State of Gujarat vs Reliance Industries Ltd.

Akil Kureshi, J.—State has preferred these tax appeals against the judgment of the Gujarat Value Added Tax Tribunal ("the Tribunal", for short) dated April 22, 2012, raising following questions for our consideration:

(1) Whether, on the facts and circumstances of the present case, the Tribunal has erred in believing that the ITC reduced twice?

(2) Whether, on the facts and circumstances of the present case, when the provisions made separately, the Tribunal can pass such order to apply only one, which is not in accordance with the main intention of the Legislature towards making both the provisions separately in the said Act?

(3) On the facts and circumstances of the present case, it is a pure question of law as to the proper interpretation of the said provisions of section 11(3)(b)(i) and (ii)?

Though the real controversy does not come from the above questions framed by the appellant, with the assistance of the learned counsel appearing for the parties, having perused the judgment on record, we notice that the issue pertains to interpretation of section 11(3)(b)(ii) and (iii) of the Gujarat Value Added Tax Act, 2003 ("the VAT Act", for short).

The respondent-assessee is engaged in the business of manufacturing selling polymers and chemicals. It has various branches across the country where the goods so manufactured in the State are transferred for sale. The respondent is a registered dealer under the VAT Act.

The respondent for the purpose of its manufacturing activity purchased furnace oil, natural gas and light diesel oil from registered dealers. Such fuel is used for its manufacturing activities. Furnace oil is chargeable to value added tax at the rate of four per cent while natural gas and light diesel oil invite tax at the rate of 12.5 per cent. Section 11 of the VAT Act pertains to credit and permits a registered dealer who has purchased taxable goods to take credit on the tax paid under certain circumstances. Clause (b) of sub-section (3) of section 11, however, limits availing of such credit under certain circumstances. Clause (b) of sub-section (3) of section 11 has three sub-clauses. The crux of the controversy between the parties is whether if a particular item falls in more than one of these sub-clauses, denial of tax credit can be applied more than once. The case of the assessee, obviously, is that limitation of availing of tax credit as provided u/s 11(3)(b) could be applied only once irrespective of the fact that whether a particular commodity purchased falls in more than sub-clauses of clause (b) of sub-section (3) of section 11. The Government, however, contends that if such goods satisfy the descriptions of sub-clauses (ii) and (iii) of clause (b) of sub-section (3) of section 11, denial of tax credit would operate twice.

The Tribunal reversed the decision of the assessing officer and ruled in favour of the respondent-assessee, upon which the present appeals have been filed by the State.

Section 11 of the VAT Act, as already noted, pertains to tax credit. Clause (a) of sub-section (1) thereof provides that a registered dealer who has purchased the taxable goods shall be entitled to claim tax credit equal to the amount specified in clauses (i) to (iii) thereof. Sub-section (2) of section 11 requires a registered dealer who intends to claim the tax credit to maintain the register and the books of accounts in the prescribed manner. Sub-section (3) of section 11 which is of importance to us has two clauses (a) and (b). Clause (a) provides that tax credit to be claimed under sub-section (1) shall be allowed to a purchasing dealer on his purchase of taxable goods which are intended for the purpose categories specified in clause (i) to (vii) specified in clause (a). Section 11(3)(a) thus provides for different categories of uses for which such tax credit would be available. Clause (b) to sub-section (3) to section 11, however, provides that notwithstanding anything contained in the said section, amount of tax credit available to a dealer shall be reduced by the amount of tax collected at the rate of four per cent on the taxable turnover of purchase if the goods satisfy the descriptions provided in sub-clauses (i) to (iii) of the said clause. Section 11(3)(b) reads as under:

(b) Notwithstanding anything contained in this section, the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four per cent on the taxable turnover of purchases within the State--

(i) of taxable goods consigned or dispatched for branch transfer or to his agent outside the State, or

(ii) of taxable goods which are used as raw materials in the manufacture, or in the packing of goods which are dispatched outside the State in the course of branch transfer or consignment or to his agent outside the State,

(iii) of fuels used for the manufacture of goods:

Provided that where the rate of tax of the taxable goods consigned or dispatched by a dealer for branch transfer or to his agent outside the State is less than four per cent, then the amount of tax credit in respect of such dealer shall be reduced by the amount of tax calculated at the rate of tax set out in the Schedule on such goods on the taxable turnover of purchases within the State.

It is not in dispute that in the present case, the taxable goods purchased by the respondent-assessee satisfy the description of sub-clauses (ii) and (iii) of section 11(3)(b). Despite this, in our view, the Tribunal came to a correct conclusion that denial of tax credit by four per cent as provided in clause (b) would have to be done only once. We say so for several reasons. Firstly, clause (b) of section 11(3) pertains to reduction of tax credit otherwise available u/s 11. Such reduction is to be applied if the goods satisfy the descriptions contained in sub-clause (i) to (iii) thereof. After clause (i), the Legislature has used the word "or". We are conscious that at end of clause (ii) and beginning of clause (iii), the Legislature has not once again used the word "or", but has also not added the expression "and". Plain reading of the said provisions thus makes it clear that the reduction of tax credit had to be applied to any case which satisfy the description contained in sub-clauses (i) to (iii) not every time such description is satisfied. Further, reduction of amount of tax at the rate of four per cent is to be done for the taxable goods which fall in any of the three categories contained in sub-clauses (i) to (iii) and not every time a particular class of goods specified fall in more than one categories.

One of the indications that the Legislature has intended to limit such credit only once is available in the proviso contained in section 11(3)(b). Proviso provides that where the rate of tax of the taxable goods is less than four per cent, then the amount of tax credit in respect of such dealer shall be reduced by the amount of tax calculated at the rate of tax set out in the Schedule on such goods. In other words, if the tax credit available to a dealer is less than four per cent, the reduction should be limited to such credit and not more. The Legislature, thus, envisaged that the reduction of tax credit u/s 11(3)(b) would in no case exceed four per cent. If the interpretation put forth by the State is accepted, a dealer who has availed of tax credit of four per cent would end up surrendering credit by 8 per cent or may be in a given case by 12 per cent. Surely, the Legislature could never have intended the reduction to exceed the tax credit itself. In the present case, this is precisely what would happen if the interpretation of the State is accepted. We have noticed that the furnace oil invites tax at the rate of four percent. The tax credit thus available to the respondent as a dealer would be limited to such amount. If such tax credit available to the respondent is reduced by eight per cent, it would bring about a situation where credit available is four per cent and what is reduced is eight per cent. Surely, the Legislature never envisaged, any such situation while framing section 11(3)(b) of the VAT Act. Under the circumstances, we do not see any question of law arising. Tax appeals are therefore dismissed.