2017 (9) TMI 1308 - SC - VAT and Sales Tax

Supreme Court interprets tax law on de-oiled cake sales, emphasizes literal reading of statutes

The Supreme Court held that Section 17 of the Karnataka Value Added Tax (KVAT) Act applies to the sale of de-oiled cake, entitling the assessee to only a ... Partial rebate of input tax - Attribution and apportionment of input tax - Sale of exempt goods versus manufacture - Non-deductibility of input tax attributable to sale of exempt goods - Rule 131(3) apportionment formula - Literal construction of taxing statutesPartial rebate of input tax - Sale of exempt goods versus manufacture - Non-deductibility of input tax attributable to sale of exempt goods - Rule 131(3) apportionment formula - Literal construction of taxing statutes - Whether Section 17 of the KVAT Act read with Rule 131 of the KVAT Rules applies where an input on which VAT was paid yields, in the course of processing, a saleable by-product that is exempt from VAT, such that only partial input tax rebate is admissible - HELD THAT: - The Court held that Section 17(1) applies on the basis of 'sale' of goods and does not hinge on whether the exempt item is a by-product or the result of a manufacturing process; what matters is that the commodity is 'goods' and is sold tax-exempt under Section 5. Rule 131 completes Section 17 by prescribing how input tax must be apportioned where inputs relate to both taxable and exempt sales; sub-rule (3) supplies a formula for non-identifiable input tax attributable to both categories. The High Court's emphasis on 'manufacture' and its purposive departure from the literal language was rejected: literal construction of the taxing provision does not produce absurdity here and gives effect to the legislative scheme of granting input tax credit subject to specified restrictions. Given that the assessee purchased oiled cake (on which input tax was paid) and sold an exempt de-oiled cake which constituted a substantial portion of output, Section 17 and Rule 131 apply and require apportionment rather than full input deduction. The Court therefore set aside the High Court's grant of full input tax deduction and upheld the assessing authorities' application of partial rebate principles under Section 17 and Rule 131(3). [Paras 29, 30, 31, 32, 33]Section 17 read with Rule 131 applies where a saleable by-product is sold as exempt goods; input tax must be apportioned and only partial rebate is admissibleFinal Conclusion: Appeals allowed; the High Court judgment granting full input tax deduction is set aside and Section 17 of the KVAT Act read with Rule 131 of the KVAT Rules requires apportionment of input tax when a saleable by-product is exempt, permitting only partial input tax rebate. Issues Involved:1. Interpretation of Section 17 of the Karnataka Value Added Tax (KVAT) Act, 2003.2. Applicability of Rule 131 of the Karnataka Value Added Tax Rules, 2005.3. Determination of whether de-oiled sunflower cake is subject to partial rebate of input tax.4. Consideration of the High Court's interpretation and application of the KVAT Act and Rules.Detailed Analysis:1. Interpretation of Section 17 of the KVAT Act, 2003:Section 17 of the KVAT Act deals with 'Partial Rebate' and applies when a registered dealer sells both taxable and exempt goods. The provision allows for partial rebate of input tax in such cases. The Supreme Court emphasized that the relevant event is the 'sale' of goods, not their 'manufacture.' The Court found that the High Court erred by focusing on the manufacturing process and treating de-oiled cake as merely a by-product. The Supreme Court clarified that the sale of de-oiled cake, which is a marketable commodity, triggers the application of Section 17, irrespective of whether it is a by-product or a main product.2. Applicability of Rule 131 of the KVAT Rules, 2005:Rule 131 prescribes the formula for apportioning input tax between sales of taxable and exempt goods. The Supreme Court noted that the High Court failed to consider sub-rule (3) of Rule 131, which is crucial for situations where input tax is not directly relatable to either taxable or exempt goods. Sub-rule (3) provides a formula to calculate partial deduction of input tax in such cases. The Supreme Court emphasized that the High Court's omission to discuss this sub-rule was a significant oversight.3. Determination of whether de-oiled sunflower cake is subject to partial rebate of input tax:The Supreme Court disagreed with the High Court's conclusion that the assessee was entitled to full input tax deduction. The High Court's reasoning was based on the premise that de-oiled cake is a by-product and not subject to manufacturing. However, the Supreme Court highlighted that de-oiled cake is a saleable commodity, generating substantial revenue (45% of the total sales) for the assessee, and thus, the provisions of Section 17 for partial rebate are applicable. The Court stressed that literal interpretation of Section 17 does not lead to absurd results but rather achieves the legislative intent of providing partial rebate in such cases.4. Consideration of the High Court's interpretation and application of the KVAT Act and Rules:The Supreme Court criticized the High Court for departing from the rule of literal construction of Section 17, arguing that such departure was unnecessary and led to an incorrect interpretation. The Court reiterated that taxing statutes should be interpreted literally unless such interpretation leads to absurdity, which was not the case here. The Supreme Court also pointed out that the entire scheme of the KVAT Act supports the application of Section 17 to sales of both taxable and exempt goods, including by-products like de-oiled cake.Conclusion:The Supreme Court set aside the judgment of the High Court, holding that Section 17 of the KVAT Act applies to the sale of de-oiled cake, and therefore, the assessee is entitled only to a partial rebate of input tax. The Court allowed the appeals with costs, emphasizing the importance of adhering to the literal interpretation of taxing statutes and the proper application of Rule 131 of the KVAT Rules.