Input tax credit denial for out-of-State job work on jewellery struck down as hostile trade discrimination.

Denial of input tax credit on bullion and worn-out jewellery bought within Tamil Nadu, sent outside the State for job work, and returned for sale within the State was found to create hostile discrimination under Article 301 read with Article 304(a). The provision was applied in a manner that imposed a heavier tax burden on goods converted outside the State than on similar goods processed within the State, even though the raw materials had suffered tax and the finished jewellery re-entered Tamil Nadu for local sale. Section 19(4) did not justify the restriction, because temporary out-of-State movement of goods did not by itself warrant reversal of credit. Section 19(2)(ii) was invalid to that extent, and relief was granted.

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Issues: Whether denial of input tax credit on bullion and worn-out jewellery purchased within the State but sent outside the State for job work and later brought back for sale within the State was valid under Sections 19(2)(ii) and 19(4) of the Tamil Nadu Value Added Tax Act, 2006.

Analysis: The denial of input tax credit was examined against the scheme of the Act and the constitutional guarantee of freedom of trade under Article 301 read with Article 304(a). The Court applied the settled principle that taxation laws are invalid only when they operate discriminatorily in effect, and that differentiation is permissible only where it is supported by reason and does not create an unfavourable bias against similar goods. It held that the impugned provision denied credit merely because the manufacturing or conversion activity was carried on outside Tamil Nadu, even though the raw materials were tax suffered, the finished jewellery returned to the State, and the final sale took place within the State. The Court found that this produced a heavier tax burden on goods manufactured outside the State than on similar goods manufactured within the State, amounting to hostile discrimination. Section 19(4) did not save the restriction, because it could not justify denial of credit where the tax rate involved was only 1% and the provision itself showed that temporary movement of goods outside the State did not, by itself, warrant reversal of credit.

Conclusion: Section 19(2)(ii) was held invalid to the extent it denied input tax credit in such cases, and the assessee was entitled to the relief sought.

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