Karnataka High Court
The State Of Karnataka vs Ashok Iron Works Private Limited on 17 February, 2014
Bench: N.Kumar, C.R.Kumaraswamy
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IN THE HIGH COURT OF KARNATAKA
DHARWAD BENCH
Dated this the 17th day of February 2014
Present
THE HON'BLE MR.JUSTICE N.KUMAR
and
THE HON'BLE MR.JUSTICE C.R.KUMARASWAMY
S.T.R.P. Nos.204 & 217-224 of 2011
Between:
The State of Karnataka,
Represented by the
Commissioner of Commercial
Taxes, Vanijya Therige
Karyalaya, Gandhingar,
Bangalore-1. ...Petitioner
(By Sri. K.S.Patil, HCGP)
And:
Ashok Iron Works Private
Limited, Industrial Estate,
Udyambag, Belgaum. ...Respondent
(By Sri. Sangram S.Kulkarni, Advocate)
These petitions are filed under Section 23(1) of the
Karnataka Sales Tax Act, 1957 against the order dated
26.04.2010 passed in STA Nos.577/2007 and 95 to
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102/2008 on the file of the Karnataka Appellate
Tribunal at Bangalore, allowing the appeals filed under
Section 62(6) of the Karnataka Value Added Tax, 2003
These petitions coming on for final hearing this
day, N.Kumar, J, made the following:
ORDER
The Revenue has preferred these revision petitions challenging the order passed by the Karnataka Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short), which has set aside the order passed by the lower authorities denying deduction of input tax out of job work receipts to the assessee.
2. The assessee is a registered dealer under the Karnataka Value Added Tax Act, 2003 (for short, hereinafter referred to as 'the Act'). The assessee carries on the business of manufacture of cast iron castings in Unit Nos.1 to 3 and also undertakes machining, assembling and other job works in the remaining three units viz., machining and assembly division, cylinder :3: block machining division and cylinder head block machining division. The assessee has filed monthly returns for all the nine tax periods from April, 2005 to December, 2005. The assessee claimed input tax deduction and filed VAT-100 for all the tax periods on the local purchases of raw-materials, consumables etc. which are consumed in the execution of labour work undertaken on behalf of others and also used in the manufacture of his own goods which are meant for sale. The assessee also claimed input tax rebate on the purchase of computer, electronic goods and parts thereof which are used in the processing/manufacturing of his goods as well as the job work and are also used to maintain the books of accounts and to raise tax invoices etc. The assessee also purchased raw-materials from unregistered dealers and used in the above said activity.
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3. An inspection was carried out in the assessee's premises by the authorities on 20th, 21st and 23rd of January 2006. On scrutiny of the entire records maintained by the assessee, the authorities were of the view that the assessee has wrongly claimed the deduction of input tax rebate on purchase of raw- materials and consumables used in job work for which he has received labour charges. Further, he had wrongly putforth a claim for input tax on the purchase of computer and its parts and electronic goods for the month of November 2005 when these purchases of capital goods were made. Accordingly, a notices were issued under Section 39(1) of the Act dated 31.01.2006 for all the nine tax periods to show cause as to why the input tax deduction claimed as aforesaid should not be disallowed. The assessee filed a detailed reply justifying the claim for input tax deduction. The Assessing Authority, after going through the objections filed, modified the proposal by accepting the claim for input :5: tax deduction pertaining to the goods which are used in the inter units, but rejected the claim of input tax deduction pertaining to the goods which are used in carrying out the job work for others and also the claim for input tax deduction on capital goods. The Assessing Authority also did not accept the claim of input tax deduction pertaining to the purchase of electrical and electronic goods which are used not only in the processing of the goods but also used for maintenance of books of accounts, raising of tax invoices etc. Aggrieved by the said order, the assessee preferred an appeal before the Appellate Authority. The Appellate Authority dismissed all the appeals by a common order. Aggrieved by the said order, the assessee preferred an appeal to the Karnataka Appellate Tribunal.
4. The Tribunal, after a careful examination of the entire material on record, after referring to the various provisions of the Act and taking note of the entry in :6: Fifth Schedule, held, the Assessing Authority erred in forming an opinion that the restrictions provided in Section 11 of the Act are applicable to the case on hand and the assessee is not entitled for the claim of input tax deduction in full as the assessee has used major portion of raw-materials and consumables in processing of other goods of others. Section 11(1) of the Act is also not applicable to the case on hand as the processing of goods of others cannot be termed as exempt goods and Section 11(5) of the Act is also inapplicable as the assessee has not effected any consignment/stock transfer transaction. Further, it held the Assessing Authority is not justified in restricting the input tax claim on the purchase of electrical goods, electronic goods and parts thereof as these goods are utilized for preparation of accounts and processing of goods of others. The Entry No.3 of the Fifth schedule does not envisage such kind of restriction. Accordingly, all the appeals were allowed. However, the orders for the :7: months of November 2005 and December 2005 were set aside and the matter was remitted back to the Assessing Authority to examine the issue of input tax rebate on capital goods with reference to filing of Form No.170 in the office of LVO-380 and issuance of Form VAT-175 by the said LVO as per Section 12 of the Act as the said information is not obtained by the assessee from the office of LVO-380. Accordingly, the appeals in STA Nos.577/2007 and 95 to 100/2008 were allowed by setting aside the order of the lower authorities. Appeals in STA Nos.101 and 102/2008 for the months of November 2005 and December 2005 were allowed by setting aside the order of both the authorities below and the matter was remitted back to the assessing authority to pass fresh orders as mentioned in the body of the order and thereafter to revise demand notice. Aggrieved by these orders, the Revenue has filed these revision petitions.
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5. Learned Government Pleader appearing for the Revenue assailing the impugned order contends that the assessee has not paid any output tax in respect of the job work undertaken by it, therefore, the input tax paid on the consumables, which are used in the process of job work, is not eligible for deduction and, in support of his contention, he relies on Section 11(5) of the Act. Secondly, he contended, the assessee is also not entitled to the rebate on input tax paid on the capital goods as they are used in the processing of the goods in respect of which the job work was done. In support of his contention, he relies on item 3 of Fifth Schedule of the Act and, therefore, he submits that the Tribunal was in error in interfering with the orders passed by the lower authorities as the authorities have not kept in mind the provision contained in Section 11(5) of the Act which disentitles an assessee from claiming any input tax in respect of the goods which are despatched outside the State and sold outside the State and, therefore, he :9: submits that seen from any angle the impugned order requires to be set aside.
6. Per contra, learned counsel appearing for the assessee submitted that it is not the requirement of law that only when output tax is paid in respect of goods which are manufactured by utilizing consumables for which input tax is paid that a assessee is eligible for input tax deduction. He submits the benefit of input tax deduction is eligible once the consumables are used in the course of business of the assessee and, therefore, he submits that the Tribunal was justified in extending the benefit of rebate of input tax. Insofar as item No.3 of the Fifth Schedule, on which reliance is placed, is concerned, it was pointed out that there is no total prohibition. If the electrical and electronic goods, appliance are used in the manufacture processing packing on storing of goods for sale and it is used for computing, issue of tax invoices or sale bills, then the : 10 : restriction is waived and the benefit of rebate of input tax is available to the assessee. Insofar as the cases falling under Section 11(5) is concerned, he fairly conceded that if the goods are sold outside the State or despatched outside the State and if the tax paid is less than 4%, the rebate of input tax is not available, but if the tax paid is above 4%, in view of Section 14, he would be entitled to rebate and, therefore, he submits that no case for interference is made out.
7. These revision petitions came to be admitted on 09.10.2012 to consider the following question of law:
Whether the Karnataka Appellate Tribunal is justified in holding that Section 11A of the Act is not applicable to the facts and circumstances of the case?
However, after hearing the parties, by consent, the substantial questions of law are re-framed and they are as under:
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1. To be eligible for input tax rebate, whether tax payable on consumables used in the job work cannot be taken into consideration in arriving at the net tax payable?
2. Whether the assessee is entitled to deduction of input tax in respect of the capital goods in terms of Section 12 of the Act in view of entry 3 of the Fifth Schedule of the Act?
3. Whether the benefit of input tax rebate is not available under Section 11(5) of the Act in respect of the goods which are despatched outside the State or sold outside the State?
8. Substantial Question No.1 The facts are not in dispute. The assessee carries on the business of manufacture of cast iron castings.
The assessee also accepts job work in which raw- materials are supplied by the customers to the assessee. : 12 : The assessee employs labour and also uses consumable in the processing, manufacturing of such goods and only collects labour charges from the customers on which no tax is payable. Now, the question for consideration is, whether the input tax paid on such consumables in relation to the job work done is liable to be deducted out of output tax liable to be paid by the assessee.
The Act defines 'taxable turnover', 'total turnover' and 'turnover'. Section 3 of the Act is the charging section. Section 4 of the Act sets out the basis of levy of tax i.e., the tax is payable on taxable turnover. Section 5 deals with exemption of tax. Section 7 deals with time of sale of goods. Section 9 deals with collection of tax by registered dealers, Governments and statutory authorities. Section 10 defines what is the 'output tax', 'input tax' and 'net tax'. The said section reads as under:
: 13 :"10. Output tax, input tax and net tax (1) Output tax in relation to any registered dealer means the tax payable under this Act in respect of any taxable sale of goods made by that dealer in the course of his business, and includes tax payable by a commission agent in respect of taxable sales of goods made on behalf of such dealer subject to issue of a prescribed declaration by such agent.
(2) Subject to input tax restrictions specified in Sections 11, 12, 14, 17 and 18, input tax in relation to any registered dealer means the tax collected or payable under this Act on the sale to him of any goods for use in the course of his business, and includes the tax on the sale of goods to his agent who purchases such goods on his behalf subject to the manner as may be prescribed to claim input tax in such cases.
(3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered dealer in respect of each tax period shall be the : 14 : amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and shall be accounted for in accordance with the provisions of this Act."
A reading of the aforesaid section makes it clear that 'output tax' in relation to any registered dealer means the tax payable under the Act in respect of any taxable sale of goods made by the dealer in the course of his business. The 'input tax' in relation to any registered dealer means the tax collected or payable under the Act on the sale to him of any goods for use in the course of his business. Sub-section 3 defines 'net tax' payable by a registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in the period and shall be accounted for and in accordance with provisions of this Act. To be eligible for the benefit of the aforesaid section, the invoice debit note or credit note in relation to the sale should be : 15 : issued in accordance with Section 29 of the Act. Sub-section (5) provides that if the input tax deductible by a dealer exceeds output tax payable by him, the excess amount shall be adjusted or refunded together with interest as may be prescribed. The benefit of tax rebate is subject to the restriction specified in Sections 11, 12, 14, 17 and 18 of the Act. Section 11 deals with input tax restriction.
Now, from the wordings of the aforesaid provision, it is clear that the output tax is calculated on the basis of taxable turnover on sale of goods made in the course of business, whereas the benefit of input tax rebate is available when the goods which has suffered input tax are used in the course of the business of the dealer. It has no nexus between the manufacturing of the goods and sale of goods. In the course of a job work, consumables are used. When the dealer purchases these consumables, he is liable to pay input tax. After : 16 : using the consumables, employing the labour job, work is completed and the finished product is delivered to the customer. What the customer pays is the labour charges on which the assessee is not liable to pay any output tax. However, he has utilized the consumables in manufacturing the finished product and he has paid input tax on such consumables. But, this business of job work is in the course of his business. Therefore, by virtue of sub-section (2) of Section 10, if he has paid input tax on consumables which is used in the course of his business, though in the course of job work he is not liable to pay any output tax, still in the taxable turnover of the said business, he is entitled to claim deduction of this input tax, however, subject to the restriction specified in Sections 11, 12, 13, 14, 17 and 18 of the Act. Therefore, the argument that as no output tax is payable on this turnover of the job work, the assessee is not entitled to the benefit of input tax rebate cannot be accepted. When the consumables are used in : 17 : the job work in respect of which no output tax is payable by the assessee or used in the manufacturing activity and used in the manufacturing activity undertaken by the assessee on his own and when the said manufactured goods are sold there is liability to pay output tax by the assessee. The assessee is entitled to the benefit of input tax rebate on the total taxable turnover of his business. Therefore, the approach of the lower authorities that the assessee is not entitled to the benefit of input tax rebate in respect of consumables used in relation to the job work in respect of which no output tax is paid by the assessee is erroneous. The Tribunal rightly set aside the said order and extended the benefit of the tax rebate to the assessee. Therefore, the said finding is affirmed.
9. Substantial Question No.2 Section 11 of the Act deals with deduction of input tax in respect of capital goods which reads as under: : 18 :
"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 or manufacture or processing or packing or storage of exempted goods exempted under Section 5, except when such goods are sold in the course of export out of the territory of India;
(2) tax paid on goods as specified in the Fifth Schedule subject to such conditions as may be specified, purchased and put to use for purposes other than for.-
(i) resale; or
(ii) manufacture or any other
process of other goods for sale.
(3) tax paid on purchase of goods as
may be notified by the Government
or the Commissioner subject to
such conditions as may be specified.
(4) tax paid on purchase of capital
goods other than those falling under clause (2) or (3), except as provided in Section 12.
(5) tax paid on purchase of goods, that are despatched outside the State or : 19 : used as inputs in the manufacture, processing or packing of other taxable goods despatched to a place outside the State, other than as a direct result of sale or purchase in the course of inter-State trade or commerce except as provided in Section 14.
(6) tax paid on purchases attributable to naptha, liquified petroleum gas, furnace oil, superior kerosene oil, kerosene and any other petroleum product, when used as fuel in motor vehicles, but when used as fuel in production of any goods for sale in the course of export out of the territory of India or taxable goods or captive power, input tax shall be deducted as provided in Section 14.
(7) tax paid under sub-section (2) of Section 3 on the purchase of fuel;
(8) tax paid under sub-section (2) of Section 3 on the purchase of goods excluding fuel, until output tax is payable on such goods or other goods in which such goods are put to use except when the said goods are exported out of the territory of India;
(9) tax paid on goods purchased by a dealer who is required to be registered under the Act, but has failed to register.: 20 :
(b) Input tax shall not be deducted by an agent purchasing or selling goods on behalf of any other person other than a non-resident principal.
(c) Input tax shall not be deducted by any dealer executing a works contract,
(i) in respect of the amount paid or payable to any sub-contractor as the consideration for execution of part or whole such works contract for him, that is claimed as deduction;
and
(ii) in respect of the amount actually expended towards labour and other like charges not involving any transfer of property in goods in connection with the execution of works contract, that is claimed as deduction.
This section has to be read along with item No.3 of the Fifth Schedule which is in conformity with Section 11(3) of the Act. Section 11 deals with input tax restriction which provides that input tax shall not be deducted in calculating the net tax payable in respect of tax paid on : 21 : purchase of goods as may be notified by the Government or Commissioner subject to such conditions as may be specified, whereas Section 12 provides that deduction of input tax shall be allowed to the registered dealer in respect of purchase of the capital goods for the use in the business of sale of any goods in the course of export out of territory of India or in the case of any other dealer in respect of the purchase of capital goods wholly or partly for use in the business of taxable goods. For the use in the business of taxable goods. However, entry 3 of 5th schedule reads as under:
"3. All electrical or electronic goods and appliances including air conditioners, air coolers, telephones, fax machines, duplicating machines, photocopiers and scanners, parts and accessories thereof, other than those for use in the manufacture, processing, packing or storing of goods for sale and those for use in computing, issuing tax invoice or sale bills, security and storing information."
A reading of the aforesaid provision makes it clear that it gives effect to both Section 11(3) as well as Section 12 of : 22 : the Act. All electrical or electronic goods and appliances including air conditioners, air coolers, telephones, fax machines, duplicating machines, photocopiers and scanners, parts and accessories thereof, when purchased the input tax paid thereon shall not be deducted in calculating the net tax payable in view of Section 11(a)(3). However, by virtue of Section 12 of the Act, if these goods are used in the manufacture, processing, packing or storing of goods for sale and those for use in computing, issue of tax invoice or sale bills security and storing information, then the input tax paid is eligible for deduction in calculating the net tax payable. Therefore, it is purely a question of fact. The benefit of tax deduction is dependent on the user for which these goods are put to. Based on the said findings, the assessee could be held to be entitled to tax rebate or not. That is the exercise to be done by the Assessing Authority and, therefore, the Tribunal was justified in remanding the matter to the Assessing Authority after setting aside the order to record : 23 : a finding and then apply law to the facts of this case either granting deduction or denying deduction. Therefore, on that score also, order passed by the Tribunal is just and proper and do not call for any interference.
10. Substantial Question No.3 Section 11(5) of the Act deals with restriction on claim for input tax deduction if any tax is paid on purchase of goods that are despatched outside the State or used as inputs in the manufacture, processing or packing of other taxable goods despatched to a place outside the State, other than as a direct result of sale or purchase in the course of inter-State trade or commerce except as provided in Section 14. In other words, if the goods which has suffered input tax was despatched outside the State or used as input in the manufacturing, processing or packing of other taxable goods despatched to a place outside the State, then, the input tax shall not : 24 : be deducted in calculating the net tax. In other words, the benefit of deduction of input tax is available only when the assessee has paid output tax within the State. Again, this is a question of fact to be decided on the material on record and then law is to be applied. Therefore, the finding of the Tribunal that the assessee is entitled to the benefit of deduction of input tax irrespective of the goods being sold within the State or outside the State is not correct. To the said extent the order requires to be corrected.
11. In that view of the matter, we do not see any justification to interfere with the order passed by the Tribunal except for the modification as referred to above. Hence, we pass the following:
ORDER
(i) Revision petitions are dismissed except in respect of the application of Section 11(5) of the Act.: 25 :
(ii) Now, that the matter is remanded to the Tribunal, it shall decide the benefit of extending input tax rebate keeping mind the law laid down as above. It is also necessary for the Tribunal to keep in mind Sections 14 and 17 of the Act while deciding to grant or denying the benefit of input tax rebate.
(iii) Ordered accordingly.
SD/-
JUDGE SD/-
JUDGE Kms