M/S Modi Naturals Ltd. v. the Commissioner of Commercial Tax Up
JUDGMENT
J. B. PARDIWALA, J.
1. Since the issues raised in both the captioned appeals are the same, the
parties are also the same and the challenge is also to the self-same judgment
passed by the High Court, those were taken up for hearing analogously and
are being disposed of by this common judgment and order.
2. For the sake of convenience, the appellant shall hereinafter be
referred to as the assessee and the respondent shall hereinafter be referred
to as the revenue.
3. These appeals are at the instance of an assessee, duly registe red
under Section 17 of the Uttar Pradesh Value Added Tax Act, 2008 (for
short, ‘the UP V AT Act’) and are directed against the common judgment
and order dated 03.05.2019 passed by the High Court of Judicature at
Allahabad in the Commercial Tax Revisions Nos. 315 of 2017 and 148 of
2018 respectively, by which the High Court allowed both the Commercial
Tax Revisions fi led by the revenue against the Orders dated 04.05.2016 and
05.07.2017 respectively passed by the Commercial Tax Tribunal, Bareilly
Bench, Bareilly and thereby took the view that the assessee is not entitled to
the full benefi t of Input Tax Credit (for short, ‘ITC’) claimed on the goods
purchased by it for manufacturing its fi nal product.
FACTUAL MATRIX
4. The assessee is a company engaged in the business of manufacture
and sale of Rice Bran Oil (for short, ‘RBO’) and Physical Refi ned RBO.
The assessee as stated above is a registered dealer under th e UP VAT Act
and the RBO manufactured by the assessee falls within the ambit of “taxable
goods” under the UP VAT Act. For the purpose of manufacturing RBO, the
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP
assessee procures Rice Bran (for short, ‘inputs’/‘purchased goods’) and
follows the Solvent Extraction Process. During the manufacturing process of
RBO a by-product in the form of “De-Oiled Rice Bran” (for short, ‘DORB’)
is also produced. DORB falls within the category of exempted goods under
S. No. 4 of Schedule – I of the UP VAT Act.
5. The dispute between the parties relates to the assessment years
2013-14 and 2015-16 respectively.
6. The assessee by processing Rice Bran in its solvent extra ction
plant produced 13.77% taxable goods i.e., RBO and 83.63% by-product
i.e., DORB. As stated, aforesaid by further refi ning the RBO, the physical
refi ned RBO is also produced. The record reveals that for the Assessment
Year 2013-14, the assessee purchased 8,21,935.71 quintals of Rice Bran
for a sum of Rs. 93,69,53,404.00 and paid tax of Rs. 4,68,47,670.00. By
processing the inputs, 1,13,180.54 quintals of RBO was produced and
6,87,138.25 quintals of DORB was produced. Out of 1,13,180.54 quintals of
RBO, 93,241.15 quintals of RBO was further refi ned to produce 76,068.37
quintals of physical refi ned RBO. The said quantity of physical refi ned RBO
and the balance quantity of RBO (19,939.40 quintals) was sold within the
State of Uttar Pradesh for Rs. 45,91,66,611 and Rs. 9,60,11,540 respectively
aggregating to a total of Rs. 55,51,78,151/-. The assessee’s tax liability on
the said sales was calculated at Rs. 2,77,58,908/-.
7. On the basis of the statutory provisions of Section 13(1)(a) read with
S. No. 2(ii) of the Table appended thereto and Section 13(3)(b) read w ith
Explanation (iii) to Section 13 of the UP VAT Act, the assessee claimed full
amount of tax paid as ITC i.e., a sum of Rs. 4,68,47,670/-. The claim of the
assessee came to be rejected vide the Order of the Deputy Commissioner,
Tax Fixation, Div. – I, Pilibhit passed in terms of Section 28(2)(i) of the UP
VAT Act. It is the case of the revenue that had the assessee been permitted
to avail the full ITC, it would have led to a loss of Rs. 1,90,88,763.00 t o
the State exchequer.
8. In connection with both the Assessment Years i.e. 2013-14 and 2015-
16, respectively vide two separate orders, the Deputy Commissioner took
the view that in terms of Section 13(1)(f), the assessee could have availed
the ITC on the inputs only vis-à-vis the taxable sales, as the sale price of the
fi nal goods was lesser than the manufacturing cost of the purchased goods.
751
In other words, according to the Deputy Commissioner the term “goods” in
Section 13(1)(f) of the UP VAT Act means only the taxable goods. The matter
ultimately reached before the Additional Commissioner Grade II, (Appeals),
2nd Commercial Tax, Bareilly. The Incharge Additional Commissioner for
the Assessment Year 2015-16 took the view that the assessee was entitled
to claim full ITC and accordingly allowed the appeal of the assessee. The
Incharge Additional Commissioner accepted the case put up by the assessee
that the word “goods” in Section 13(1)(f) of the UP VAT Act cannot be
restricted to only “taxable goods”. However, for the Assessment Year 2013-
14, the Additional Commissioner proceeded to remand the matter to the Tax
Fixation offi cer for passing the re-tax fi xation order.
9. The revenue being dissatisfi ed with the view taken by the Additional
Commissioner went in appeal before the Commercial Tax Tribunal, Bareilly
Bench, Bareilly in so far as the Assessment Year 2015-16 is concerned. We
may clarify that so far as the Assessment Year 2013-14 is concerned, it was
the assessee who had to go before the Commercial Tax Tribunal by way of a
second appeal as the Additional Commissioner had allowed the appeal fi led
by the assessee and had remanded the matter to the Tax Fixation Offi cer.
10. Although the Commercial Tax Tribunal passed two separate orders
with respect to the two assessment years referred to abov e, yet the issues
between the parties remained common. Ultimately, it is the revenue who went
before the High Court with two Commercial Tax Revision Applications being
the Revision No. 148 of 2018 and Revision No. 315 of 2017 respectively.
Both the revision applications were heard analogously by the High Court.
11. The High Court formulated the following substantial question of
law for its consideration: “Whether under the facts and circumstances of
the case, the Commercial Tax Tribunal was legally justifi ed in granting the
benefi t of ITC of Rs. 1,90,88,763.00 which was reversed by the Assessing
Authority?”
12. The High Court relying on the decision of this Court in the case of
State of Karnataka v. M.K. Agro Tech Private Limited, reported in (2017) 16
SCC 210 took the view that a dealer has no vested right to seek the benefi t
of ITC as the same is just a concession by virtue of the provisions of the
Act. The High Court held that the provisions of Section 13(1)(a) read with
S. No. 2(ii) of the Table appended thereto and Section 13(3)(b) read w ith
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
Explanation (iii) of the UP VAT Act are not applicable as asserted by the
assesee and the case of the assessee stood covered by Section 13(1)(f) of
the UP VAT 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. The High Court accordingly allowed both the revision applications
fi led by the revenue.
13. In such circumstances referred to above, the asseesee is here before
this Court with the present appeals.
SUBMISSIONS ON BEHALF OF THE ASSESSEE
14. Mr. Arvind Datar, the learned Senior Counsel appearing for the
assessee vehemently submitted that the High Court committed a serious error
in passing the impugned judgment. According to Mr. Datar the impugned
judgment of the High Court is incorrect as it has failed to take notice of the
fact that the case of the assessee herein is squarely covered by the provisions
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. It was
argued that the High Court erroneously held that Section 13(1)(f) of the UP
VAT Act is applicable to the case on hand.
15. Mr. Datar further argued that the entire edifi ce of the impugned
judgment of the High Court is based on incorrect application of the decision
of this Court in case of M.K. Agro Tech (supra). He would argue that the
statutory provisions under the Karnataka Value Added Tax Act, 2003 and
UP VAT Act are distinct and diff erent in all respects. He pointed out that
the UP VAT Act specifi cally carves out an exception for the by-products and
waste products respectively. Even if those are exempt goods or non-V AT
Goods, the ITC is permissible.
16. Mr. Datar further argued that the defi nition of the word “goods”
under Section 2(m) of the UP VAT Act does not diff erentiate between the
exempted and taxable goods and equally the word “goods” under Section
13(1)(f) of the UP VAT Act cannot be said to be qualifi ed by th e word
“taxable”. He pointed out that, if the legislative intent was to qualify “goods”
with the word “taxable”, it could have been said so by the Legislature in
Section 13 of the UP VAT Act itself. It was argued that if the legislative
intent in the 2010 amendment was to limit the scope and ambit of the word
753
“goods” under Section 13(1)(f) of the UP VAT Act solely to “taxable goods”,
there was nothing that prevented the concerned legislature from expressly
utilising the phrase “taxable goods” in Section 13(1)(f) of the UP VAT Act.
17. In the last, Mr. Datar argued that in construing taxation stat utes,
the court should apply the strict rule of interpretation. When the competent
legislature mandates taxing certain business/certain objects in certain
circumstances, it cannot be expounded/interpreted to those which were not
intended by the legislature.
18. In such circumstances referred to above, Mr. Datar the le arned
Senior Counsel prayed that there being merit in his appeals those ma y be
allowed and the impugned judgment passed by the High Court be set aside
and that of the Tribunal be affi rmed.
SUBMISSIONS ON BEHALF OF THE REVENUE
19. Mr. R.K. Raizada, the learned Additional Advoca te General
appearing for the State of UP on the other hand vehemently opposed both
the appeals submitting that no error, not to speak of any error of law could
be said to have been committed by the High Court in passing the impugned
judgment.
20. The principal contention canvassed on behalf of the revenue is that
the use of the expression “except as by-product or waste product” in Section
13(3)(b) of the UP VAT Act is decisive and if the exempt goods or non-VAT
goods are being produced as the main products only and not being produced
as the “by-product or waste product” then in such circumstances , Section
13(3)(b) of the UP VAT Act would have no application. According to the
learned counsel, Section 13(3)(b) would be applicable only to a situat ion
wherein the manufacturing of the “VAT goods”, “exempt goods” and “non-
VAT goods” are not being produced as the “by-product” or “waste product”.
21. It was argued that in the case on hand, the cumulative sal e price
of the RBO and DORB respectively is more than the cost price and in such
circumstances, Section 13(3)(b) read with Explanation (iii) of the UP VAT
Act would have no applicability. It was also argued that Section 13(1 )(f)
of the UP VAT Act starts with a non-obstante clause having an overriding
eff ect on the provision of Section 13(1)(a) of the UP VAT Act. The words
and expressions used in Section 13(1)(f) of the UP VAT Act require a textual
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
interpretation matching with the contextual interpretation that Section 13(1)
(f) of the UP VAT Act seeks to remedy the mischief, caused by the words
used in the Table of Section 13(1)(a) of the UP VAT Act. Section 13(1)(f)
UP VAT Act restricts the amount of ITC fi guring in Table of Section 13(1)
(a) UP VAT Act to the extent of tax payable on the sale value of goods or
manufactured goods, in specifi c cases, i.e., costing of the manufactured
taxable goods except the non-VAT goods being lower than the costing of
the taxable inputs.
22. It was also argued that the High Court rightly placed reliance on
the decision of this Court in the case of M. K. Agro Tech (supra).
23. In such circumstances referred to above, Mr. R. K. Raizada
submitted that there being no merit in both the appe als those may be
dismissed.
ANALYSIS
24. Having heard the learned counsel appearing for the parties and
having gone through the materials on record the following questions fall
for our consideration:
a. Whether the assessee is entitled to claim full amount of t ax paid
towards the purchase of raw Rice Bran as ITC on the basis of the provisions
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 Section 13 of the UP VAT
Act?
b. Whether the scope of the word “goods” as defi ned under Section
2(m) of the UP VAT Act as outlined in Section 13(1)(f) of the UP VAT Act
should be limited to only “taxable goods”?
c. Whether the decision of this Court in the case of M.K. Agro Tech
(supra) has any application to the case on hand?
RELEV ANT PROVISIONS OF THE UP V AT ACT, 2008
25. Before we advert to the rival submissions canvassed on either side,
we must look into few relevant provisions of the UP VAT Act:
“2. Defi nitions
xxx xxx xxx
755
(m) “goods” means every kind or class of movable prop erty and
includes all materials, commodities and articles in volved in the
execution of a works contract, and growing crops, g rass, trees and
things attached to, or fastened to anything permane ntly attached
to the earth which, under the contract of sale, are agreed to be
severed, but does not include actionable claims, st ocks, shares
or securities;
Xxx xxx xxx
(p) “input tax” in relation to a registered dealer who has
purchased any goods from within the State, means the aggre gate
of the amounts of tax, -
(i) paid or payable by such registered dealer to th e registered
selling dealer of such goods in respect of purchase of such goods;
and
(ii) paid directly to the State Government by the p urchasing
dealer himself in respect of purchase of such goods where such
purchasing dealer is liable to pay tax under this A ct on the
turnover of purchase of such goods
Provided that tax paid or payable in respect of tra nsfer of right
to use any goods shall not form part of the input t ax
Xxx xxx xxx
(u) “manufacturer” in relation to any goods mention ed or
described in column (2) of Schedule IV of this Act, means a
dealer who, by application of any process of manufa cture, after
manufacture of a new commercial commodity inside th e State,
makes first sale of such new commercial commodity w ithin the
State, whether directly or otherwise; and includes a selling agent
who makes sale of such new commodity on behalf of t he person
who has manufactured it;
(v) “non-vat goods” means any of the goods mentione d or
described in column (2) of Schedule-IV;
Xxx xxx xxx
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
(z) “registered dealer” means a dealer registered u nder Section
17 or Section 18;
Xxx xxx xxx
(ah) “taxable dealer” means a dealer who is liable to pay tax
under this Act;
(ai) “taxable goods” means any goods except goods m entioned
or described in column (2) of Schedule I;
Xxx xxx xxx
“13. Input tax credit
(1) Subject to provisions of this Act, dealers referred to in the following
clauses and holding valid registration certifi cate 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 s uch 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:
(a) Subject to conditions given in column (2), every dealer liable to pay
tax, shall, in respect of all taxable goods except non-vat goods, capital
goods and captive power plant, where such taxable goods are purchased
on or after the date of commencement of this Act, be allowed credit of
the amount, as input tax credit, to the extent provided in column 3 of
the table below:
TABLE
Serial
No.
Conditions Extent of amount of
input tax credit
(1) (2) (3)
1. If purchased goods are re-sold-
(i) inside the State, or
(ii) in the course of inter-state trade
or commence; or
(iii) in the course of the export of the
goods out of the territory of India.
Full amount of
input tax
757
2. If purchased goods are
used in manufacture of
-
(i) any goods except non-vat goods
and where such manufactured goods
are sold in the course of the export
of the goods out of the territory of
India; or
(ii) any taxable goods except non-
vat goods and where such
manufactured goods are sold
either inside the State or in the
course of inter-State trade or
commerce.
Full amount of input
tax
3. If purchased goods are –
(i) transferred or consigned outside
the State otherwise than as a
result of a sale; or
(ii) used in manufacture of any
taxable goods except non-vat
goods and such manufactured
go ods are tran sferred or
consigned outside the State
otherwise than as a result of
a sale.
Partial amount of
input tax, which is in
excess of four percent
of the purchase price
on which the dealer
has paid tax either to
the registered selling
dealer or to the State
Government”
Xxx xxx xxx
(f) Notwithstanding anything to the contrary contai ned in this sub-
section where goods purchased are resold or goods man ufactured
or processed by using or utilizing such purchased g oods are sold,
at the price which is lower than
(i) purchase price of such goods in case of resale; or
(ii) cost price in case of manufacture,
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
the amount of input tax credit shall be claimed and be allowed
to the extent of tax payable on the sale value of g oods or
manufactured goods. (Clause (f) was inserted w.e.f. 20-08-2010
vide notif. no 1101(2) dt. 20-08-2010, U.P . Act No 19 of 2010)
xxx xxx xxx
(3) (a)Where purchased goods are to be used or disposed of partially
for the purpose specifi ed in clause (a) of sub-section (1) or otherwise,
the input tax credit may be claimed and be allowed proportionate to
the extent they are used or disposed of for the purposes spe cifi ed in
such clause,
(b)Subject to the provisions of this section where during proc ess 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 tha n
non vat goods and exempt goods Explanation:- For the purpose of
this subsection the “exempt goods” shall include taxable goods other
than non vat goods, which are disposed of otherwise than by way of
sale within the State or in the course of inter-State trade or commerce
or sale in the course of export of goods out of the territory of India or
sale out side the State.”
xxx xxx xxx
Explanation:-For the purposes of this section, –
(i) goods for use in manufacture of any goods includes goods
required for use, consumption or utilization in manufacture or
processing of such goods or goods required for use in packing
of such manufactured or processed goods;
(ii) manufacture of any goods includes processing of such goods
and packing of such manufactured or processed goods; and
(iii) where during the process of manufacture of any taxable
goods any exempt goods are produced as by-product or waste-
product, it shall be deemed that purchased goods have been used
759
in the manufacture of taxable goods. Conversely, where during
the process of manufacture of any exempt goods any taxable
goods are produced as by-product or waste product; it shall be
deemed that purchased goods have been used in the manufacture
of exempt goods.
(iv) where during the process of manufacture of any vat goods
any non-vat goods are produced as by-product or waste-product,
it shall be deemed that purchased goods have been used in the
manufacture of vat goods. Similarly, where during the process of
manufacture of any non-vat goods any vat goods are produced as
by-product or waste-product, it shall be deemed that purchased
goods have been used in the manufacture of non-vat goods.
(w.e.f.01.01.2008).”
(Emphasis supplied)
26. As the entire debate revolves around the interpretation of Section 13
of the UP VAT Act, we must look into the Statement of objects and reasons
for the enactment of Section 13(1)(f) by way of the 2010 Amendment Act.
In the Statement of objects and reasons of the Uttar Pradesh Value Added
Tax (Amendment) Bill, 2010 (for short, “the 2010 Amendment”), it has
been stated that the amendment was to provide for –
“xxx
(d) limiting the input tax credit to the extent of tax payable on the sale
value of goods or manufactured goods in cases where goods purchased
are resold or goods manufactured or processed by using or utilizing
such purchased goods are sold at a price lower than purchase price
or cost price;”
(Emphasis supplied)
27. The plain reading of the aforesaid would 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 amendment was eff ected
with some defi nite purpose. 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
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
or waste products) manufactured were being sold at a price lower than the
cost price.
28. It is in such cases that the extent of permissible or a llowable
ITC would be limited to the tax payable on the sale value of th e goods or
manufactured goods. We are at one with Mr. Datar that this was the sole
purpose of the 2010 Amendment.
29. We are also at one with Mr. Datar that the defi nition of “goods”
under Section 2(m) of the UP VAT Act referred to above does not diff erentiate
between exempt and taxable goods and equally, the word “goods” under
Section 13(1)(f) of the UP VAT Act has also not been qualifi ed by the word
“taxable”.
30. Mr. Datar is right in his submission that the necessary coroll ary
to the reading of the provision ought to be that th e goods which are
manufactured/produced by using or utilizing the purchased goods and whose
sale price is being considered for applying Section 13(1)(f) of the UP VAT
Act, ought to be taxable goods.
31. The aforesaid is further manifested from the fact that wherever
the legislative intent was to qualify “goods” with the word “taxable”, it has
been so done by the Legislature in Section 13 of the UP VAT Act itself.
32. 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.
33. Mr. Datar is right in his submission that the said omission in Section
13(1)(f) is all the more glaring considering that the said amendment w as
inserted in the year 2010.
34. In the aforesaid context, our attention was also drawn by Mr. Datar
to the provisions of Rule 23(6) of the Uttar Pradesh Value Added Tax Rules,
2006 (for short, “the UP V AT Rules”) (which provides for the computation
of reverse ITC in cases of a dealer other than a trader), wherein t he word
“goods” has not been qualifi ed by “taxable” and rather has used the word
“any” to expressly convey the unequivocal legislative mandate. Rule 23(6)
of the UP VAT Rules is reproduced hereunder:
761
“23. Computation of reverse input tax credit in cases of a dealer other
than trader:
(1) In case of a dealer, other than a dealer referred to in sub-rule (1) of
rule 22, amount of reverse input tax credit, in respect of any quantity
or measure of any goods-
xxx xxx xxx
(6) In respect of any quantity or measure of any goods manufactured
or processed by using or utilizing purchased goods, sold at the price
which is lower than cost price, the amount of reverse input tax credit
shall be equal to the diff erential amount of tax paid or payable on the
purchase price of such goods and tax paid or payable on sale price of
manufactured or processed goods sold.”
35. We take notice of the fact that “taxable goods” has been separately
defi ned under Section 2(ai) of the UP VAT Act. The defi nition reads thus:
“(ai) “taxable goods” means any goods except goods mentioned or
described in column (2) of Schedule I;”
GENERAL PRINCIPLES FOR INTERPRETATION OF TAXING
STATUTES
36. It is well accepted that a statute must be construed in accordance
with the intention of the Legislature and the courts should act upon the true
intention of the Legislation while applying law and while interpreting law.
In the litigation on hand, we have been asked to interpret the provisions of
a taxing statute.
37. Justice G.P. Singh, in his treatise Principles of Statutory
Interpretation (14th Edn. 2016 p. 879) after referring to Micklethwait, In
re;1 Partington v. Attorney General2, Rajasthan Rajya Sahakari Spg. &
Ginning Mills Federation Ltd. v. CIT3, State Bank of Travancore v. CIT4
1 (1855) LR 11 Ex 452 : 156 ER 908
2 (1869) LR 4 HL 100
3 (2014) 11 SCC 672
4 (1986) 2 SCC 11 : 1986 SCC (Tax) 289
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
and Cape Brandy Syndicate v. IRC5, summed up the law in the following
manner:
“A taxing statute is to be strictly construed. The well-established rule in
the familiar words of Lord Wensleydale, reaffi rmed by Lord Halsbury6
and Lord Simonds7, means:
“The subject is not to be taxed without clear words for that purpose;
and also that every Act of Parliament must be read according to the
natural construction of its words.””
38. In a classic passage Lord Cairns stated the principle thus:
“If the person sought to be taxed comes within the letter of the law he
must be taxed, however great the hardship may appear to the judicial
mind to be. On the other hand, if the Crown seeking to recover the tax,
cannot bring the subject within the letter of the law, the subject is free,
however apparently within the spirit of law the case might otherwise
appear to be. In other words, if there be admissible in any statute, what
is called an equitable construction, certainly, such a construction is
not admissible in a taxing statute where you can simply adhere to the
words of the statute.”
39. Viscount Simon quoted8 with approval a passage9 from Rowlatt,
J. expressing the principle in the following words: ( Cape Brandy case10,
KB p. 71)
‘… in a taxing Act one has to look merely at what is clearly said. There
is no room for any intendment. There is no equity about a tax. There
is no presumption as to a tax. Nothing is to be read in, nothin g is to
be implied. One can only look fairly at the language used.’”
40. It was further observed:
“In all tax matters one has to interpret the taxation statute strictly.
5 (1921) 1 KB 64
6 Ed: Tennant v. Smith, 1892 AC 150 at p. 154
7 Ed. : St Aubyn v. Attorney General, 1952 AC 15 at p. 32 (HL)
8 Ed. : Canadian Eagle Oil Co. Ltd. v. Selection Trust Ltd., 1946 AC 119 at p. 140 (HL)
9 Cape Brandy Syndicate v. IRC, (1921) 1 KB 64
10 Ibid.
763
Simply because one class of legal entities is given a bene fi t which is
specifi cally stated in the Act, does not mean that the benefi t can be
extended to legal entities not referred to in the Act as there is no equity
in matters of taxation….”
41. Yet again, it was observed:
“It may thus be taken as a maxim of tax law, which although not to be
overstressed ought not to be forgotten that,
‘the subject is not to be taxed unless the words of the taxi ng
statute unambiguously impose the tax [on] him’, (Russell v.
Scott11, AC p. 433).
The proper course in construing revenue Acts is to give a fai r and
reasonable construction to their language without leaning to one side
or the other but keeping in mind that no tax can be imposed without
words clearly showing an intention to lay the burden and that equitable
construction of the words is not permissible [Ormond Investment Co.
v. Betts12 ]. Considerations of hardship, injustice or anomalies do
not play any useful role in construing taxing statutes unless there be
some real ambiguity [Mapp v. Oram 13]. It has also been said that if
taxing provision is
‘so wanting in clarity that no meaning is reasonably clear, the
courts will be unable to regard it as of any eff ect [IRC v. Ross
and Coulter [IRC v. Ross and Coulter14]’.”
42. Further elaborating on this aspect, the learned author stated as
follows:
“Therefore, if the words used are ambiguous and reasonable open
to two interpretations benefi t of interpretation is given to the subject
[Central India Spg. and Wvg. & Mfg. Co. Ltd. v. Municipal Committee,
Wardha15]. If the legislature fails to express itself clearly and the
11 1948 AC 422 : (1948) 2 All ER 1 (HL)
12 1928 AC 143 (HL)
13 1970 AC 362 : (1969) 3 WLR 557 : (1969) 3 All ER 215 (HL)
14 (1948) 1 All ER 616 (HL)
15 AIR 1958 SC 341
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
taxpayer escapes by not being brought within the letter of t he law,
no question of unjustness as such arises [CIT v. Jalgaon Elec tric
Supply Co. Ltd.16 ]. But equitable considerations are not relevant in
construing a taxing statute, [CIT v. Central India Industrie s Ltd. 17],
and similarly logic or reason cannot be of much avail in interpreting
a taxing statute [Azam Jah Bahadur v. Expenditure Tax Offi cer18]. It
is well settled that in the fi eld of taxation, hardship or equity has no
role to play in determining eligibility to tax and it is for the legislature
to determine the same [Kapil Mohan v. CIT 19]. Similarly, hardship
or equity is not relevant in interpreting provisions imposi ng stamp
duty, which is a tax, and the court should not concern itself with the
intention of the legislature when the language expressing such intention
is plain and unambiguous [State of M.P . v. Rakesh Kohli20 ]. But just
as reliance upon equity does not avail an assessee, so it does not avail
the Revenue.”
43. The passages extracted above, were quoted with approval by this
Court in at least two decisions being CIT v. Kasturi and Sons Ltd.21 and State
of W.B. v. Kesoram Industries Ltd.22 (hereinafter referred to as “Kesoram
Industries case”, for brevity). In the later decision, a Bench of fi ve Judges,
after citing the above passage from Justice G.P. Singh’s treatise, summed up
the following principles applicable to the interpretation of a taxing statute:
“(i) In interpreting a taxing statute, equitable consider ations are
entirely out of place. A taxing statute cannot be interpreted on any
presumption or assumption. A taxing statute has to be interpreted in
the light of what is clearly expressed; it cannot imply anything which
is not expressed; it cannot import provisions in the statute so as to
supply any defi ciency; (ii) Before taxing any person, it must be shown
that he falls within the ambit of the charging section by clear words
16 AIR 1960 SC 1182
17 (1972) 3 SCC 311 : AIR 1972 SC 397
18 (1971) 3 SCC 621 : AIR 1972 SC 2319
19 (1999) 1 SCC 430 : AIR 1999 SC 573
20 (2012) 6 SCC 312 : (2012) 3 SCC (Civ) 481
21 (1999) 3 SCC 346
22 (2004) 10 SCC 201
765
used in the section; and (iii) If the words are ambigu ous and open
to two interpretations, the benefi t of interpretation is given to the
subject and there is nothing unjust in a taxpayer escaping if the letter
of the law fails to catch him on account of the legi slature’ s failure
to express itself clearly.”
44. Applying the aforesaid principles of interpreta tion, we fi nd
it diffi cult to accept the case put up by the revenue as doing so would
permit the assessing authority to do something indirectly what he cannot
do directly i.e., get around the mandate of the except ion carved out by
Section 13(3)(b) read with Explanation (iii) by invoking Section 13(1)(f)
of the UP VAT Act.
45. It is also pertinent to note that indisputably, the D ORB which is
produced as part of the Solvent Extraction process is a b y-product of the
manufacturing process. Our attention was drawn by Mr. D atar to a letter
dated 13.01.2015 addressed by the Additional Commis sioner (Legal)
Commercial Tax, UP to all Zonal Additional Commissi oner Grade-I,
Commercial, Tax Uttar Pradesh (Annexure P-1) which reads thus:
“Letter No. Legal-2(1) Rice export (2014-15)/1458/ Commercial Tax
Sender:
The Commissioner
Commercial Tax
Uttar Pradesh
To
All Zonal Addl. Commissioner Grade-1
Commercial Tax
Uttar Pradesh
Lucknow dated 13 Jan. 2015
Sir,
After examining the records of traders/ manufacturer of the rice bran
oil, the Joint Commissioner (SIB) Commercial Tax Gonda vide his DO
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
letter No. 47/ Jt. Comm. (SIB) Commercial Tax Gonda dated 16.7.2011
has submitted a detailed report. Copy of which is attached. In this
context the Addi. Commissioner Grade-1 Commercial Tax Faizabad
Zone, Faizabad has given the following report:
The Joint Commissioner (SIB) Commercial Tax Gonda i n the
perspective of provisions of section 13(3) (B) read with section
13(1)(f) of the VAT Act has expressed this presumpt ion that if
the sale of any taxable goals is effected at the low p rice than the
purchase cost of the raw material then the trader s hall get the
benefit of ITC only up to the extent of sale value of manufactured
goods. The trader produce the rice bran oil by purc hasing the
rice bran in which de-oiled rice bran is received as a byprodu ct/
waste product. In this way such produced is sold at much lower
price in the perspective of cost of production wher eas ITC is
being claimed on the entire amount of utilized rice bran which is
in contra to Section 13(1)(f). In this manner the t rader shall get
the benefit of ITC on the utilized rice bran up to the limit of sale
of produced rice bran.
Hence in relation to above please examine the records manufacturing
units of your zone involved in the extraction of rice bran and oil cake.
The details of action taken in this regard be please made available within
a period of one week.
Encl: as above
Yours faithfully,
Sd/- Sadhna Tripathi
Addl. Commissioner
(Legal) Comm. Tax HQ,
UP”
(Emphasis supplied)
46. It is to be noted that the DORB falls within exempted goods under
S. No. 4 of Schedule I of the UP VAT Act. The relevant Entry is reproduced
below for ease of reference:
767
“SCHEDULE I
[See clause (b) of Section 7 of Uttar Pradesh V alue Added Tax Act, 2008]
LIST OF EXMEPTED GOODS
SI. NO. Name and description of goods
(1) (2)
I [1.] xxx xxx xxx
xxx xxx xxx xxx
4. Aquatic feed; poultry feed including
balanced poultry feed; cattle feed
including balanced cattle feed; and
cattle fodder including green fodder,
chuni, bhusi, chhilka, choker , javi,
gower , de-oiled rice polish, de-oiled
rice bran, de-oiled rice husk, de-
oiled paddy husk or outer covering
of paddy; aquatic, poultry and cattle
feed supplement, concentrate and
additives thereof; wheat bran and
de-oiled cake but excluding oil cake;
rice polish; rice bran and rice husk;
sanai and dhaincha”
47. A bare perusal of the scheme under Section 13 of the UP VAT Act
[and specifi cally under Section 13(1)(a)] makes it abundantly clear that in
cases where the purchased goods (in the present case Rice Bran) are used in
the manufacture of taxable goods (in the present case RBO and physically
refi ned RBO) except the non-VAT goods, and where such manufactured
goods are sold within the State or in the course of inter-state trade and
commerce, the registered dealers (like the assessee herein) are entitled to
claim input tax credit of the full amount. The charging section of the UP
VAT Act, therefore, entitles the assessee to claim full amount of tax paid
on the purchases as ITC.
48. Furthermore, 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 fi ction provides that where during the manufacture of VAT
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
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.
49. Section 13(3)(b), however, leaves a grey area with respect to cases
where the process of manufacture (such as in the present case) results in the
production of VAT goods and by-products or waste products. In such cases,
the legislature has done well to take care of the grey area by providing for
another legal fi ction in the form of Explanation (iii) to Section 13 wherein
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.
50. Explanation (iii) to Section 13, therefore, forbids the Asses sing
Authority as well as the assessee from raising any dispute in regard to the
allowability of the ITC in cases where exempted goods are being produced
as a by-product or waste product during the process of manufacture.
WHETHER THE HIGH COURT WAS RIGHT IN PLACING
RELIANCE ON THE DECISION OF THIS COURT IN THE
CASE OF M.K. AGRO TECH PRIV ATE LIMITED (SUPRA)
51. The revenue has relied upon the decision of this Court in M.K.
Agro Tech (supra), as the basis for denying ITC to the assessee.
52. The decision in the case of M.K. Agro Tech (supra), was rendered
by this Court, examining the claim of ITC by an assessee on the goods
purchased under the Karnataka Value Added Tax Act, 2003 (for short
“Karnataka V AT Act”).
53. In the case of M.K. Agro Tech (supra), the assessee was engaged
in the manufacture of sunfl ower oil (taxable goods), which is extracted from
sunfl ower cake, by employing solvent extraction process. Sunfl ower oil cake
is the input/raw material on which VAT was payable. During the extraction
process, a ‘by-product’ in the form of de-oiled sunfl ower oil is produced.
The said by-product was also exempted under the Karnataka VAT Act.
54. Section 17 of the Karnataka VAT Act relates to partial rebate and
deals with contingencies where the fi nal products are more than one and
769
the output tax is payable only on some products with the other remaining
products being exempted from the payment of tax. In the said case as no tax
was payable on the ‘by-product’, the ITC was only partially admissible.
Rule 131 of the Karnataka Value Added Tax Rules, 2005 (for short “KV AT
Rules”) relates to the apportionment of ITC in cases of dealer falling under
Section 17 of the Karnataka VAT Act.
55. The relevant portion of Section 17 of the Karnataka VAT Act and
Rule 131 of KVAT Rules are reproduced below:
“17. Partial rebate.- Where a registered dealer deducting input tax.-
(1) makes sales of taxable goods and goods exempt under Section
5, or
xxx xxx xxx
Rule 131. Apportionment.— Apportionment of input tax in the case
of a dealer falling under section 17 shall be calculated as follows.-
(1) All input tax directly relating to sale of goods exe mpt under
section 5 other than such goods sold in the course of export out of
the territory of India, is non-deductible.
(2) All input tax directly relating to taxable sales may be deducted,
subject to the provisions of section 11.
(3) Any input tax relating to both sale of taxable goods and ex empt
goods, including inputs used for non-taxable transactions, that is,
the non-deductible input tax, may be calculated on the basis of the
following formula:”
(Emphasis supplied)
56. This Court while examining Section 17 of the KVAT Act, read with
Rule 131 of the KVAT Rules, held that ITC was admissible to the extent of
inputs used in the sale of taxable goods. The relevant observations of this
Court are reproduced below:
“28. The fi rst mistake which is committed by the High Court is to ignore
the plain language of sub-section (1) of Section 17. This provisi on
which allows partial rebate makes the said provision applicable on
the ‘sales’ of taxable goods and goods exempt under Section 5. Thus,
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
this sub-section refers to ‘sale’ of the ‘goods’, taxable as well as
exempt, and is not relatable to the ‘manufacture’ of the goods. The
High Court has been swayed by the fact that while extracting oil from
sunfl ower, cake emerges only as a by-product. Relevant event is not the
manufacture of an item from which the said by-product is emerging.
On the contrary, it is the sale of goods which triggers the provisions
of Section 17 of KVAT Act. Whether it is by-product or manufactured
product is immaterial and irrelevant. Fact remains that de-oiled cake
is a saleable commodity which is actually sold by the respondent
assessee. Therefore, de-oiled cake fi ts into the defi nition 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.
29. Secondly, as rightly pointed out by the learned counsel for t he
appellant, the High Court has not considered the import and eff ect
of sub-rule (3) of Rule 131 of the KVAT Rules. We hav e already
reproduced Rule 131, including sub-rule (3) thereof. After perusi ng
Rule 131 in its entirety, it becomes clear that sub-rule (1) pertains
to input tax directly relatable to sales of exempt goods which is non-
deductible. Likewise, sub-rule (2) mandates that input tax dir ectly
relating to sale of goods shall be deductible. On the other hand, sub-
rule (3) covers those cases where input tax is not directly relatable to
exempt goods and taxable goods. It is therefore, applied in those cases
where input tax relating to both sale and taxable goods and exemp t
goods is known. In that situation, formula is given under this sub-rule
to work out the partial deduction. The High Court has neither take
note of nor discussed sub-rule (3).
xxx xxx xxx
32. On literal interpretation of Section 17 it can be gathered that it does
not distinguish between by-product, ancillary product, intermediary
product or fi nal product. The expressions used are ‘goods’ and ‘sale’ of
such goods is covered under Section 17. Both these ingredients stand
satisfi ed as de-oiled cakes are goods and the respondent assessee
had sold those goods for 8 (1993) Supp 4 SCC 536 9 (2015) 15 SCC
125 Civil Appeal Nos. 15049-15069/2017 Page 24 of 26 valuable
771
consideration. We may point out there that the assessing authorities
recorded a clear fi nding, which was accepted by the Tribunal as well,
that records and statement of accounts of the respondent assessee
clearly stipulates that after solvent extraction is compl eted, 88% of
de-oiled cake remains and only 12% remains is the oil which is further
refi ned in the refi nery. This clearly shows that major outcome (88%)
of the solvent extraction plant is de-oiled cake which in itse lf is a
marketable good having market value.”
(Emphasis supplied)
57. In the case of M.K. Agro Tech (supra), this Court held that only
partial ITC was permitted to the assessee as they were making taxable and
exempted sales from the dutiable raw materials procured by them. In Para
28, this Court has elaborated on the scheme under the Karnataka VAT Act, to
emphasise that the provision which allows partial rebate is made applicable
on the ‘sales’ of taxable goods and goods exempt under Section 5. It refers
to ‘sale’ of ‘goods’, taxable as well as exempt, and is not relatable to the
‘manufacture’ of the goods. Further elaboration has been made to hold that
upon the ‘sale’ of goods exempted under Section 5 of the Karnataka VAT
Act, partial rebate shall only be admissible.
58. This Court in the said case, permitted only partial ITC as the
wordings of the provision relates only with ‘sale’ and not ‘manufacture.
This distinction has also been acknowledged.
59. In such circumstances as aforesaid, we are of the view th at the
decision of M.K. Agro Tech (supra), is not applicable to the case on hand
as the provisions under the Karnataka VAT Act are quite diff erent compared
to that of the UP VAT Act in regard to the scheme of ITC.
60. Section 11 of the Karnataka VAT Act reads thus:
“11. Input tax restrictions. –
(a) Input tax shall not be deducted in calculating the net tax payable
in respect of —
tax paid on purchases attributable to sale of exempted goods
exempted under Section 5, except when such goods are sold in
the course of export out of the territory of India;”
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
61. Section 11(a)(1) of the Karanataka VAT Act as above specifi cally
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 an y
such scheme or provision that aims at achieving the same.
62. Au contraire, Explanation (iii) to Section 13 read with Section
13(3)(b) UP VAT Act, as outlined above, seeks to create a deeming fi ction
where during the manufacture of any taxable goods any exempt goods
are produced as by-product or waste product, it shall be deemed tha t the
purchased goods have been used in the manufacture of taxable goods. The
scheme under the UP VAT Act therefore, is wholly distinct from the one
provided in the Karnataka VAT Act.
63. The Karnataka VAT Act with the aid of Section 17 read with Rule
131 of the Karnataka VAT Rules seeks to provide a statutory mec hanism
for grant of partial rebate where a registered dealer de ducting input tax
makes sale of taxable goods as well as exempt goods. The apportionme nt
and attribution of input tax deductible between such sales and dispatch of
goods for such purpose, shall be made in accordance with Rule 131 of the
KVAT Rules and any input tax deducted in excess becomes re-payable
forthwith. Further, Rule 131 of the KVAT Rules specifi cally provides that
all input tax directly relating to sale of goods exempt under Section 5 other
than such goods sold in the course of export out of the territory of India, is
non-deductible.
64. However, the scheme under the UP VAT Act is not the same as in
Karnataka and no such 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 applica ble to the
facts of the present case, and could not have been relied upon to deny the
full ITC to the assessee.
65. Under Section 13(1)(a) read with S. No. 2 (ii) of the table appended
and Section 13(3)(b) read with Explanation (iii) of Section 13, the scheme
of ITC is concerned with the ‘manufacture’ of goods and not ‘sale’ as dealt
with in M.K. Agro Tech (supra).
773
66. Further, the deeming fi ction as provided by the Explanation (iii) to
Section 13 makes all the diff erence. It says that where during the manufacture
of any taxable goods, any exempt goods are produced as by-products or
waste product, it shall be deemed that the purchased goods have been used
in the manufacture of taxable goods, creating a wholly distinct schem e to
the one envisaged under the Karnataka VAT Act.
67. The following illustration highlights the diff erence between the
ITC scheme envisaged under the Karnataka VAT Act and the scheme under
the UP VAT Act:
I. Karnataka V AT Act, 2003
Total Sales = Rs. 1,000/-
Taxable goods = Rs. 250/-
Exempt goods/By-product = Rs. 700
Non-tax goods = Rs. 50
Total ITC on purchases = Rs. 100
In terms of the formula prescribed in Rule 131(3), the non-deductible
ITC shall be as follows:
700 + 50/1000 * 100 = Rs. 75
Only Rs. 25/- will be allowed as ITC and Rs. 75 will be disallowed
under Section 17 of the Karnataka V AT Act, read with Rule 131
of the KV AT Rules.
II. Uttar Pradesh V AT Act, 2008
Total Sales = Rs. 1,000/-
Taxable goods (RBO) = Rs. 250
Exempt goods (DORB) = Rs. 700
Non-VAT goods = Rs. 50
Total ITC on purchases = Rs. 100/-
In terms of Explanation (iii) to Section 13 of the UP V AT Act, both
the taxable goods and the by-product will be eligible to claim ITC.
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
The disallowance will be limited to non-V AT goods which is Rs.
50/-, thus the disallowance of ITC will be Rs. 5/- only.”
68. The aforesaid discussion as regards the salient features of the two
enactments can be outlined briefl y as under:
Provisions of the U.P. VAT Act and
U.P. V AT Rules
Provisions of the Karnataka V AT
Act and Karnataka V AT Rules
13. Input tax credit
(1) ...
(f) Notwithstanding anything to the
contrary contained in this sub-section
where goods purchased are resold
or goods manufactured or processed
by using or utilizing such purchased
goods are sold, at the price which in
lower than
(a) purchase price of such goods in case
of resale; or
(b) cost price in case of manufacture,
the amount of input tax credit shall be
claimed and be allowed to the extent of
tax payable on the sale value of goods
or manufactured goods.
Section 11. Input tax restrictions. –
(a) Input tax shall not be deducted
in calculating the net tax payable in
respect of-
(1) tax paid on purchases attributable to
sale of exempted goods exempted under
Section 5, except when such goods are
sold in the course of export out of the
territory of India;”
Section 17. Partial rebate. –Where a
registered dealer deducting input tax-
(1) makes sales of taxable goods and
goods exempt under Section 5, or
(2) in addition to the sales referred to in
clause (1), dispatches taxable goods or
goods exempted under Section 5 outside
the State not as a direct result of sale
or purchase in the course of inter-State
trade, or
775
(3) puts to use the inputs purchased
in any other purpose (other than sale,
manufacturing, processing, packing or
storing of goods), in addition to use in
the course of his business,
apportionment and attribution of input
tax deductible between such sales and
dispatches of goods or such purpose,
shall be made in accordance with
Rules or by special methods to be
approved by the Commissioner or any
other authorised person and any input
tax deducted in excess shall become
repayable forthwith.”
Rule 131. Apportionment.-
Apportionment of input tax in the
case of a dealer falling under Section 17
shall be calculated as follows –
(1) All input tax directly relating to
sale of goods exempt under Section 5
other than such goods sold in the
course of export out of the territory
of India, is non-deductible.
(2) All input tax directly relating to
taxable sales may be deducted,
subject to the provisions of Section
11.
(3) Any input tax relating to both sale
of taxable goods and exempt goods
including inputs used for nontaxable
transactions, that is, the nondeductible
input tax, may be
calculated on the basis of the
following formula:
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF
COMMERCIAL TAX UP [J. B. PARDIWALA, J.]
(Sales of exempt goods + nontaxable
transactions) x Total input
tax.
(i) Non-deductible input tax = -------
-----
Total sales (including non-taxable
transactions)
(4)….
(5) Where in the case of any dealer,
the Commissioner is of the opinion
that the application of the formula
prescribed under clause (3) does not
give the correct amount of deductible
input tax, he may direct the dealer to
adopt a special formula as he may
specify. “
69. For all the foregoing reasons, we have reached to the conclusion
that the High Court committed an error in passing the impugned judgment
relying on the decision of this Court rendered in M.K. Agro Tech (supra).
70. In the result, both the appeals succeed and are hereby allowed.
71. The impugned common judgment and order passed b y the
High Court of Allahabad is hereby set aside and the orders passed by the
Commercial Tax Tribunal dated 04.05.2016 and 05.07.2017 are hereby
restored.
72. Pending applications if any shall stand disposed of.