2023 (1) TMI 1040 - HC - VAT and Sales Tax

Court grants Input Tax Credit on fuels for electricity generation in manufacturing, deems writ petitions maintainable.

The court allowed the writ petitions, finding that the petitioners were entitled to Input Tax Credit (ITC) on furnace oil and other fuels used in ... Maintainability of petition - availability of alternative remedy - common argument of the petitioners is that Section 19(2)(ii) of the TNVAT Act permits the availment of ITC on goods purchased as ‘inputs’ in the manufacture or processing of goods in the State - HELD THAT:- All the impugned orders comprise orders of assessment, that are amenable to statutory appeal, and in one case an appellate order as well and hence, a preliminary submission has been raised assailing the very maintainability of these Writ Petitions - the question raised in these Writ Petitions revolves around an interpretation of the statutory provisions, specifically touching upon the eligibility or otherwise to ITC. The facts are undisputed. The authorities have, including the appellate authority, adopted the categoric view that the petitioners are not entitled to ITC in a situation where they have merely manufactured/purchased and consumed, an exempt product, though admittedly, such exempt product is not sold as an independent commodity, barring in one case. The authorities, as revealed by the submissions of the Revenue and the stand taken in the impugned orders, have revealed their propensity to adopt a view that bypasses the spirit of the statutory provisions and scheme of the Act. The writ petitions are thus held to be maintainable. Reversal of ITC on furnace oil used as fuel - HELD THAT:- Section 19(2) permits grant of ITC on any goods purchased and used as input in the manufacturing or processing of goods in the State or used as capital goods in the manufacture of taxable goods. Section 19(5)(a) denies ITC on the turnover from sale of exempt products. The entitlement to ITC must thus be seen in the context of, and decided, bearing note, not just of the letter of the law but the purpose for which the benefit was intended in the first place. Whether ITC on fuel purchased as an input for use in power generation came to be considered by several Courts. In the case of Saurashtra Calcine Bauxite [1992 (9) TMI 314 - GUJARAT HIGH COURT] the statutory provision considered was Section 5A of the Gujarat Sales Tax Act, 1969. The Court considered the import of its earlier judgments in the cases of J.K.Cotton Spinning & Weaving Mills Co. Ltd. V. The Sales Tax Officer, Kanpur and another [1964 (10) TMI 2 - SUPREME COURT] and Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam V. Thomas Stephen & Co. Ltd. [1988 (3) TMI 59 - SUPREME COURT] - The question that arose in these two cases was whether the furnace oil used must be regarded as a mere fuel and not as processing material. On an overall consideration of the matter, the Court held in favour of the assessee concluding that the authorities were not justified in taking a view that furnace oil is used only as fuel and not as a processing material within the ambit of Rule 42A of the Gujarat Sales Tax Rules. There is no dispute in the present cases, either by way of pleading or argument that the fuels used do not constitute industrial input. In the present case, there is no dispute whatsoever that input fuel/electricity generated, has only been used to aid the process of manufacture. Except to a small extent in the case of SKML, neither the input fuel nor electricity generated, have been sold as an independent commodity. In that exceptional case, the commodity has suffered the rigour of taxation per regular application of the Act. The Court rejected the case of the revenue holding that the assessee was eligible to the exemption in terms of clause (a) of Section 5A, in light of the admitted position that the shells purchased had been ‘consumed in the manufacture of other goods’. Petition allowed. Issues Involved:1. Disallowance of Input Tax Credit (ITC) on furnace oil used for generating electricity.2. Eligibility of ITC on inputs used in manufacturing processes.3. Interpretation of statutory provisions under the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act).4. Maintainability of writ petitions due to alternate statutory remedies.Issue-wise Detailed Analysis:1. Disallowance of Input Tax Credit (ITC) on furnace oil used for generating electricity:The petitioners, including Sri Kannapiran Mills Limited (SKML), Gee Kay Printing Mills (GKPM), Tamil Nadu Petro Products Limited (TNPPL), and Varalakshmi Starch Industries (VSI), challenged the disallowance of ITC on furnace oil used for generating electricity. The electricity generated was used captively in their manufacturing processes. The respondents argued that ITC should be denied as the electricity generated is an exempt product under Section 19(5)(a) of the TNVAT Act. However, the petitioners contended that the electricity was used solely in the manufacturing process and not sold as an independent commodity, except in a small portion by SKML, which was duly taxed.2. Eligibility of ITC on inputs used in manufacturing processes:The petitioners argued that Section 19(2)(ii) of the TNVAT Act allows ITC on goods purchased as inputs in the manufacturing or processing of goods. They cited multiple judgments supporting their claim that fuels like furnace oil used in generating electricity for manufacturing processes should be eligible for ITC. The court noted that the statutory scheme of the VAT Act, including the provisions for ITC, should be interpreted in light of the purpose of preventing the cascading effect of tax. The court also referenced several precedents, including Saurashtra Calcine Bauxite, Partap Steel Rolling Mills, and Reliance Industries, which supported the petitioners' entitlement to ITC on such inputs.3. Interpretation of statutory provisions under the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act):The court examined the relevant provisions of the TNVAT Act, particularly Sections 19(2) and 19(5)(a). It concluded that the mere generation and consumption of electricity or purchase and consumption of fuel in the manufacturing process should not disentitle the petitioners to ITC. The court emphasized that Section 19(5)(c) specifically denies ITC only on the sale of exempted products, not on the purchase or internal consumption of fuel/electricity used in manufacturing.4. Maintainability of writ petitions due to alternate statutory remedies:The respondents raised a preliminary objection regarding the maintainability of the writ petitions, arguing that the petitioners should have pursued alternate statutory remedies. However, the court held that the issue at hand involved the interpretation of statutory provisions related to ITC eligibility, which could be considered under Article 226 of the Constitution of India. The court found that the authorities had adopted a view that bypassed the spirit of the statutory provisions and scheme of the Act, making the writ petitions maintainable.Discussion on Merits:The court discussed the merits of the case, noting that the fuels used by the petitioners constituted industrial inputs and were integral to their manufacturing processes. The court referred to various judgments, including those from the Supreme Court and High Courts, which consistently held that fuels used in generating electricity for manufacturing processes should be eligible for ITC. The court concluded that the impugned orders disallowing ITC were not justified and reversed them to the extent indicated.Conclusion:The court allowed the writ petitions, holding that the petitioners were entitled to ITC on furnace oil and other fuels used in generating electricity for their manufacturing processes. The connected miscellaneous petitions were closed with no order as to costs.