Akil Kureshi, J.:— The appellant assessee has challenged the judgement of the Value Added Tax Tribunal dated 12.12.2014 in the following background.
2. Facts which are not in dispute are that the assessee company purchased timber which are taxable goods, for the purpose of manufacturing and selling logs or sawn timber of specified size. On such raw material, the assessee carries on the process of sawing during which process, in addition to the main product of sawn timber, sawn dust which is used as firewood, would come into existence by way of by-product. The assessee sales the sawn timber which is also a taxable commodity. The assessee also sales the firewood which is by virtue of entry 23(i) in the First schedule to the Gujarat Value Added Tax Act, 2003 (“VAT Act” for short), exempt from payment of tax. The proportion of firewood is about 1% of the raw material.
3. In this background, the question of assessee taking full tax credit on the purchase of timber came up for consideration on an application filed by the assessee to the Commissioner of Commercial Tax under section 80 of the VAT Act. The Joint Commissioner (Ahmedabad) by order dated 31.12.2013 opined that by virtue of proviso to sub-section 11(3)(a) and section 11(8)(a) the VAT Act to the extent the purchased timber was used for manufacturing the firewood, the assessee would not be entitled to tax credit. Aggrieved by the said order of the Joint Commissioner, the assessee preferred appeal before the Tribunal. The Tribunal by the impugned judgement dated 12.12.2014 dismissed the appeal and confirmed the view of the Joint Commissioner. The Tribunal was of the opinion that:
“Further, the scheme of the Act, to our mind is such that all the taxable goods carry tax until it reaches the last customer for consumption. Thus, the last customer who would consume the goods has to bear the ultimate burden of the tax. From production/manufacture to market to agency, to sub-agency, stockiest, the whole seller, retailer and the last consumer who purchases the goods for consumption, forms a long chain. And in this chain the consumer is at the last point, who has to bear the tax which is carried by the taxable goods.
Now, if in this chain, one link (who may be manufacturer, or other person in the chain) converts any taxable goods into tax free goods, that link, thereby becomes liable to pay tax for the proportion which is converted from taxable goods to tax free goods. Because otherwise, the entire goods has to be taxable goods till it reaches the ultimate consumers. In this view of the facts also, the appellant becomes liable pay tax…..by reduction of the input tax credit.”
4. This judgement the assessee has challenged in the tax appeal in which at the time of admission, following question of law was framed:
“Whether in the facts and circumstances of the case the learned Gujarat Value Added Tax Tribunal is justified in holding that input tax credit of tax paid on purchases of timber logs is required to be proportionately reduced under the proviso to Section 11(3)(a) or Section 11(8)(a) of the Gujarat Value Added Tax Act, 2003 to the extent the waste product generated during the process of sawing of timber is sold as firewood which is exempt from tax?”
5. Learned counsel Shri Uchit Sheth for the appellant submitted that in terms of section 11(8)(a) of the VAT Act, the assessee was entitled to tax credit on purchase of the goods since the entire quantity was used as raw material in manufacture of taxable goods. He submitted that proviso to sub-section (3)(a) of section 11 in such a situation would not apply. Merely because a small portion of the timber by way of waste was sold as firewood, would not mean that the entire quantity purchased by the assessee was not used for manufacturing of taxable goods. He highlighted that the scrap generated during such process was barely about 1% of the entire quantity of timber. Counsel relied on the following decisions in support of his contentions:
(1) In case of State of Gujarat v. Jayant Agro Organics Ltd., order dated 10, 11.8.2015 passed in Tax Appeal No. 1129/2013.
(2) In case of Commissioner of C. Ex. & Customs, Vadodara-1 v. Sterling Gelatin reported in 2011 (270) ELT 200 (Guj).
(3) On decision of Madhya Pradesh High Court in case of Ruchi Soya Industries Ltd. v. State of MP reported in (2014) 70 VST 40 (MP).
(4) In case of Swadeshi Polytex Ltd. v. Collector of C. Ex. reported in 1989 (44) ELT 794 (SC).
(5) On decision of Karnataka High Court in case of M.K Agro Tech (Private) Limited v. State of Karnataka (order dated 17.7.2014 passed in Sales Tax Revision Petition Nos. 774 to 794 of 2013)
6. On the other hand, learned AGP Shri Pranav Trivedi opposed the appeal contending that the Tribunal has correctly applied the statutory provisions. To the extent firewood was generated, the assessee was not entitled to tax credit on purchase of timber since such firewood was exempted from payment of tax. Proviso to section 11(3)(a) would therefore, apply.
7. Facts are seriously not in dispute. The appellant purchased timber which is taxable for the purposes of manufacturing sawn timber or logs which is also taxable. The process creates a waste of about 1% of sawn dust which is sold as firewood and which is exempt from payment of tax.
8. In this context, we may notice statutory provisions applicable. Section 11 of the VAT Act pertains to tax credit. In terms of sub-section (1) thereof, a registered dealer would be entitled to tax credit equal to the amount of tax collected from the purchasing dealer subject to fulfillment of certain conditions. As per sub-section (2) of section 11, the registered dealer intending to claim the tax credit is required to maintain register and the books of accounts in such manner as may be prescribed. Relevant portion of sub-section(3) reads as under:
“(3)(a) Subject to the provisions of this section, tax credit to be claimed under sub-section (1) shall be allowed to a purchasing dealer on his purchase of taxable goods made in the State, which are intended for the purpose of—
(vi) use as raw material in the manufacture of taxable goods intended for (i) to (v) above or in the packing of the goods so manufactured.
Provided that if purchases are used partially for the purposes specified in this sub-section, the tax credit shall be allowed proportionate to the extent they are used for the purposes specified in this sub-section”.
9. Sub-section(5) of section 11 provides that notwithstanding anything contained in this Act, tax credit shall not be allowed for purchases in cases mentioned in clauses (a) to (p) thereof. Clause (h) reads as under:
“(h) of the goods which are used in manufacture of goods specified in Schedule I or the goods exempt from the whole of the tax by a notification under sub-section(2) of section 5 or in the packing of goods so manufactured;”
10. Sub-section (8) of section 11 reads as under:
“8(a) If the goods purchased were intended for the purposes specified under sub-section (3) and are subsequently used fully or partly for purposes other than those specified under the said sub-section or are used fully or partly in the circumstances described in sub-section (5), the tax credit, if availed of, shall be reduced on account of such use, from the tax credit being claimed for the tax period during which such use has taken place and such reduction shall be done in the manner as may be prescribed.
(b) Where the capital goods referred to in sub-clause(vii) of clause (a) of sub-section(3) are not used continuously for a full period of five years in the State, the amount of tax credit shall be reduced proportionately having regard to the period falling short of the period of five years.”
11. From the above statutory provisions, it can be seen that as per clause (a) of sub-section(3) of section 11, tax credit under sub-section(1) would be allowed to a purchasing dealer for his purchase of taxable goods which are intended for the purposes mentioned in clauses (i) to (vii). Clause (vi) thereof refers to use as raw material in the manufacture of taxable goods intended for clauses (i) to (v) or in the packing of the goods so manufactured. Thus in terms of clause(vi) of sub-section(3)(a) of section 11 with respect to raw material for the manufacture of taxable goods intended for the purposes mentioned in clauses (i) to (v), tax credit would be allowed. Proviso to sub-section(3) however, limits the scope for such tax credit by providing that if purchases are used partially for the purposes specified in the said section, the tax credit shall be allowed proportionately to the extent they are used for the purpose they are so specified.
12. In terms of proviso, thus if the purchases mentioned in clause (vi) namely, the raw material is used only partially for specified purposes, the tax credit would be restricted proportionate to the extent they are so used for such purpose. In other words, to the extent the raw material is used partially for the purposes other than those specified in the sub-section, there shall be proportionate disallowance of available tax credit. However, for applicability of this proviso what has to be fundamentally seen is whether the purchases are used partially for the purposes specified. If the purchases are used fully for the specified purposes, the proviso would have no applicability and consequently the concept of proportionate allowance of tax credit would not apply.
13. In the present case, it is not even the case of the department that the entire timber purchased by the assessee was not used for the purpose of manufacturing sawn timber or logs. The department however, contends that howsoever unintentional, since the firewood came into existence as a by-product, the_proviso would apply. This begs the question of use of the raw material for the specified purpose. In our opinion, since the entire commodity purchased by the dealer was used for the specified purpose, namely, as a raw material in manufacturing of taxable goods, entire tax credit was required to be granted. The restriction or disallowance referred to in the said proviso, would not apply. Merely because in the process of manufacturing sawn timber or logs, a small quantity of waste incidentally is created by way of by-product which is sold as firewood, would not mean that the raw material purchased was not used fully for manufacture of the specified product.
14. Clause (h) of sub-section(5) merely clarifies and declares that notwithstanding anything contained in the Act, tax credit shall not be allowed for purchases of goods which are used in manufacture of goods specified in Schedule-I i.e goods which are exempt from payment of tax. Like-wise, sub-section (8)(a) of section 11 applies where the goods are purchased with intention for use of specified purposes under sub-section(3) but are subsequently used or partially for other purposes. On the same logic adopted by us for holding that proviso to subsection (3)(a) would not apply, neither clause(h) of sub-section(5) nor sub-section (8)(a) of section 11 would apply.
15. Division Bench of this Court in case of State of Gujarat v. Jayant Agro Organics Ltd., (supra) was considering a situation where the as sessee had purchased castor seeds for production of castor oil. After two cycles of extraction of oil from the castor seeds, what was left was a residue known as de-oiled cake which was used by the assessee for home consumption as fuel. The department contended that the tax credit, to the extent the castor seeds were used for production of de-oiled cake, would not be available in view of the proviso to section 11(3). The High Court negatived the contention making the following observations:
“19 Considering the above observations, compared with the facts of the present case, it is clear that the entire purchase made by the company is intended to manufacture castor oil and oil based products. In the first phase, when crushing of the seeds takes place, only some portion of the seeds turn into oil. After the first process of crushing the seeds, most of the oil is extracted. The said castor oil cake is again crushed and the remaining portion of the castor oil is extracted therefrom in the second process leaving the waste, which is of no use to the company and therefore the same is used in the furnace as a fuel in the manufacture of castor oil as well as other products. Only the waste is used as fuel and that too again in the manufacturing process of oil. Therefore, in our opinion, it would not fall under proviso to Section 11(a) of the Act.”
16. Similar view was expressed by the Division Bench of Madhya Pradesh High Court in case of Ruchi Soya Industries Ltd. (supra), making the following observations:
“13. From the aforesaid finding of the honourable Supreme Court, it is clear that manufacturer is eligible the benefit of set-off on the entire amount of tax paid on purchase of raw material and principle of apportionment could not be invoked. In the facts and circumstances of the present case, the judgement of the honourable Supreme Court is applicable because the DOC, a by-product is tax-free and another by-product sludge and main product oil are taxable. Hence, the authority cannot apportion the tax liability after deducting the percentage of proportionate manufacture of DOC, which has been done in the present
17. The Karnataka High Court also in case of M.K Agro Tech (Private) Limited v. State of Karnataka (supra) considered a similar situation as under:
“10. In this case it is not in dispute that the assessee is in the business of sale and manufacture of sunflower oil from sunflower oil cake had applied solvent extraction process. He did not set up any industrial unit for the purpose of manufacturing de-oiled cake. The entire raw material named as sunflower cake purchased is for the manufacture of sunflower oil. But, in the process, after the entire sunflower oil is extracted, de-oiled cake remains. The said de-oiled cake also has a value. He cannot keep that de-oiled cake in his premises as it could occupy a large space and no purpose would be served by keeping the same. Merely because the said de-oiled cake also has a value and he sells the same, there is no justification to deny the benefit of deduction to the assessee, because there is no direct nexus between the sunflower oil cake and the de-oiled cake. Sunflower oil cake was purchased for the purpose of extracting oil from the said cake and for the sale of (the de-oiled cake, the assessee has not put-up a separate unit. Therefore, it is not the case that assessee has put-up a separate industry for the purpose of manufacture of de-oiled cake and merely because the de-oiled cake has some value and it is sold, that would not take away the benefit conferred on the assessee by the statute. A harmonious interpretation of Sections 10, 11(a)(1) and 17 of KVAT Act and Rule 131 of the Karnataka Value Added Tax Rules, 2005, makes it very clear that it is only when there is direct relationship to the taxable sales, the assessee is entitled to the benefit. The assessee cannot be denied the benefit, taking into consideration the sale of de-oiled cake which is an exempted goods. In that view of the matter, the authorities have not properly appreciated the said statutory provisions. The legislative intent is defeated in denying the benefit of input tax deduction relying on Section 11(a)(1) read with Section 17 of the Act. The impugned order is unsustainable. Hence, we pass the following order. The revision petition is allowed. The impugned order is hereby set aside. It is held that the assessee is entitled to the benefit of ‘Full Input Tax Deduction’. Ordered accordingly.”
18. In case of Swadeshi Polytex Ltd. v. Collector of C. Ex. (supra), the Supreme Court considered as situation where set-off duty on inputs used for manufacturing of final product was already paid. It was observed that such set-off cannot be denied if non-excisable or fully exempted by-products, materials waste or reside emerged at intermediate stage unless excess use of input is proved.
19. For such reasons, tax appeal is allowed. Question is answered in favour of the assessee and against the department. Judgement of the Tribunal dated 12.12.2014 is reversed. Tax Appeal is disposed of.
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