J.K. Cement Works, Muddapur vs State of Karnataka

P. Puttaraju, CTM

These three (03) appeals are filed u/s 63 of the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as the ''Act'') contesting the appellate order passed by the Joint Commissioner of Commercial Taxes (Appeals), Belgaum Division, Belgaum (hereinafter referred to as ''First Appellate Authority'' or ''FAA'' for short) in Case Nos. JCCT/AP/BG/KVAT/100 and 101/2010-11 and 289/2011-12, dated 28th July, 2011 and 22nd August, 2011 for the tax periods of 2007-2008 and 2008-2009 and 2009-2010 respectively. The reassessment orders are concluded by the Deputy Commissioner of Commercial Taxes (Audit), Bijapur (for brevity, the ''AA'') on 28th April, 2010 and 22nd July, 2011, for the tax periods of April 2007 to March 2008, April 2008 to March 2009 and April 2009 to March 2010 respectively. The brief facts and grounds of appeals are stated thus:

(i) The appellant is limited company engaged in manufacture of cement and clinker at their factory namely J.K. Cement Works, Muddapur. The appellant is registered under the Act and borne on the records of ACCT, LVO-430, Jamkhandi. The appellant has commenced the commercial production with effect from 24th October, 2009.

(ii) In pursuant to the assignment note given by the Commissioner of Commercial Taxes, the AA has framed the reassessment orders for the tax periods of April 2009 to March 2010 in a consolidated manner. Whereas, for the tax periods of April 2007 to March 2008 and April 2008 to March 2009 since no output tax was payable except for input tax credit, the AA has quantified the eligible input tax credit for the aforesaid tax periods separately disallowing tax credit on cement, electrical goods, lubricants and other consumables. The disallowance of input tax credit is based on the principle that the tax credit claimed by the appellant-company is not eligible for such credit in view of Section 11(a)(2) of the Act read with entries of the Fifth Schedule appended to the Act. Thus, the AA by invoking Section 11(a)(2) of the Act has restricted the input tax credit for all the tax periods encompassing from April 2007 to March 2010. Thereby, the claim of input tax credit made by the company u/s 12 of the Act on capital goods such as cement, electrical items, lubricant oils, grease, safety equipments, construction equipments and other consumables. The AA has taken the stand that since Section 11(a)(2) prohibits the input tax credit on the goods which are enumerated in the Fifth Schedule are not eligible for input tax rebate. However, the AA has accorded input tax credit for 2007-2008 and 2008-2009 to the extent of Rs. 4,92,03,187/- and for the year 2009-2010, eligible input tax credit allowed is at Rs. 2,04,11,987/-.

(iii) Aggrieved by these orders and proceedings the appellant has carried the matter before the FAA who by virtue of two appeal orders, one appeal order numbered 100 and 101/2010-2011, dated 28th July, 2011 has modified the proceedings of the AA for the tax periods of April 2007 to March 2008 and April 2008 to March 2009 and by the 2nd appeal order bearing No. 289/2010-2011, dated 22nd August, 2011 has modified the orders of the AA. The FAA for the years 2007-2008 and 2008-2009 has allowed the input tax credit in addition to the tax credit allowed by the AA has accorded tax credit of Rs. 3,94,718/- and Rs. 51,46,915/- and for the year 2009-2010, the tax credit allowed by the FAA is at Rs. 19,75,173/-. Not satisfied by the findings of the FAA, the appellant has preferred the present appeals and main ground taken to claim tax credit on the main commodity cement and other goods is that the same are qualified as capital goods. The appellant urges that both the FAA and AA have failed to appreciate the fact that the plant is also capital goods under the Act.

The main ground on which the tax credit is claimed by assailing the orders of the FAA and AA is based on the definition of capital goods u/s 2(7) of the Act. For this the appellant relies mainly on the decision rendered by the Hon''ble Apex Court in Scientific Engineering House (P) Ltd. Vs. Commissioner of Income Tax, Andhra Pradesh, , which in turn based on two English case-laws namely Lindley L.J. in Yarmouth v. France (1887) 19 QBD 647 and Inland Revenue Commissioner v. Barclay, Curle and Company Limited (1970) 76 ITR 62 (HL) : (1969) 1 All ER 732. In addition to these three case-laws, the appellant has relied on the following decisions.--

(a) Santosh Enterprises Vs. Commissioner of Income Tax, ;

(b) Commissioner of Income Tax Vs. Dr. B. Venkata Rao, ;

(c) Manipal Packaging Industries, Manipal v. State of Karnataka 2009 (67) Kar. L.J. 401 (Tri.) (DB);

(d) M.S. Penna Cement Industries Limited, Bellary v. State of Karnataka 2009 (67) Kar. L.J. 241 (Tri.) (DB);

(e) KCP Limited v. Commissioner of Central Excise, Guntur 2009 (237) ELT 500 (Tri.) (Bang.);

(f) 2000 (90) ECR 387 .

and finally relying on the decision of the our Hon''ble High Court rendered in M/s. Jayadeva Oil Mills v. Additional Commissioner of Commercial Taxes in STA No. 23 of 1994.

The appellant taking support of the above decisions contends that as Section 2(7) defines capital goods for the purposes of Section 12 means plant, including cold storage and similar plant, machinery, goods vehicles, equipments, moulds, tools and jigs, and used in the course of business other than for sale and highlighting the fact that the two notifications issued by the Government which restricts input tax credit on cement when used as input in the business relating to pipes and fittings and cement when used as input in the business relating to cement bricks, the cement used for the construction of factory building and silos is eligible for tax credit since the plant includes building and silos. On the above ground, assails the orders of the FAA as well as that of AA and prays to set aside the impugned orders of the FAA and AA and to direct the AA to allow input tax credit on cement, electrical goods, other items and the tax credit thereon claimed as relief at the stage of Tribunal is quantified at Rs. 2,02,93,051/-. The learned Counsel for the appellant advanced the arguments stating that the decision of the Hon''ble High Court of Karnataka rendered in Jayadeva Oil Mills case is under the Sales Tax Law, wherein their Lordships were pleased to decide that plant includes building and thereby relying on the case-laws cited supra prays to allow input tax credit. The learned Counsel also highlights the fact that the AA by recording that he is not competent to interpret the capital goods and input tax credit in the absence of clear meaning assigned under the Act has disallowed the input tax credit claimed by the appellant. Similarly, in the absence of specific finding by the FAA why the cement is not eligible for input tax credit has restricted the same without assigning the reasons. Therefore, the learned Counsel for the appellant submits that the orders of the lower authorities are contrary to the decisions of the Hon''ble Apex Court and Hon''ble High Court of Karnataka and also the other decisions rendered by this Tribunal as well as by the Central Excise Tribunal. On the above grounds, the prayer is made to set aside the impugned appeal orders of the FAA and so also that of the AA and to allow the appeal in full.

Heard the learned Counsel for the appellant who reiterated the grounds of appeals. The learned State Representative is also heard.

The common question of law and facts are involved in these three appeals and hence the same are clubbed together and disposed of by this common judgment.

The points which arise for our consideration are:

Whether the appellant is entitled for input tax credit on cement which is used for the construction of factory building and laying foundation for the installation of machinery and equipments?

Whether the FAA is justified in modifying the orders of the AA by allowing input tax credit even on consumables?

Whether the matter needs to be remanded to the FAA for limited purpose in the absence of clear finding on other goods?

What order?

Our answer to the above points are as under:

Point No. 1: In the negative.

Point No. 2: In the negative.

Point No. 3: In the affirmative.

Point No. 4: As per the final order for the following:

REASONS

Point No. 1.--Before answering the issue, it is necessary to sum up the gist of the ratios relied by the appellant to claim input tax rebate on cement on the ground that the same is used for the construction of factory building and foundation to install machinery.

(1) Scientific Engineering House Private Limited''s case, which in turn based on two English case-laws namely Lindley L.J. in Yarmouth and Inland Revenue Commissioner''s cases.

The decision of the Hon''ble Apex Court in the above case is with reference to the Income Tax Law and it has been decided that the payment done by the appellant towards acquisition of designs, drawings, charts etc., are in the instant case amounts to acquisition of depreciation asset rather than revenue expenditure. This is based on the aforementioned two English case-laws one relating to the interpretation of cart-horse as plant within the meaning of Employees Liability Act, 1880 and the later namely the Barclay''s case relating to the decision rendered by the House of Lords deciding that dry-dock as it fulfills the function of plant must be held as plant. This has been followed by our Hon''ble High Court in M/s. Jayadeva Oil Mills case, which is decided while interpreting the word plant for the purposes of the notification dated 15th October, 1981 issued under the Karnataka Sales Tax Act, 1957 extending the benefit of tax exemption to new industrial units. The Hon''ble High Court interpreted the expression ''plant'' appearing in the said notification to include building also. It is only for the purpose of reckoning the investment to accord the tax exemption. It is to be noted that the factory building is considered as one of the main component of fixed assets. The very word fixed assets implies the immovable character of the asset and the same also has the feature of depreciation as per the accounting procedure. The investment made in such assets are considered as capital expenditure rather than revenue expenditure.

(2) Santhosh Enterprises case: This decision is rendered under the income tax Act, 1961 deciding that Cinema Theater including the portions thereof is plant.

(3) Dr. B. Venkat Rao''s case: This decision is rendered under the income tax Act, 1961 deciding that nursing home has to be construed as plant for the purposes of depreciation.

The above two ratios rendered under the Income Tax Law relates to what constitutes ''plant'' as per the context of investment for the purpose of income tax Act, 1961.

(4) Manipal Packaging Industries case: This relates to whether printing machinery and its parts are capital goods for the purposes of Section 12 of the KVAT Act and this Tribunal has decided the same are capital goods. There is no dispute to the fact that machinery and its parts are capital goods for the purpose of Section 12 of the Act and it is pertinent to note that the same are liable for VAT and naturally entitled for input tax credit.

(5) M.S. Penna Cement Industries Limited''s case: This citation in no way relevant for the purpose of deciding these appeals.

(6) KCP Limited ''s case.

(7) Jawahar Mills Limited''s case.

The last two decisions relied by the appellant are rendered by the CESTAT under the Central Excise interpreting the Rule 2(k) of the CENVAT Credit Rules, 2002/2004 and Rule 57-Q defining capital goods.

Before venturing to analyse the above case-laws, the relevant provisions of the Act are necessary to be examined and the same are reproduced hereunder:

Definitions.--In this Act unless the context otherwise requires.--

(1) to (6) x x x x

(7) "Capital Goods" for the purposes of Section 12 means plant, including cold storage and similar plant, machinery, goods vehicles, equipments, moulds, tools and jigs, and used in the course of business other than for sale;

X X X X.

(19) "Input" means any goods including capital goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture or processing or packing or storing of other goods or any other use in business;

x x x x

Input tax restrictions.--

(a) Input tax shall not be deducted in calculating the net tax payable, in respect of.--

(1) x x x x

(2) tax paid on goods as specified in the Fifth Schedule subject to such conditions as may be specified, purchased and put to use for purposes other than for.--

(i) resale; or

(ii) manufacture or any other process of other goods for sale;

(3) tax paid on purchase of goods as may be notified by the Government or Commissioner subject to such conditions as may be specified.

(4) tax paid on purchase of capital goods other than those falling under clause (2) or (3) except as provided in Section 12.

(5) to (9) x x x x

Deduction of input tax in respect of capital goods.--(1) Deduction of input tax shall be allowed to the registered dealer in respect of the purchase of capital goods on or after the commencement of this Act for use in the business of sale of any goods in the course of export out of the territory of India and in the case of any other dealer in respect of the purchase of capital goods wholly or partly for use in the business of taxable goods.

(2) Deduction of input tax under this section shall be allowed only after commencement of commercial production, or sale of taxable goods or sale of any goods in the course of export out of the territory of the India by the registered dealer.

First of all, it is essential to note that by virtue of Entry 54 of the State List of Seventh Schedule of the Constitution, the States have been empowered to legislate law on sale or purchase of goods other than newspapers subject to Entries 92-A and 92-B of the Union List. The word ''goods'' appearing in Entry 54 of the State List has to be understood as defined under Article 366(12) which defines goods as ''goods'' includes all materials, commodities and articles. Thus, the meaning of goods assigned under the General Sales Tax Law or the VAT Law is with reference to the goods which are moveable in nature rather than immovable goods. No doubt capital goods are defined under clause (7) of Section 2 of the Act, which includes the expression ''plant'' also. There is no dispute to the fact that factory building is plant but the input tax rebate or credit is not claimed on the factory building or silos or foundation but on cement which is used as raw material for the construction of the same. There is no tax under the General Sales Tax Law or KVAT Law on the sale of factory building or any immovable property, since the same do not come under the purview of definition of goods. It has to be understood in this background alone. As per the principle laid down by the Hon''ble Apex Court, when ''functional test'' is applied, factory building is plant. If input tax has been paid on the purchase of plant, then certainly the appellant is entitled for input tax credit. But this is not the case in the present appeals but rather the appellant is claiming the input tax credit on cement which is one of the building materials along with other goods like sand, jelly etc. What is contemplated under the Act, is input tax credit on plant. Section 2(7) commences with the expression plant including cold storage and similar plant, machinery, goods vehicles, equipments, moulds, tools and jigs and used in the course of business other than for sale; what is to be noted here all the goods after the expression plant, cold storage and similar plant, the other goods, enumerated therein are all moveable goods or moveable assets. By applying the principle of ''ejusdem generis'' to factory building and silos which are immoveable property or immovable goods, cannot be considered as ''capital goods'' for the purpose of KVAT Act, 2003. Secondly factory building and silos as well as foundation even though immoveable property as goods in the nature of plant, by no stretch of imagination, the cement which is one of the raw materials used for the construction of factory building or silos or foundation cannot be considered as capital goods. The very expression capital goods imply assets which are having longer life and the such assets are of in the nature of depreciation value. The case-laws relied by the appellant are all related to plant in different contexts and the same are not applicable in the instant appeals as they have direct bearing on the interpretation of the expression plant and not on the raw materials or inputs which are used to construct such plant. Secondly, the decisions rendered by the CESTAT under the Central Excise Law is with reference to Rule 2(k) and Rule 57-Q where the specific meaning has been assigned for the expression input and in fact the said rules provides for input tax credit on inputs purchased and used to manufacture capital goods. Hence, these two decisions of CESTAT do not apply in the present case as neither Section 12 or any other section under the Act or any rule does not contemplate the input tax credit on the inputs which are used for the construction of the factory building. What is to be noted that in case of factory building or foundation, the phrase construction is used rather than manufacture or process or production or fabrication. This itself clearly distinguishes the factory building, silos and foundation from the other capital goods like machinery, goods vehicles etc. The decisions of this Tribunal cited by the appellant are of no help since, the same deals with moveable goods like printing machinery. The decisions rendered under the income tax Act, 1961 are with reference to the immoveable assets and not on the materials which are used for the purpose of constructing such immoveable assets. Therefore all the case-laws cited and relied by the appellant in the instant case is not at all applicable for the purpose of claiming tax credit on cement. Thus it has to be held that the cement which is used as raw material or input for the construction of immoveable property is not eligible for input tax credit as it does not qualify as capital goods.

Further to this, the Section 11(a)(4) stipulates that in order to qualify as capital goods, two conditions are to be satisfied. First condition is that such goods are capital goods and second condition is that they should not come under the purview of Section 11(a)(2) or 11(a)(3) of the Act. In the instant case, cement is a commodity enumerated under Sl. No. 5 of the Fifth Schedule of the Act. Thus cement by itself not being capital goods does not satisfy the first condition. Secondly, Section 11(a)(2) and 11(a)(3) of the Act overrides Section 11(a)(4) of the Act, as cement finds place under Sl. No. 5 of the Fifth Schedule of the Act, attracts the restriction imposed u/s 11(a)(2) of the Act and thereby does not satisfy the second condition also. In view of the above analysis, we answer Point No. 1 in the negative.

Point No. 2.--The AA has rightly disallowed the input tax credit on consumable like oxygen gas, welding rods, lubricants and grease etc., but the FAA has allowed input tax credit on the same without proper analysis. Secondly, we do find the details of the consumables as tabulated by the AA in case of cement and other goods in the impugned orders of the AA. However, the FAA has not quantified in the same manner before allowing input tax credit. The logic and the reasoning given by the FAA in his impugned appeal at page No. 11 of the impugned appeal orders are not in consistent with the provisions of the Act. Therefore, the FAA has erred in allowing tax credit on consumables only on the ground that the same are used before the commencement of commercial production and the same are part and parcel of machinery is not an acceptable reason. Hence Point No. 2 is also answered in the negative.

Point No. 3.--As the issue of consumables is not dealt in the right manner for allowing tax credit and in the absence of details with regard to other items and electrical goods, it is necessary to remand the matter back to the FAA for fresh consideration for limited purpose as under Point No. 1 on the issue of cement, the finding has been given emphatically to the effect that the same is not eligible for input tax credit. At the same time, the FAA has not considered the computation done by the AA for the tax periods of April 2009 to March 2010 as a whole which is not in accordance with law. However, for the tax periods of April 2007 to March 2008 and April 2008 to March 2009, the AA has computed the eligible input tax and non-eligible input tax separately for each month as evident from the AA''s records. The question of computing net tax liability for the above mentioned tax periods does not arise as there is no commercial production. But, the AA inspite of recording that the commercial production has commenced with effect from 24th October, 2009 ought to have computed net tax liability for each calendar month from October 2009 to March 2010. Hence this issue relating to only October 2009 to March 2010 also needs to be reconsidered by the FAA while disposing of the appeals. Hence, it is necessary to remit the case to FAA for limited purpose only. Therefore, Point No. 3 is answered in the affirmative. Point No. 4.--As Point Nos. 1 and 2 are answered in the negative and Point No. 3 being answered in the affirmative, the matter has to be remitted back to the FAA for limited purpose confining his findings related to consumables and electrical items and other goods. However, we make it abundantly clear that cement used as raw material or input for the construction of factory building, silos and foundation is not qualified for tax credit as the cement is not qualified as capital goods under the Act as answered above. Accordingly, we proceed to pass the following order.--

ORDER

(1) All the three (03) appeals are allowed in part by setting aside the orders of the FAA and remanded back to the FAA for limited purpose only as discussed in this order.

(2) The FAA is directed to compute the tax liability for each month from October 2009 to March 2010.

(3) The tax credit disallowed on cement is held as valid.

(4) Keep the original judgment in STA No. 2055 of 2011 and copies of the same in STA Nos. 2056 and 2057 of 2011.

(5) The office is directed to send back the lower Court records along with the copy of the judgment forthwith.