Supreme Court Upholds Denial of Input Tax Credit on Tax-Exempted Sales to Manufacturer-Exporters.


[ Court Doc ]   Value Added Tax (VAT) >> Tax Laws  

In a recent civil appeal of Neha Enterprises Vs Commissioner, Commercial Tax, Lucknow, Uttar Pradesh., before the Supreme Court of India, the central issue revolved around the denial of input tax credit to a registered dealer under the Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act). The appellant-dealer had recorded sales amounting to Rs. 1,89,35,100/- against the issuance of Form-E to a manufacturer-exporter for the assessment year 2010-11 and had claimed an input tax credit of Rs. 6,42,260/-.

The assessing officer initially allowed the input tax credit but subsequently disallowed it under Section 28 of the UP VAT Act. The core contention was whether the dealer was entitled to input tax credit on purchase tax paid for sales made to a manufacturer-exporter, where the sale itself was exempt from tax under Section 7(c) of the Act.


 

 

The assessing officer argued that while the turnover fell under Section 7(c), the proviso in Section 13(7) of the Act specifically disallowed input tax credit for transactions covered under Section 7(c). Notifications dated 24.02.2010 and 25.03.2010, which outlined the procedure for dealing with turnover under Section 7(c), did not provide for input tax credit to sellers making tax-exempted sales to manufacturer-exporters.

The dealer's appeal before the Additional Commissioner was dismissed, with the appellate authority emphasizing that the notifications related to Section 7(c) exempted direct sales of raw materials and spare parts to manufacturer-exporters upon filing Form-E but did not extend input tax credit benefits to the sellers. The authority held that Section 13(7) acted as an embargo, and since the subject turnover was tax-exempt, the dealer was not entitled to input tax credit.

The Tribunal of Commercial Tax, Meerut, Uttar Pradesh, upheld this view in the second appeal. The Tribunal reasoned that Section 13(1)(a) specifies which traders are eligible for input tax credit, while Section 13(7) explicitly carves out exceptions where input tax credit is not allowed. The Tribunal concluded that the notifications and circulars related to facilities for exporters did not extend input tax credit to the exporter-sellers, and Section 13(7) clearly prohibited such credit for sales exempt under Section 7(c).

The dealer's revision before the High Court also met with dismissal. The High Court, in its order dated 24.11.2014, stated that a plain reading of Section 13(7) clearly revealed the applicant's ineligibility for input tax credit on goods sold exempt under Section 7(c). The High Court found no infirmity in the Tribunal's order, answering the question of law in favor of the revenue and against the assessee.

Before the Supreme Court, the appellant's counsel argued that denying input tax credit was contrary to the policy of encouraging manufacturer-exporters in Uttar Pradesh. It was contended that while the exemption under Section 7(c) promoted trade, denying input tax credit to the seller would be counterproductive. The counsel urged the court to read Section 7(c) in conjunction with Section 13(1) to allow the input tax credit.

Conversely, the respondent's counsel argued that the dealer's case squarely fell under Section 7(c) read with the relevant notifications, and consequently, Section 13(7) explicitly disentitled the dealer from claiming input tax credit. It was emphasized that tax statutes should be interpreted based on their clear expression, and intent cannot override the explicit provisions.

The Supreme Court, after hearing both sides and perusing the record, upheld the decisions of the lower authorities. The Court noted that the subject turnover was admittedly covered under Section 7(c) of the Act read with the notifications. While Section 13(1) generally allows input tax credit, Section 13(7) clearly specifies instances where this benefit is not applicable. Crucially, Section 13(7)(i) states that no input tax credit shall be allowed to a dealer in respect of the purchase of any goods where the sale of such goods by the dealer is exempt from payment of tax under clause (c) of Section 7.

The Court held that the prohibition on allowing input tax credit in this scenario was a clear statutory mandate. Despite the appellant's argument regarding the policy intent, the Court found it difficult to disregard the unambiguous language of Section 13(7). The Court reasoned that a dealer availing the exemption under Section 7(c) should be aware of the limitations on claiming input tax credit.

Consequently, the Supreme Court dismissed the Civil Appeal, affirming the denial of input tax credit. There was no order as to costs.


UTTAR PRADESH VALUE ADDED TAX (SECOND AMENDMENT) Act, 2009