2014 (2) TMI 815 - HC - VAT and Sales Tax

Court rules tax credit denial should occur once under Gujarat VAT Act, limiting reduction to 4% to prevent unjust outcomes.

STATE OF GUJARAT. Versus RELIANCE INDUSTRIES LTD.

The Court dismissed the Tax Appeals, ruling in favor of the respondent, holding that the denial of tax credit under section 11(3)(b) of the Gujarat Value ... Interpretation of section 11(3) (b)(ii) and (iii) of the Gujarat Value Added Tax Act, 2003 - whether if a particular item falls in more than one of these sub-clauses, denial of tax credit can be applied more than once. - Assessee purchasing furnace oil, natural gas and light diesel oil for manufacturing activity and transferring manufactured goods to branches outside state - Held that:- reduction of tax credit under section 11(3)(b) would in no case exceed four per cent If the interpretation put forth by the State is accepted, a dealer who has availed of tax credit of four per cent would end up surrendering credit by 8 per cent or may be in a given case by 12 per cent. Surely, the Legislature could never have intended the reduction to exceed the tax credit itself. In the present case, this is precisely what would happen if the interpretation of the State is accepted. We have noticed that the furnace oil invites tax at the rate of four per cent. The tax credit thus available to the respondent as a dealer would be limited to such amount. If such tax credit available to the respondent is reduced by eight per cent, it would bring about a situation where credit available is four per cent and what is reduced is eight per cent. Surely, the Legislature never envisaged any such situation while framing section 11(3)(b) of the VAT Act - Decided against Revenue. Issues:Interpretation of section 11(3)(b)(ii) and (iii) of the Gujarat Value Added Tax Act, 2003.Analysis:The case involved the State appealing against the Gujarat Value Added Tax Tribunal's judgment concerning the interpretation of section 11(3)(b)(ii) and (iii) of the VAT Act. The respondent, engaged in manufacturing polymers and chemicals, purchased taxable goods like furnace oil, natural gas, and light diesel oil for its manufacturing activities. The controversy revolved around whether denial of tax credit could be applied twice if goods satisfied descriptions in multiple sub-clauses of section 11(3)(b). The Tribunal ruled in favor of the respondent, prompting the State to file appeals.The relevant provisions of section 11 of the VAT Act were crucial in understanding the dispute. Section 11(3)(b) specified that tax credit for a dealer would be reduced by 4% on the taxable turnover of purchases if goods satisfied descriptions in sub-clauses (i) to (iii). The Tribunal held that denial of tax credit by 4% should only occur once, even if goods fell under both sub-clauses (ii) and (iii). The Tribunal's decision was supported by the interpretation of the legislative language, which did not mandate multiple reductions for goods satisfying different sub-clauses.The Court analyzed the legislative intent behind section 11(3)(b) and emphasized that the reduction of tax credit should not exceed 4%. The proviso in section 11(3)(b) further indicated that the reduction should be limited to the tax credit available, ensuring it does not surpass 4%. Accepting the State's interpretation would lead to unintended consequences, such as dealers surrendering more credit than available. The Court highlighted that the Legislature did not intend for reductions to exceed the tax credit itself, as it would create unjust outcomes for dealers. Therefore, the Court dismissed the Tax Appeals, concluding that no question of law arose from the interpretation of section 11(3)(b)(ii) and (iii) in the present case.