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A.K. SIKRI, J.

In these appeals, a short but interesting question of law arises for consideration. It pertains to the construction of Section 17 of the Karnataka Value Added Tax (Act), 2003 [hereinafter referred to ‘KVAT Act’] read with Rule 131 of the Karnataka Value Added Tax Rules, 2005 (hereinafter referred to as the ‘KVAT Rules, 2005’).

2) The respondent is the manufacturer of sunflower oil, which is extracted from sunflower cake by employing solvent extraction process. Sunflower oil cake, is, thus, used as input/raw material. On purchase of sunflower oil cake (input) VAT is payable under the KVAT Act. After the extraction of sunflower oil, on its sale again VAT is payable under the said Act. For this reason, provisions of KVAT Act provides for tax credit paid on the input. To this extent there is no issue. However, when the sunflower oil is extracted, by-product in the form of de-oiled sunflower oil cake (hereinafter referred to as the ‘de-oiled cake’) also becomes available. This by-product is sold by the respondent (hereinafter referred to as the ‘assessee) but on the sale of this by-product, no VAT is payable as it is exempted item under the KVAT Act. Section 17 of the KVAT Act takes care of those contingencies where the final products are more than one and output tax is payable on the sale of one such final product but other final product is exempted from payment of the said output tax. Since, no output tax is payable on the sale of exempted goods, the input tax credit in such cases is partially admissible. The manner in which partial exemption is given is provided in Rule 131 of KVAT Rules, 2005.

26) Putting an emphatic response, Mr. Chidambaram laid emphasis on the scheme contained in Section 10 of the KVAT Act dealing with output tax, input tax and net tax. His contention was that this Section clearly provides for payment of net tax by a registered dealer. For this reason, input tax which is paid, has to be deducted from the output tax. Sub-section (3) of Section 10 mandates a registered dealer to pay net tax in respect of each tax period which is the amount of output tax payable by him in that period, less the input tax deductible by him. Therefore, argued the learned senior counsel, the assessee was entitled to deduct the input tax that was paid by it on purchase of sunflower oil cake. He also emphasised the word ‘attributable’; occurring in Section 11(a)(1). On that basis, he argued that Section 11 of the KVAT Act, which prescribes restrictions on input tax categorically mentions that tax paid on purchases ‘attributable’ to sale or manufacture etc. of exempted goods exempt under Section 5 are 3 (1967) 19 STC 1; AIR 1967 SC 1066 not deductible in calculating the net tax payable by the assessee.

27) After examining the relevant provisions of KVAT Act and bestowing our serious consideration to the respective arguments, we find it difficult to accept the aforesaid approach of the High Court.

28) The first mistake which is committed by the High Court is to ignore the plain language of sub-section (1) of Section 17. This provision which allows partial rebate makes the said provision applicable on the ‘sales’ of taxable goods and goods exempt under Section 5. Thus, 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 sunflower, 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 fits into the definition 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.