CASE DETAILS v. THE COMMISSIONER OF COMMERCIAL TAX UP

From the Judgment and Order dated 03.05.2019 of the High Court of Judicature at Allahabad in CTR Nos.148 of 2018 and 315 of 2017. Appearances: Arvind P Datar, Sr. Adv., Saubhagya Agarwal, Arjun Sharma, Shreyas Maheshwari, Ms. Sukanya Das, M/s. Karanjawala & Co., Advs. for the Appellant. M/S MODI NATURALS LTD. v. THE COMMISSIONER OF COMMERCIAL TAX UP 749 R. K. Raizada, AAG, Bhakti Vardhan Singh, Anuroop Chakravarti, Ankit Khatri, Advs. for the Respondent. Avi Tandon, Santosh Kumar Gupta, Ms. Meghna Tandon, Ami Tandon, Srinivas Vishven, Mohit Prasad, Ms. Vanshika Gupta, Anish Agarwal, Mohit Shivakumar, Dushyant Sharma, Advs. for the Intervenor. JUDGMENT / ORDER OF THE SUPREME COURT JUDGMENT J. B. PARDIWALA, J.

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.

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.

These appeals are at the instance of an assessee, duly registered under Section 17 of the Uttar Pradesh Value Added Tax Act, 2008 (for short, ‘the UP VAT 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

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 the 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 750 SUPREME COURT REPORTS [2023] 15 S.C.R. 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.

The dispute between the parties relates to the assessment years 2013-14 and 2015-16 respectively.

The assessee by processing Rice Bran in its solvent extraction 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/-.

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 with 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 to the State exchequer.

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. M/S MODI NATURALS LTD. v. THE COMMISSIONER OF COMMERCIAL TAX UP [J. B. PARDIWALA, J.] 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.

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.

Although the Commercial Tax Tribunal passed two separate orders with respect to the two assessment years referred to above, 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.

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?”

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 with 752 SUPREME COURT REPORTS [2023] 15 S.C.R. 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.

In such circumstances referred to above, the asseesee is here before this Court with the present appeals. SUBMISSIONS ON BEHALF OF THE ASSESSEE

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.

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-VAT Goods, the ITC is permissible.

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 the 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 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF COMMERCIAL TAX UP [J. B. PARDIWALA, J.] 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.

In the last, Mr. Datar argued that in construing taxation statutes, 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.

In such circumstances referred to above, Mr. Datar the learned Senior Counsel prayed that there being merit in his appeals those may 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

Mr. R.K. Raizada, the learned Additional Advocate 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.

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 situation wherein the manufacturing of the “VAT goods”, “exempt goods” and “non- VAT goods” are not being produced as the “by-product” or “waste product”.

It was argued that in the case on hand, the cumulative sale 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 754 SUPREME COURT REPORTS [2023] 15 S.C.R. 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.

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).

In such circumstances referred to above, Mr. R.K. Raizada submitted that there being no merit in both the appeals those may be dismissed. ANALYSIS

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 tax 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? RELEVANT PROVISIONS OF THE UP VAT ACT, 2008

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 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF COMMERCIAL TAX UP [J. B. PARDIWALA, J.] 755 (m) “goods” means 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; Xxx (p) “input tax” in relation to a registered dealer who has purchased any goods from within the State, means the aggregate of the amounts of tax, - (i) paid or payable by such registered dealer to the registered selling dealer of such goods in respect of purchase of such goods; (ii) paid directly to the State Government by the purchasing dealer himself in respect of purchase of such goods where such purchasing dealer is liable to pay tax under this Act on the turnover of purchase of such goods Provided that tax paid or payable in respect of transfer of right to use any goods shall not form part of the input tax Xxx (u) “manufacturer” in relation to any goods mentioned or described in column (2) of Schedule IV of this Act, means a dealer who, by application of any process of manufacture, after manufacture of a new commercial commodity inside the State, makes first sale of such new commercial commodity within the State, whether directly or otherwise; and includes a selling agent who makes sale of such new commodity on behalf of the person who has manufactured it; (v) “non-vat goods” means any of the goods mentioned or described in column (2) of Schedule-IV; Xxx 756 SUPREME COURT REPORTS [2023] 15 S.C.R. (z) “registered dealer” means a dealer registered under Section 17 or Section 18; Xxx (ah) “taxable dealer” means a dealer who is liable to pay tax under this Act; (ai) “taxable goods” means any goods except goods mentioned or described in column (2) of Schedule I; Xxx “13.

2. If purchased goods are used in manufacture of Full amount of input - (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.

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 g o o d s a re t r a n s f e r re d o r 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 (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 is lower than (i) purchase price of such goods in case of resale; or (ii) cost price in case of manufacture, 758 SUPREME COURT REPORTS [2023] 15 S.C.R. 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.

(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) (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 specifi ed in such clause, (b)Subject to the provisions of this section where during 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:- 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.” 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 M/S MODI NATURALS LTD. v.

THE COMMISSIONER OF COMMERCIAL TAX UP [J. B. PARDIWALA, J.] 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)

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)

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 760 SUPREME COURT REPORTS [2023] 15 S.C.R. or waste products) manufactured were being sold at a price lower than the cost price.

It is in such cases that the extent of permissible or allowable ITC would be limited to the tax payable on the sale value of the goods or manufactured goods. We are at one with Mr. Datar that this was the sole purpose of the 2010 Amendment.

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”.

Mr. Datar is right in his submission that the necessary corollary to the reading of the provision ought to be that the 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.

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.

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.

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 was inserted in the year 2010.

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 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 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: M/S MODI NATURALS LTD. v. THE COMMISSIONER OF COMMERCIAL TAX UP [J. B. PARDIWALA, J.] 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- (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.

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

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.

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