Input tax credit depends on whether exemption attaches to goods themselves, not merely to manufacturers under VAT notifications.

Input tax credit under the Rajasthan VAT Act could be denied only where raw materials were used to manufacture goods that were themselves exempted. Reading Notifications S.O.371, S.O.372 and S.O.377 of 09.03.2007 together, the Rajasthan HC noted that asbestos cement sheets and bricks were deleted from Schedule-I, while their manufacturers were placed in Schedule-II and granted exemption subject to conditions. The exemption therefore attached to the manufacturers, not to the goods as exempted goods under Section 2(13). On that construction, Section 18(1)(e) did not bar credit on raw materials, and the disallowance was unsustainable.

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Issues: (i) Whether manufacturers of asbestos cement sheets and bricks, included in Schedule-II by Notification S.O.372 dated 09.03.2007, were disentitled to input tax credit on raw materials under Section 18(1)(e) of the Rajasthan Value Added Tax Act, 2003. (ii) Whether Notifications S.O.371, S.O.372 and S.O.377 dated 09.03.2007 exempted the goods asbestos cement sheets and bricks, or only the manufacturers, for the purpose of denial of input tax credit.

Issue (i): Whether manufacturers of asbestos cement sheets and bricks, included in Schedule-II by Notification S.O.372 dated 09.03.2007, were disentitled to input tax credit on raw materials under Section 18(1)(e) of the Rajasthan Value Added Tax Act, 2003.

Analysis: Section 18(1)(e) denies input tax credit only where raw materials are used in the manufacture of goods other than exempted goods. Section 8 of the Act creates distinct categories of exemption: exemption of specified goods in Schedule-I, exemption of persons or classes of persons in Schedule-II, and exemption relating to special economic zones or exports. The Notifications dated 09.03.2007 deleted asbestos cement sheets and bricks from Schedule-I, added manufacturers of such goods to Schedule-II, and imposed conditions for exemption of sales by such manufacturers. The structure of the statute and notifications showed that the exemption after 09.03.2007 operated on the manufacturers, not on the goods as exempted goods within Section 2(13).

Conclusion: The manufacturers were not hit by Section 18(1)(e), and input tax credit could not be denied on the footing that the goods were exempted goods.

Issue (ii): Whether Notifications S.O.371, S.O.372 and S.O.377 dated 09.03.2007 exempted the goods asbestos cement sheets and bricks, or only the manufacturers, for the purpose of denial of input tax credit.

Analysis: Reading the three notifications together, S.O.371 took asbestos cement sheets and bricks out of Schedule-I, S.O.372 inserted manufacturers of those goods into Schedule-II, and S.O.377 prescribed conditions for the exemption available to sales by such manufacturers. The communication issued by the department and the contemporaneous administrative understanding also supported the view that the exemption was intended for the manufacturers. The Court distinguished prior authority dealing with conditional exemption of goods, holding that it did not govern a case where the statutory scheme separated exempted goods from exempted persons.

Conclusion: The notifications exempted the manufacturers subject to conditions and did not treat asbestos cement sheets and bricks as exempted goods for the purpose of Section 18(1)(e).

Final Conclusion: The revision petitions succeeded, and the disallowance of input tax credit was unsustainable because the statutory bar applied only to exempted goods, not to exempted manufacturers.

Ratio Decidendi: For denial of input tax credit under Section 18(1)(e), the exemption must attach to the goods themselves; where the statute and notifications exempt only the manufacturer or class of persons, input tax credit on raw materials remains available.

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