Input tax credit on DEPB and duty credit scrips was upheld where the cost formed part of manufacturing inputs.

Input tax credit under the Rajasthan VAT Act was held allowable on VAT paid for DEPB, duty free licences and duty credit scrips used to import raw materials for manufacturing finished goods, because the statutory scheme treated goods used in the manufacturing chain as eligible inputs and no notification excluded such items. The Court applied a broad construction of "raw material" and rejected denial of credit on the ground that it would create cascading taxation. Interest on differential tax could not survive once the credit disallowance failed, as the demand and consequential interest were inseparable from the reversal of credit and reassessment.

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Issues: (i) Whether input tax credit on VAT paid for purchase of DEPB / Duty Free Licences / Duty Credit Scrip could be denied when those goods were used for importing raw materials for manufacture of finished goods in the State. (ii) Whether interest on differential tax could be levied where the dealer had deposited the tax shown in returns and the assessment was later reopened.

Issue (i): Whether input tax credit on VAT paid for purchase of DEPB / Duty Free Licences / Duty Credit Scrip could be denied when those goods were used for importing raw materials for manufacture of finished goods in the State.

Analysis: The relevant scheme of Section 18 of the Rajasthan Value Added Tax Act, 2003 permits input tax credit on purchase of taxable goods from a registered dealer when the goods are used for the specified purposes, including use as raw material in the manufacture of goods. The expression "raw material" was construed broadly, and the Court treated the DEPB / Duty Free Licences / Duty Credit Scrip as goods whose cost became embedded in the cost of imported raw materials and the final manufactured product. The Court also held that there was no notification excluding such goods from the credit scheme and that denial of credit would defeat the object of the VAT regime by causing cascading taxation.

Conclusion: Input tax credit on the purchase of DEPB / Duty Free Licences / Duty Credit Scrip was allowable, and the disallowance was unsustainable.

Issue (ii): Whether interest on differential tax could be levied where the dealer had deposited the tax shown in returns and the assessment was later reopened.

Analysis: Once the Court held that the assessee was entitled to input tax credit on the disputed purchases, the foundation for the differential demand and the consequential levy of interest disappeared. The question of interest was thus inseparable from the validity of the reversal of credit and the reassessment-based demand.

Conclusion: The levy of interest on the differential tax could not survive.

Final Conclusion: The assessee was held entitled to the disputed input tax credit, and the contrary orders of the authorities below and the Tax Board were set aside.

Ratio Decidendi: Goods purchased on payment of VAT may qualify for input tax credit under a VAT statute when their use forms part of the manufacturing chain and their cost is embedded in the final product, absent a specific statutory exclusion.

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