2016 (7) TMI 1125 - HC - VAT and Sales Tax

High Court: Full tax credit on raw material allowed against ultimate tax liability without reduction for tax-exempt sales

The High Court ruled in favor of the assessee, holding that the tax paid on raw material should be fully adjusted against the ultimate tax liability ... Input tax credit - whether the tax which the assessee has paid on the purchase of raw material and packing material which is ultimately used in the manufacture and packing of goods is liable to be adjusted in full from the ultimate tax liability which a dealer may stand faced with or is it liable to be adjusted only to the extent of the taxable turnover. - Held that:- Applying the ratio of Bharat Petroleum [1992 (2) TMI 250 - SUPREME COURT OF INDIA] to the facts of the present case and the language of section 4BB, this Court finds the clear absence of a 'quantitative correlation' to the total tax paid on the raw or packing material and their utilisation in the manufacture of taxable goods. Secondly this Court notes that the tax free sales effected by the revisionist was not of its own accord. These were sales effected in favor of units which had been granted exemption from payment of tax under section 4B. Surely the benefit of tax already paid by the revisionist could not be denied adjustment based upon the liability or otherwise of another dealer. Thirdly, the Court notes that the revisionist has effected a sale of goods to entities within the State. However since these enjoyed exemption under Section 4-B, no tax was collected on these sales. The mere fact that tax has not been collected, does not detract from the position that a sale of goods took place. Lastly, the Court notes that the section itself provided a facility of set off of tax already paid by a dealer in respect of input goods. It was therefore in the nature of a beneficial provision. It must, therefore, be accorded an interpretation which is in favour of the assessee. For the aforesaid reasons, this Court finds the action of the assessing authority in reducing the set off which was claimed by the revisionist to be unsustainable. The answer is thus entered in favour of the assessee and against the Department. Issues:Adjustment of tax paid on raw material against ultimate tax liability.Analysis:The High Court considered whether the tax paid on raw material and packing material used in manufacturing goods should be fully adjusted against the ultimate tax liability or only to the extent of taxable turnover. The revisionist had paid a tax of Rs. 5,72,182 on raw material used in manufacturing goods and claimed a set-off against the tax liability of Rs. 3.41 lakhs. The assessing authority reduced the set-off amount to Rs. 4,21,406 based on sales to tax-exempt entities. The Court analyzed Section 4-BB of the U.P. Trade Tax Act, which allows deduction of tax paid on raw material from tax payable on sale of goods. The revisionist argued for full set-off, citing the Supreme Court's judgment in Commissioner of Sales Tax Vs. Bharat Petroleum Corporation Ltd. (1992) 2 SCC 579.The Court rejected the assessing authority's argument for proportionate reduction of set-off based on sales to tax-exempt entities. It emphasized that Section 4-BB does not distinguish between tax-exempt and taxable sales for set-off purposes. The Court highlighted that the legislative intent was to allow set-off of all taxes paid on raw material used in manufacturing goods sold within the State. Referring to the Bharat Petroleum case, the Court concluded that there was no quantitative correlation required between tax paid on raw material and taxable turnover.Furthermore, the Court noted that the tax-free sales by the revisionist were due to sales to units exempted under Section 4B, and the benefit of tax paid should not be denied based on another dealer's liability. It also clarified that the mere absence of tax collection on sales did not negate the fact that a sale occurred. Lastly, the Court interpreted Section 4-BB as a beneficial provision for dealers to set off tax paid on input goods, favoring an interpretation in favor of the assessee. Consequently, the Court found the assessing authority's reduction of set-off claimed by the revisionist to be unsustainable and ruled in favor of the assessee.In conclusion, the revision was allowed, and the assessee was granted all consequential reliefs as permissible by law.