By TIOL News Service

NEW DELHI, NOV 25, 2015: THE assessee is engaged in the business of manufacturing Asbestos Cement Pressure Pipe and Asbestos Cement Sheets and it had availed Input Tax Credit (ITC) on the purchase of raw material used in the manufacture of A.C. Sheets.

The assessing authority disallowed the ITC and charged interest. The Appellate Authority declined to interfere, compelling the assessee to file second appeals before the Board whichtoo dismissed the appeals.

The Board while dismissing the appeals opined that the assessee-Company, a manufacturing unit, had not been charged on the sales of its product, the final product was exemptedand, therefore, was not entitled to avail ITC.

Revision petitions were filed before the High Court contending that it could not be said that A.C. Sheets manufactured by the assessee were exempted goods which is the pre-requisite for denying ITC under Section 18 of the Act. Reliance was placed on the judgment of ACTO v. Abishek Granites Ltd. to buttress the proposition that exemption to unit is different from the exemption to the transaction of sale of the commodity. It was also highlighted that when two views are possible, the view in favour of the assessee should be accepted - CIT v. Kulu Valley Transport Co. (P) Ltd. 2002-TIOL-169-SC-IT-LB refers.

The stand of the assessee was controverted by the revenue contending, inter alia, that vide notification S.O. 372, manufacturers of A. C. Sheets and Bricks were included at S. No. 20 in Schedule-II, which entitles the units to claim exemption on the sale of manufactured goods on the fulfillment of certain conditions and in view of the specific conditions stipulated in Section 18(1)(A) of the Act, ITC was not allowed. Reliance was placed on notification S.O. 377, dated 09.03.2007 issued under Section 8(3) of the Act to harp that A.C. Sheets clearly fall within the category of exempted goods. Reference was made to the definition of 'exempted goods' and 'goods' contained in Section 2(13) & (15) of the Act. It was further submitted that irrespective of whether the notification was issued under sub-Section (1) or (3) or (3A) or (4), the goods would fall within the definition of exempted goods and consequently the assessee would not be entitled to ITC.

The Single Judge observed -

"If the persons included in Schedule-II were not entitled to claim ITC, there was no reason to include the said conditions for the above noted persons. Apparently, it is the sale of goods made by person or persons included in Schedule-II, which is exempt and not the goods manufactured by them, whereas, for denying ITC, the requirement is that of 'exempted goods'."

The High Court held -

"In view of express language of Section 18(1)(e) of the Act, notifications S.O. 371 and S.O. 372 read with S.O. 377, the petitioner who is a manufacturer of A.C. Sheets is entitled to avail ITC and the authorities below were not justified in denying Input Tax Credit to the petitioner based on interpretation put by them on inclusion of the petitioner in Schedule-II under Section 8(3A) and notification S.O. 377 dated 09.03.2007 issued under Section 8(3) of the Act."

Against this order, the Commercial Taxes Officer is before the Supreme Court.

The apex court, after considering the submissions and extracting the various provisions of the Act and notifications involved observed -

++ On an analysis of the scheme of the Act, it is manifest that there is difference between exempted goods, i.e., goods on which no Value Added Tax is payable and are, therefore, not taxable and other cases where a particular transaction, when it satisfies specific condition, is not taxable.

++ There is no doubt that a distinction has to be drawn between exempted goods, which means complete exemption for the specified goods, and when the goods are taxable goods, but a transaction or a person is granted exemption. When the goods are exempt, there would be no taxable transactions or exemption to a taxable person. In other cases, goods might be taxable, but exemption could be given in respect of a taxable event, i.e., exemption to specified transactions from liability of tax or exemption to a taxable person, though the goods are taxable. Such exemptions operate in circumscribed boundaries and not as expansive as in the case of taxable goods.

++ Exemptions with reference to taxable events or taxable persons would not exempt the goods as such, for a subsequent transaction or when the goods are sold or purchased by a non-specified person, the subsequent transaction or the taxable person would be liable to pay tax. It is, in this context, it has been highlighted by the respondent and, in our opinion, absolutely correctly that Section 4 of the Act provides for levy of tax in a situation where the goods, which were not exempted but could otherwise not be subjected to tax on account of exemption granted to a person or to a transaction. The goods remain taxable goods though exemption stands granted to a particular individual or a specified transaction. That being so, all subsequent transactions in those goods, which are not specifically exempt and not undertaken by an exempted person could be subjected to taxation.

++ Therefore, the appellant though exempted from payment of tax, subsequent transactions of sale of asbestos cement sheets would be taxable. The transaction of sale by the manufacturer/dealer covered by the exemption notifications issued under Section 8(3) of the Act would be protected or an exempted transaction, but the goods not being exempted goods would be taxable and could be taxed on the happening of a taxable or charging event. It is simply because the goods are not exempt from tax or exempted goods, but are taxable. As a logical corollary it follows that the Value Added Tax would have to be paid on the taxable goods in a subsequent transaction by the purchasing dealer.

++ As a sequitur, if the contention of the appellant is to be accepted, the respondent though covered by exemption notification under Section 8(3) of the Act could be at a disadvantage because finally when the subsequent sale is made by a non-exempted dealer or tax stands paid on the non-exempted transfer, the goods, i.e., asbestos cement sheet, would suffer the tax on the entire sale consideration . This would place an exempted manufacturer-dealer at a disadvantageous position and make his products uncompetitive inspite of the exemption notifications under Section 8(3) of the Act.

++ The respondents have rightly highlighted that where the appellant wanted to restrict the benefit of ITC when a particular dealer or transaction was exempted, it was so stipulated in the exemption notification issued under Sections 8(3) and 8(4) of the Act. Such notifications admittedly do exist and were issued by the appellant.

++ They are also right in drawing support from the note sheets relating to Finance Bill, 2007 as also the communications issued by Commissioner of Commercial Taxes. The note sheets and the communication of the Commissioner draw a clear distinction between exemptions when the goods were not taxable as they do fall under the First Schedule and when an exemption was granted under the Second Schedule, which relates to specified transaction of sale or exempted dealers even when the goods were taxable goods. In latter cases, subsequent dealers undertaking sale of goods would be liable to pay tax on sale of such products. There can be no shadow of doubt that subsequent dealers undertaking sale of goods manufactured and sold by the respondent company would be liable to pay tax on such products.

Holding that there is no merit in the appeals filed by the Commercial Taxes Officer, the same were dismissed.

(See 2015-TIOL-279-SC-VAT)