales due to Section 13(7).

5. What is Form-E in the context of this case?

   Form-E is a declaration form prescribed by the Commissioner to claim benefits under the notification dated 24.02.2010, which exempts manufacturer-exporters from tax on direct sales or purchases of specified materials.