Disallowance of ITC under UP VAT Act 2008 not same as in Karnataka VAT – Supreme Court

Disallowance of ITC under UP VAT Act 2008 not same as in Karnataka VAT Act with respect to by-product/exempt goods – Supreme Court allows ITC

ABCAUS Case Law Citation:
ABCAUS 3813 (2023) (11) SC

Important Case Laws relied upon by parties:
State of Karnataka v. M.K. Agro Tech Private Limited, reported in (2017) 16 SCC 210

The issue was related to Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act). The appeal was directed against the order passed by the Allahabad High Court taking a view that took the view that the appellant assessee was not entitled to the full benefit of Input Tax Credit (ITC) claimed on the goods purchased by it for manufacturing its final product.

Supreme Court Judgment Abcaus

The appellant assessee company was a registered dealer under the UP VAT Act and was engaged in the business of manufacture. The goods produced fall within the ambit of “taxable goods” under the UP VAT Act. In the manufacturing process a by-product was also produced which fall within the category of exempted goods under the UP VAT Act.

The matter travelled to Hon’ble High Court. The High Court took the view that a dealer has no vested right to seek the benefit of ITC as the same is just a concession by virtue of the provisions of the Act. The High Court relying on Section 13(1)(f) of the UP VAT Act took the view that the assessee is not entitled to claim full ITC on the inputs.

Before the Hon’ble Supreme Court, the assessee contended that the order of the High Court was based on incorrect application of the decision of Hon’ble Supreme Court and the statutory provisions under the Karnataka Value Added Tax Act, 2003 and UP VAT Act are distinct and different in all respects.

The Hon’ble Supreme Court observed that in the Statement of objects and reasons of the Uttar Pradesh Value Added Tax (Amendment) Bill, 2010 (the 2010 Amendment), indicate that the legislative intent was never to limit or circumscribe the scope of “goods” as outlined in Section 13(1)(f) to only “taxable goods”.

The Hon’ble Supreme Court further observed that 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.

Also, the Hon’ble Supreme Court noted that Rule 23(6) of the Uttar Pradesh Value Added Tax Rules, 2006 (UP VAT Rules”) (which provides for the computation of reverse ITC in cases of a dealer other than a trader), wherein the word “goods” has not been qualified by “taxable” and rather has used the word “any” to expressly convey the unequivocal legislative mandate.

Further, it was observed that “taxable goods” has been separately defined under Section 2(ai) of the UP VAT Act.

The Hon’ble Supreme Court observed that Section 13(3)(b) of the UP VAT Act, introduces the concept of proportionality in the scheme of the enactment and by means of a deeming fiction provides that where during the manufacture of VAT goods, exempt and non-VAT goods (except as by-product or waste product) are produced, the amount of ITC credit may be claimed and may be allowed in proportion to the extent they are used or consumed in manufacture of taxable goods other than the non-VAT goods and exempt goods. Further, in Explanation (iii) to Section 13 it is provided that 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 Hon’ble Supreme Court stated that reliance placed by the VAT Department is not applicable to the case on hand as the provisions under the Karnataka VAT Act are quite different compared to that of the UP VAT Act in regard to the scheme of ITC. Section 11(a)(1) of the Karanataka VAT Act as above specifically stipulates 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.

The Hon’ble Supreme Court opined that the scheme under the UP VAT Act is not the same as in Karnataka and no provision regarding 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 is not applicable to the facts of the present case, and could not have been relied upon to deny the full ITC to the assessee.

The Hon’ble Supreme Court illustrated with calculation of ITC with respect to case in hand under both Karnataka VAT Act 2003 and UP Vat Act 2008.

As a result, 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 was restored.

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