Input tax credit cannot be denied by implication for supplies to SEZ units when the statute contains no express disallowance.

Input tax credit under the Tamil Nadu Value Added Tax Act was held not to be denyable merely because manufactured goods were supplied to Special Economic Zone units under section 8(6) of the Central Sales Tax Act, since the restriction in section 19(5)(c) applied only to section 8(2) sales and no express disallowance covered these transactions. Such supplies were also not treated as exempt sales under section 15 or the Fourth Schedule, so reversal of credit was not attracted under section 19(5)(a), (b) or (c). The challenge to the notices therefore succeeded on merits to that extent, and the matter was remitted for fresh consideration in accordance with law.

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Issues: (i) Whether input tax credit could be denied on inputs used in manufacturing goods supplied to units in Special Economic Zones under section 8(6) of the Central Sales Tax Act, 1956. (ii) Whether such supplies to Special Economic Zone units constituted exempt sales under section 15 of the Tamil Nadu Value Added Tax Act, 2006 so as to attract reversal of credit under section 19(5) of that Act.

Issue (i): Whether input tax credit could be denied on inputs used in manufacturing goods supplied to units in Special Economic Zones under section 8(6) of the Central Sales Tax Act, 1956.

Analysis: Input tax credit under section 19(1) of the Tamil Nadu Value Added Tax Act, 2006 is available for goods used in manufacturing, subject to the specific restrictions in section 19(5). The restriction in section 19(5)(c) applies to sales falling under section 8(2) of the Central Sales Tax Act, 1956, while the sales in question were effected under section 8(6), which is a separate exemption for supplies to authorised Special Economic Zone units. No express provision in section 19(5) denied credit for such manufactured goods merely because the finished goods were supplied without tax under section 8(6).

Conclusion: The denial of input tax credit on this ground was not justified.

Issue (ii): Whether such supplies to Special Economic Zone units constituted exempt sales under section 15 of the Tamil Nadu Value Added Tax Act, 2006 so as to attract reversal of credit under section 19(5) of that Act.

Analysis: A sale to an authorised Special Economic Zone unit under section 8(6) of the Central Sales Tax Act, 1956 was not treated as an exempt sale under section 15 of the Tamil Nadu Value Added Tax Act, 2006. The statutory restrictions on input tax credit had to be applied as expressly enacted, and the sales in question were neither exempt under the Fourth Schedule nor under a State Government notification. Since the case did not fall within the specific disallowance in section 19(5)(a), (b) or (c), credit could not be reversed on the assumption of exemption.

Conclusion: The sales were not exempt sales under section 15 and did not warrant reversal of input tax credit.

Final Conclusion: The challenge to the notices succeeded only to the extent that the demand for reversal of input tax credit was held unsustainable on merits, while the matter was remitted for reply and fresh consideration in accordance with law.

Ratio Decidendi: In taxing statutes, a benefit or disallowance must rest on an express statutory provision, and input tax credit cannot be denied by implication where the governing restrictions do not specifically cover the transaction.

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