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Karnataka High Court · body

2016 DIGILAW 204 (KAR)

Hindustan Unilever Ltd. v. State of Karnataka

2016-02-26

JAYANT M.PATEL, S.SUJATHA

body2016
ORDER : Jayant M. Patel, J. 1. All matters are simultaneously heard and being considered by the present order. We may record that the main lead matter is STRP No. 1 of 2014, but as the respective assessment period are more than one, they are numbered as STRP Nos. 79-89 of 2015. Therefore, we would be referring to the facts of the main lead matter being STRP No. 1 of 2014. 2. The present revision petitions have been preferred by the Assessee by raising the following substantial questions of law. "(a) Whether, on the facts and in the circumstances of the petitioner's case, was the Appellate Tribunal justified in law in holding that the petitioner could not compute the input tax credit on the basis of its books of account and in accordance with Section 11, 14 and 17 of the Act and ought to resort only to Rule 131(3) of the Rules?. (b) Whether, on the facts and in the circumstances of the petitioner's case, was the Appellate Tribunal justified in law in holding that the petitioner was not entitled to claim the rebate of input tax in respect of the purchases effected by its research division when the said division was ancillary to the business of the petitioner? (c) Whether, on the facts and in the circumstances of the petitioner's case, was the Appellate Tribunal justified in law in holding that the petitioner was not entitled to claim input tax credit in respect of the purchase of un-interrupted power supply system which is an integral part of the manufacturing process?." 3. In order to appreciate the facts and contentions in our present decision, we shall be dealing with the facts related to question wise instead of common discussion. 4. We may broadly state the facts that the reassessment proceedings were undertaken before the Assistant Commissioner of Commercial Taxes and ultimately he passed the Order on 15.10.2010. The matter was carried in appeal before the First Appellate Authority, namely, Joint Commissioner of Commercial Taxes [Appeals] and vide Order dated 26.09.2011, the assessments were confirmed and the appeals were dismissed. These matters were further carried before the Karnataka Appellate Tribunal, Bangalore [hereinafter referred to as 'Tribunal', for short] in STA Nos. 2473-2484/2011. The Tribunal, ultimately vide Order dated 5.7.2013, partly allowed the appeals. Under the circumstances, the present revision petitions before this Court. 5. These matters were further carried before the Karnataka Appellate Tribunal, Bangalore [hereinafter referred to as 'Tribunal', for short] in STA Nos. 2473-2484/2011. The Tribunal, ultimately vide Order dated 5.7.2013, partly allowed the appeals. Under the circumstances, the present revision petitions before this Court. 5. We may now extract the discussion point wise. On the first question pertaining to the claiming of input tax credit which was not computable on the basis of the books of accounts, the Tribunal at paragraph 12[a] has observed thus: "(a) We have perused the assessment as well as appeal records. It was recorded that the assessee company having manufacturing, processing, packing and trading activities which involve purchase of taxable and exempted goods, exports, dispatching of goods to out side the state on stock transfer basis, imports and stock receipts of raw materials and finished goods from other states. In view of this situation the input tax credit has to be calculated as per Section 11, 14, 04 and 17 of KVAT Act read with Rule 131(3) of the KVAT Rules. In the light of the above explanation, the assessee co., stated that they are engaged in manufacture and sale of certain commodities which are exempt from levy of tax under the Act. Further, it is submitted that in respect of the said exempted goods, Section 11(a)(1) of the Act, restricts the deduction of input tax while calculating the net tax payable. Accordingly, in view of the said provisions, the company did not claim any input tax credit separately in respect to sale of exempted goods. All inputs are taken as common input and eligible tax is claimed based on common formula. Further, they have submitted that they have also effected stock transfer of goods, to their branches outside the state during the relevant assessment period and Section 14 & 17 of the Act provided for special scheme of rebate to arrive at the quantum of input tax deductible, read with Rule 131 of KVAT Rules 2005, and has contended that the method adopted in the notice is incorrect since the method has not given the correct amount of non-eligible input tax. It is also recorded that "As per Section 11(a)(1) of the KVAT Act 2003, the assessee co., is not eligible to get any input tax credit in respect of sales of exempted goods whereas it has taken credit of input tax in respect of goods taxable at 4% and taxable at 12.5% including furnace oil instead of disallowing the entire input tax pertaining to the exempted sale turnovers. Further the assessee has contended that they have not claimed any input tax credit in the units where exempt goods sales are effected. All inputs are taken has common input and eligible input tax is claimed based on common formula. This contention of the assessee is not acceptable. For illustration, the assessee company is having a bakery division namely M/s. Modern Bakerys Bangalore wherein the manufacture of bread, bun, cakes and other bakery item are undertaken. For manufacture of these goods it has effected purchases of taxable goods as well and claimed input tax on the said purchases. Therefore, the contention of the assessee is not acceptable. The FAA has also recorded that the scrutiny of the re-assessment records or the accounts maintained by the appellant, do not revealed that the appellant company has maintained day to day accounts, stock accounts on a day to day basis in respect of exempted goods and taxable goods for the manufacturing activities. Hence both the authorities below concluded that the nondeductible input tax calculated by the appellant is not in accordance with the provisions of Section 11, 14 & 17 of the KVAT Act, read with Rule 131 of KVAT Rules 2005. Accordingly, the same was worked out as per the formula appended to Rule 131(3) of KVAT Rules. We refer the Rule-131(3) which reads thus; "Rule-131(3) Any input tax relating to both sale of taxable goods and exempt goods, including inputs used for nontaxable transactions, the non-deductible input tax, may be calculated on the basis of the following formulas: (sales of exempt goods+ non taxable transactions)* total input tax Non-deductible input tax=............................... Total sales (including non- taxable transactions). We refer the Rule-131(3) which reads thus; "Rule-131(3) Any input tax relating to both sale of taxable goods and exempt goods, including inputs used for nontaxable transactions, the non-deductible input tax, may be calculated on the basis of the following formulas: (sales of exempt goods+ non taxable transactions)* total input tax Non-deductible input tax=............................... Total sales (including non- taxable transactions). (4) For the purpose of Clause (3)-(a) "Sale of taxable goods" would be the aggregate of the amounts specified in clauses (b), (c), (d), (e) and (f) of sub-rule (1) of Rule 3 relating to sale of goods other than those exempt under Section 5 which are not sold in the course of export out of the territory of India [and those sold in the course of import into the territory of India]; and" In this regard, we also refer the Commissioner's Circular cited supra in which at Sl. No. 9 it was stated that cases in which the application does not view the correct amount of input tax rebate available to the dealer, the Commissioner would have to be moved by the dealer or the Departmental officer concerned would specify a special formula as per Rule 131(5) of KIVAT Rules. In the case of the appellant he has not moved any application in respect of the formula adopted by him for approval by the Commissioner or any other Departmental authorities. Since the appellant has multiple type of transactions, it was impossible to maintain day-to-day classification reflecting the factual position in the manufacturing and trading activities so as to correlate the transactions on one to one basis. The Rule provided to the KVAT Rules 131(3) or 131(5) with effect from 01.04.2006 has to be followed in respect of apportionment of non-deductible input tax in such circumstances. Hence, we agree with the respondent authorities for having restricted the claim of input tax credit by applying the formula as per KVAT Rules 131(3) in the case of the appellant." 6. The aforesaid shows that the Tribunal having found that the appellant has not moved any application in respect of the formula adopted by it for approval by the Commissioner or any other Departmental Authorities, the view taken by the lower authorities including the First Appellate Authority that the benefit of input tax credit would not be available has not been interfered with. 7. 7. The contention of the learned Counsel for the petitioner was that the Circular dated 26.06.2006, copy whereof is produced at Annexure-D, was already issued by the Commissioner of Commercial Taxes for the purpose of procedure for partially rebating under the Karnataka Value Added Tax Act, 2003 [hereinafter referred to as 'KVAT Act', for short] and such circular was binding to the Assessing Officer and the Department. As per the said Circular vide paragraph-9, it has been provided as under: "(9) It may be noted that in many cases the deductible input tax is identifiable even if the dealers transactions are many and attract partial rebating. It would be because of the fact that the dealers concerned have maintained classified and detailed accounts indicating the purchase, use and disposal of every input purchased by them. In such cases, the dealers may claim partial input tax rebate based on their books of account. This does not require any permission from the Commissioner. Further, in such cases, the partial rebating formula provided in Rule 1131 should not be applied without any justifiable reason. It may also be noted that the apportionment formula prescribed in Rule 131(3) is a general formula and may not fit all cases. Therefore, cases in which its application does not give the correct amount of input tax rebate available to the dealer, the Commissioner would have to be moved by the dealer or the departmental officer concerned to specify a special formula. However, if even in such cases the procedure laid down in this Circular is applicable, then specification of a special formula would not be necessary." 8. Learned Counsel for the petitioner further contended that the aforesaid circular shows that in a given case, if the Assessee does not give correct amount of input tax rebate, the Commissioner will have to be moved by the dealer or the Department Officer concerned to specify a special formula and thereafter the matter could be considered. As per the learned Counsel, in the event the dealer has failed to move the Commissioner for a specified formula, the Departmental Officer also could be moved which in the present case was the Assessing Officer or otherwise and just on mere ground that the amount was non computable of input tax credit, the claim could not have been denied. 9. 9. Learned Counsel for the respondent-Revenue contended that it was for the Assessee-Petitioner to move the Commissioner if he was of the view that the input tax credit on the basis of actual material used could not be arrived at since the raw material used includes taxable as well as exempted goods. 10. It was therefore submitted that if there is failure on the part of the Assessee to get the specified formula through the Commissioner, the input tax credit is not permissible and has been rightly denied as per Rule 131[3] of the Karnataka Value Added Tax Rules, 2005. 11. We may record that existence of Circular dated 26.06.2006 is not in dispute. However, even if it is found that the circular was in operation at the relevant point of time and its binding effect is accepted, then also as per the contents of paragraph-9 if specified formula on account of the nature of transaction was to be applied, it was for the Assessee to move the Commissioner and get the said formula approved. If the Assessee has without there being any prior approval, applied the formula on its own and has prepared books of accounts in a manner that the input tax is not identifiable in respect of product used as raw material, the Assessee runs the risk. The Assessee cannot pass over the burden to the Departmental Officer as sought to be canvassed. It is hardly required to be stated that if one is claiming input tax credit, the burden would be upon the Assessee to satisfy the Authority that he is entitled to input tax credit of a particular goods, used as raw material. If the books of accounts are prepared wherein the product for input tax credit is not identifiable and resultantly, the Assessing Officer has disallowed the credit, it cannot be said that there is any error of law as sought to be canvassed. Under the circumstances, we answer question No. [a] against the Assessee and in favour of the Revenue. 12. As regards question No. [b], the relevant discussion in the impugned order of the Tribunal is at clause [b] which reads thus: "(b) The assessee Company has mainly purchased furniture, chemicals, engineering goods scientific goods to its research centre i.e., HLRC and claimed input tax. 12. As regards question No. [b], the relevant discussion in the impugned order of the Tribunal is at clause [b] which reads thus: "(b) The assessee Company has mainly purchased furniture, chemicals, engineering goods scientific goods to its research centre i.e., HLRC and claimed input tax. According to Sec. 2(19) of the KVAT Act input means any goods including capital goods purchased by a dealer in the course of its business for resale or for use in the manufacture or processing or packing or storing of other goods or any other use in business. According to the KVAT business includes 'any trade, commerce, manufacture or any adventure are concerned in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure are concerned is carried or in furtherance carried on in furtherance of gain or profit and whether or not any gain or profit approves there from, any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure are concerned. The research activities of the appellant do not fit in to the definition of business as provided under the KVAT Act. In this regard we refer the judgment of Hon'ble High Court of Madras in the case of South India Textile research association Vs. DCCT, Coimbatore. The Judgment of this Tribunal in STA No. 1819 to 1821/2004 in respect of Entry Tax is not applicable in this case as the same was for the levy of Entry tax which is mandatory when the scheduled goods are entered into the authorities below clearly state that since these goods purchased are not utilized in the course of business that used for conduction research the appellant was not entitled for input tax credit. We are unable to agree with the learned Counsel for the appellant in this regard and uphold the restrictions made by the authorities below in respect of input tax credit on the purchase made for the research unit which is not related to normal business activities." 13. The aforesaid shows that the Tribunal found that the research activity of the appellant do not fit in the definition of 'business' as provided under the KVAT Act. The aforesaid shows that the Tribunal found that the research activity of the appellant do not fit in the definition of 'business' as provided under the KVAT Act. Further, the Tribunal also observed that as per the orders of the Authorities below, the goods purchased are not utilized in the course of the business and were used for conducting research of the appellant-petitioner herein and therefore not entitled to input tax credit. The Tribunal has concurred with the restrictions made by the Authority in respect of input tax credit on the purchases made for the research unit. 14. The contention raised on behalf of the petitioner was that all incidental activity in furtherance to the trade or commerce or manufacture are included. As per the petitioner, the research is made exclusively for the products which are being manufactured by the petitioner and therefore there was no reason on the part of the Tribunal to concur with the view taken by the lower authority. It was also submitted that the decision of Madras High Court upon which reliance has been made by the Tribunal is easily distinguishable and therefore the said question may be answered in favour of the Assessee. 15. On the contrary, Learned Additional Government Advocate appearing on behalf of the Respondent-Revenue contended that this Court in the case of 'Balanoor Plantations & Industries Ltd. Vs. State of Karnataka & Others' rendered in Writ Appeal Nos. 6586-6633 of 2012 decided on 28.02.2014, has held that the fertilizers used for agricultural plantations and other expenses incurred for the agricultural operations in the separate product of tea and coffee are not admissible for the purpose of input tax credit. It was also submitted that the Tribunal has rightly relied upon the decision of the Madras High Court which has been referred to and the view taken by the Tribunal is correct and may not be interfered by this Court. 16. In order to appreciate the contentions, the definition of the word 'business' will be required to be considered. It was also submitted that the Tribunal has rightly relied upon the decision of the Madras High Court which has been referred to and the view taken by the Tribunal is correct and may not be interfered by this Court. 16. In order to appreciate the contentions, the definition of the word 'business' will be required to be considered. Section 2[6] of the KVAT Act reads as under:- "2(6) 'Business' includes:- (a) any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues therefrom; and (b) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern." 17. The aforesaid shows that the business does include any transaction in connection with or incidental and ancillary to such trade or commerce or manufacture or adventure or concern. Such a definition as such is inclusive definition and is not exhaustive. Therefore, any activity or any function which has direct nexus to the manufacturing activity of the assessee would fall within the definition of the word 'business' apart from the principal activity of manufacturing. The word 'business' even otherwise is defined in an inclusive manner and not by giving exhaustive meaning. If one is running an independent research organization or research institute and it is amenable to any person interested to get services of Research Institute, it may stand on a different footing and different consideration. But, if a Manufacturer-Assessee sets up a Research Centre for undertaking the research of a product or may be a new product in which he is dealing, such, in our view, can be said as having direct nexus to the principal activity of manufacture. It is out of various research undertaken one may possibly decide to manufacture a particular product or of a particular quality having better prospects in the business. 18. In the decision of Madras High Court in the case of 'Deputy Commissioner [C.T.] Coimbatore Vs. It is out of various research undertaken one may possibly decide to manufacture a particular product or of a particular quality having better prospects in the business. 18. In the decision of Madras High Court in the case of 'Deputy Commissioner [C.T.] Coimbatore Vs. South India Textile Research Association' reported in [1978] 41 STC 197, it was an independent co-operative Research Institution in a textile industry supported by a Council of Scientific and Industrial Research of Government of India and therefore the observations were made that where the Organization is constituted solely and exclusively for the purpose of carrying on research and is not dealing in sale of a resultant product, it cannot be said to be falling within the definition of the term 'business'. 19. The facts of the present case are substantially distinguishable, in as much as, the Assessee is not running an Independent Research Institute, but is also dealing in the manufacturing or sale of the products. In the present case, the principal activity of the Assessee is manufacturing of the product and research is limited to the variety of products which may be manufactured by the Assessee. Under the circumstances, the decision in the case of South India Textile Research Association [supra] cannot be applied to the facts of the present case. 20. In another decision of the Madras High Court in the case of 'State of Tamil Nadu Vs. Cement Research Institute of India' reported in [1992] 86 STC 124, the same situation arose, in as much as, it was an Institution initiated by Cement Industries and supported by Council of Scientific and Industrial Research of the Government of India. It was an independent Research Organization. Under the circumstances, the observations were made that the activity could not fall within the word 'business' as defined under the definition clause. Such are not the fact situation in the present case. Hence, we are of the view that the said decision on the aforesaid observations as made by us in respect of another decision of the Madras High Court in the case of South India Textile Research Association [supra], cannot be made applicable to the facts of the present case. 21. In the decision of this Court in the case of 'Unilever Industries Pvt. Ltd. Vs. 21. In the decision of this Court in the case of 'Unilever Industries Pvt. Ltd. Vs. The State of Karnataka' rendered in CRP No. 683 of 2006 and others decided on 6.7.2007, the matter came up before this Court against the Order passed by the Tribunal in STA Nos. 1819-1821/2004 decided by the Tribunal vide Order dated 1.9.2005. If facts of both decisions are considered, it appears that in the said case, in respect of very assessee, it was contended that the appellant therein was engaged in the research activity, but the relevant aspect is that in Paragraph-13 in the decision of the Tribunal, it was also recorded that the appellant-company is also a registered dealer and therefore since both the activities were by the same assessee, namely, research and as a registered dealer, the view was taken. 22. As observed by us hereinabove, if one is a dealer and manufacturing a particular product and is also undertaking research activity pertaining thereto for itself, such can be said to be an incidental activity to the manufacturing activity and hence would fall within the definition of the word 'Business'. 23. In view of the aforesaid observation and discussion, we find that the view taken by the lower Authority and further confirmation of the Tribunal for giving restricted meaning to the word 'business' cannot be maintained. The petitioner would be entitled to input tax credit on the purchases made for research unit as claimed. Under the circumstances, question No. [b] shall stand answered in favour of the Assessee and against the Revenue. 24. Concerning to Question No. [c] pertaining to entitlement of input tax credit in respect of purchases of Express Speeder System, the Tribunal has observed at clause [d] as under: "(d) With Regard to input tax claimed on electrical goods it is contended that the claim is in relation to the installation of Uninterrupted Power Supply system to the Production plant called Express Speeder System. On verification of the records we feel that these are nothing but part of the capital goods failing under 5th schedule to the KVAT Act 2003. These electrical goods have not been sold nor used in the manufacturing of processing of any other goods for the sale. The disallowance of input tax credit is in order and we agree with the orders passed by the authorities below in this regard." 25. These electrical goods have not been sold nor used in the manufacturing of processing of any other goods for the sale. The disallowance of input tax credit is in order and we agree with the orders passed by the authorities below in this regard." 25. The aforesaid shows that the Tribunal itself allowed the input tax credit mainly on the ground that the electrical goods have not been sold nor used in the manufacturing or processing of any goods or sale. Under the circumstances, the Tribunal had agreed with the view taken by the lower Authority and did not interfere with the Orders passed by the lower Authority in this regard. 26. The learned Counsel for the petitioner relied upon Section 11[a][2] of the KVAT Act read with Fifth Schedule of KVAT Act and contended that if the tax is paid on any goods specified in Fifth Schedule and the said goods are purchased and put to use, input tax credit would be available if the goods are for the purpose of resale or manufacture or any process of other goods for the sale. It was submitted that when there was express provision made for admissibility of input tax credit, even on all electrical goods, there was no reason on the part of the Tribunal to disallow the claim. He submitted that the goods of Express Speeder System were purchased by the Assessee in order to ensure that there is no disruption of the power resulting into seriously hampering the manufacturing process. He submitted that the Express Speeder System is a separate dedicated speeder from the power grid to the manufacturing plant to ensure continuous supply of power. In his submission, it was in furtherance to the manufacturing activity and therefore directly covered by the provisions of Section 11[a][2] of the KVAT Act read with item No. 3 of Fifth Schedule and therefore the view taken by the Tribunal deserves to be interfered with. 27. On the contrary, learned Additional Government Advocate appearing for the Respondent-Revenue supported the view taken by the Tribunal by contending, inter alia, that the said Express Speeder System was by way of capital goods and cannot be said to be a consumable item used in the manufacturing process and hence in his submission, the Tribunal has rightly confirmed the view taken by the lower Authority. 28. 28. We may have to first consider the provisions of Section 11[a][2] of the KVAT Act which reads as under: "11. Input tax restrictions:- (a) Input tax shall not be deducted in calculating the net tax payable, in respect of: (1) xxx xxx xxx (2) tax paid on goods 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." 29. Further, Fifth Schedule and more particularly, items specified at Sl. No. 3 showing description of the goods reads as under: "3. All electrical or electronic goods and appliances including air conditioners, air coolers, telephones, fax machines, duplicating machines, photocopiers and scanners, parts and accessories thereof, other than those for use in the manufacture, processing, packing or storing of goods for sale and those for use in computing, issuing tax invoice or sale bills, security and storing information." 30. If the aforesaid provisions of the Act and the items specified of goods are considered, all electrical and electronic goods including air conditioners, air coolers, telephones, fax machines etc., used would fall in the category of the goods for which the input tax credit would be inadmissible for the purpose of input tax credit unless the goods are for resale or for manufacturing of any other goods for sale. To put it in other words, if the goods specified in Fifth Schedule are purchased and put to use for the purpose of resale or for manufacture or for the process of other goods for sale, the input tax credit would be available. So far as Fifth Schedule is concerned, the electrical or electronic goods so narrated and referred to hereinabove should have the nexus to the manufacturing process if they are purchased and put to use for the purpose of or in furtherance to the manufacturing process. 31. We may usefully refer to the decision of the Apex Court in the case of Maruti Suzuki Limited Vs. Commissioner of Central Excise, Delhi-IIV reported in (2009) 9 SCC 193 and more particularly, the observations made at paragraph-45 which reads as under: "45. 31. We may usefully refer to the decision of the Apex Court in the case of Maruti Suzuki Limited Vs. Commissioner of Central Excise, Delhi-IIV reported in (2009) 9 SCC 193 and more particularly, the observations made at paragraph-45 which reads as under: "45. To sum up, we hold that the definition of "input" brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose." 32. It is true that it was a case before the Apex Court pertaining to CENVAT credit, but in our view, the principles would remain the same and can reasonably be applied even in the case of input tax credit. Therefore any input used for generation of electricity or steam, provided such electricity or steam is used within the factory for the manufacturing activity of the final product, the same would stand covered. 33. It is also true that in the decision of the Apex Court, the matter was pertaining to consumable item, namely, 'naphtha' and 'diesel' for generation of electricity. But, in our view, once the goods are purchased in furtherance to or for aiding the manufacturing process, the same will have a direct nexus to the manufacturing activity and there is no reason why the same could be treated as an independent capital goods disentitling the benefit. As such, the matter cannot be segregated just on a mere ground that it would be capital goods. If the various items mentioned at Sl. No. 3 in the description of goods are considered, it does include air conditioner, air cooler, fax machines which can be broadly considered as capital goods. Further, the language for all electrical or electronic goods is inclusive and not exhaustive. Therefore, when the other goods specified can also be considered as capital goods, but to be used in the manufacturing activity, there would not be any justifiable ground if the speeder system is purchased and used to back up the electricity in the manufacturing process to treat it differently for the purpose of input tax credit. Under these circumstances, we find that the input tax credit as per the above referred provisions of Section 11[a][2] of the KVAT Act read with Fifth Schedule, the input tax credit could not be denied to the petitioner. Under these circumstances, we find that the input tax credit as per the above referred provisions of Section 11[a][2] of the KVAT Act read with Fifth Schedule, the input tax credit could not be denied to the petitioner. Hence, the view taken by the lower Authorities and its confirmation by the Tribunal cannot be sustained. Hence, we answer the question No. [c] in favour of the Assessee and against the Revenue. 34. Accordingly, all the petitions are disposed of. Considering the facts and circumstances, no order as to costs.