The State of Karnataka Versus M/s. M.K. Agro Tech Pvt. Ltd. - 2017 (9) TMI 1308 - SUPREME COURT OF INDIA

In an important decision though related to Karnataka Value Added Tax (VAT) but equally important in the GST era for reversal of Input Tax Credit on exempted by-products.

While interpreting the provisions of Section 17 of KVAT, hon'ble Supreme Court in the case of 2017 (9) TMI 1308 - SUPREME COURT OF INDIA, held that:

- Fourthly, the entire scheme of the KVAT Act is to be kept in mind and Section 17 is to be applied in that context. Sunflower oil cake is subject to input tax. The Legislature, however, has incorporated the provision, in the form of Section 10, to give tax credit in respect of such goods which are used as inputs/ raw material for manufacturing other goods. Rationale behind the same is simple. When the finished product, after manufacture, is sold, VAT would be again payable thereon. This VAT is payable on the price at which such goods are sold, costing whereof is done keeping in view the expenses involved in the manufacture of such goods plus the profits which the manufacturer intends to earn. Insofar as costing is concerned, element of expenses incurred on raw material would be included. In this manner, when the final product is sold and the VAT paid, component of raw material would be included again. Keeping in view this objective, the Legislature has intended to give tax credit to some extent.

- However, how much tax credit is to be given and under what circumstances, is the domain of the Legislature and the courts are not to tinker with the same.

- Judgment in Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v. Commissioner of Sales Tax and Others [1992 (7) TMI 292 - SUPREME COURT OF INDIA] relied upon.

- To the same effect are the judgments in the case of Hotel Balaji & Ors. v. State of Andhra Pradesh & Ors. [1992 (10) TMI 240 - SUPREME COURT OF INDIA] 

- In this context, if the Legislature has decided to give partial rebate of input tax under the circumstances mentioned in that provision, that has to be strictly applied.

- On literal interpretation of Section 17 it can be gathered that it does not distinguish between by-product, ancillary product, intermediary product or final product. The expressions used are ‘goods’ and ‘sale’ of such goods is covered under Section 17. Both these ingredients stand satisfied as de-oiled cakes are goods and the respondent assessee had sold those goods for valuable consideration. We may point out there that the assessing authorities recorded a clear finding, which was accepted by the Tribunal as well, that records and statement of accounts of the respondent assessee clearly stipulates that after solvent extraction is completed, 88% of de-oiled cake remains and only 12% remains is the oil which is further refined in the refinery. This clearly shows that major outcome (88%) of the solvent extraction plant is de-oiled cake which in itself is a marketable good having market value.

- Section 17 gets attracted in the instant case.

The State of Karnataka Versus M/s. M.K. Agro Tech Pvt. Ltd. - 2017 (9) TMI 1308 - SUPREME COURT OF INDIA

Reversal of input tax credit: sale of exempt by products triggers reversal under VAT/GST credit rules. Reversal of input tax credit is triggered by the sale of goods produced incidentally during manufacture, not by their status as by products. The statutory credit regime aims to prevent double taxation by granting input credit for inputs used in manufacture, but the legislature determines the extent and conditions of credit. A provision that uses the terms 'goods' and 'sale' does not distinguish by products from final products, so where the incidental output is marketable and sold for consideration, reversal rules apply.