Input tax credit on cement used for plant foundations was allowed under the functional test for manufacturing capital goods.

Cement purchased and used before commercial production for laying foundations and erecting plant and machinery of a cement unit was treated as eligible for input tax credit under the Karnataka Value Added Tax Act, 2003. The scheme distinguishes restrictions on input tax for specified goods from deduction of input tax on capital goods, and the Fifth Schedule restriction does not apply where the goods are purchased and put to use for manufacture or another process of goods for sale. Applying the functional test, the Court treated the cement used in civil works as integral to setting up the manufacturing plant and within the statutory exception.

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Issues: Whether cement purchased and used before commencement of commercial production for laying foundations and erecting the plant and machinery of a cement manufacturing unit is eligible for input tax credit under the Karnataka Value Added Tax Act, 2003.

Analysis: The relevant scheme of the Act distinguishes between input tax restrictions under Section 11 and deduction of input tax in respect of capital goods under Section 12. Goods listed in the Fifth Schedule are restricted, but the restriction does not operate where such goods are purchased and put to use for manufacture or other process of goods for sale. The Court applied the functional test to hold that the cement used for foundations and civil works was an integral part of the setting up of the plant and machinery for manufacturing cement. It rejected a narrow reading of the term plant and held that the cement cost formed part of the overall capital goods used for the manufacturing activity. The mere inclusion of cement in the Fifth Schedule did not defeat credit because the use was connected with the manufacture of taxable goods and fell within the statutory exception.

Conclusion: Cement used for laying foundations and erecting plant and machinery before commercial production qualified for input tax credit, and the assessee succeeded.

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