Case: State of Gujarat Vs. Reliance Industries Ltd

2. The Respondent (hereinafter referred to as the assessee) is engaged in the business of manufacturing and selling polymers and chemicals. These goods are manufactured by the Respondent in its factory situated in the State of Gujarat (hereinafter referred to as the Appellant State). After the manufacture of these goods, same are transferred by the Assessee to its various branches located in different parts of the country from where those goods are sold. Obviously, in respect of goods transferred to places outside the Appellant State, the Value Added Tax (VAT) is paid at the time of sale of those goods in those States, as per the local laws of the said States. The goods are sold in the Appellant State as well and in respect of these goods VAT is paid as per the Gujarat Value Added Tax Act, 2003 (for short, the VAT Act). For the purpose of manufacturing the aforesaid goods, namely, polymers and chemicals, the Assessee purchases furnace oil, natural gas and light diesel oil (hereinafter referred to as the raw material or inputs) from its registered dealers. These fuels are used for the aforesaid manufacturing activities. On purchase of the raw material, VAT is paid at varying rates. On furnace oil, 4% VAT is payable as per the VAT Act, whereas on natural gas and light diesel oil rate of VAT prescribed and payable is 12.5%. Since these inputs are used for manufacturing of the final products, there is a provision in the VAT Act for giving credit on the VAT which is paid at the time of purchase of these inputs. The manner in which this credit is to be given is prescribed Under Section 11 of the VAT Act.4. The Assessing Officer had held that in respect of such goods tax credit is required to be reduced at the rate of 4% under Sub-clause (ii) and again at the rate of 4% under Sub-clause (iii). This order was upheld by the Joint Commissioner of Commercial Taxes in appeal that was preferred by the Assessee. However, in further appeal before the Gujarat Value Added Tax Tribunal, the aforesaid view was upset as the Tribunal held that the deduction can be at 4% only and there cannot be double reduction in tax credit admissible to the Assessee. The High Court has put its stamp of approval to the aforesaid view of the VAT Tribunal. That is the reason for the Appellant State to approach this Court as it is obviously not satisfied with the decision of the High Court.5. Reasons given by the High Court in taking the aforesaid view can be captured from the following discussion contained in the impugned judgment:It is not in dispute that in the present case, the taxable goods purchased by the Respondent Assessee satisfy the description of Sub-clause (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 4 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 Under Section 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 4 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.6. In addition, the High Court has also observed that the legislative intent of Section 11(3)(b) can be gathered from proviso thereto which provides that where the rate of tax of taxable goods is less than 4%, 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 of such goods, meaning thereby, if the tax credit available to a dealer is less than 4%, the reduction should be limited to such credit and no more. From this, the High Court has observed that the Legislature envisaged that in no case reduction of tax credit Under Section 11(3)(b) would accede 4%.

Reasoning: 3. A birds eye view of the relevant portion of the aforesaid provision, which is the subject matter of these appeals, reveals that the tax credit which is admissible to the purchasing dealer is subject to provisions of Sub-section (2) of Section 12. Sub-section (3)(b), with which we are primarily concerned, provides that if the goods are falling in the categories mentioned in Sub-clauses (i), (ii) and (iii), the tax credit is to be reduced by the amount of tax calculated at the rate of 4% on the taxable turnover of purchases within the State. As noted above, the raw material/inputs used in the instant goods are fuels. Sub-clause (ii) includes such goods in case the taxable goods are dispatched outside the State in the course of branch transfer. As already mentioned above, after the final product is produced, the Assessee transfers these goods to its various branch offices, many of which are located outside the State and, therefore, those goods which are so transferred would be covered by this Sub-clause and in respect of such goods which are transferred outside the State and are taxable under the VAT Act, the tax credit is to be reduced by 4%. Since the raw material in the instant goods is in the nature of fuels used for the manufacture of goods, it gets covered by Sub-clause (iii) as well.In nutshell, Clause (a) of Sub-section (1) of Section 11 entitles the registered dealer to claim tax credit of the amount of VAT or entry tax which was paid. However, this tax credit is subject to Sub-sections (2) to (12) of Section 11.13. Clause (a) of Sub-Section 3 lays down certain conditions which have to be fulfilled in order to claim the tax credit. First condition is to give the tax credit in those cases where taxable goods are purchased. Thus, it is not admissible where the purchased goods are non-taxable inasmuch as in those cases no tax was paid and thus the question of giving credit would not arise. Second condition mentions that these goods are intended for specific purposes which are stipulated in Sub-clauses (1) to (7) of Clause (a). A perusal of these sub-clauses would indicate that contingencies stipulated in Sub-clauses (i) to (v) pertain to one category, i.e. where the goods are purchased as it is. On the other hand, Sub-clauses (vi) and (vii) would fall in other category. Sub-clause (vi) deals with a situation where the goods, after purchase, are used as raw material in the manufacture of taxable goods or in the packing of goods so manufactured. Sub-clause (vii) deals with those goods which are used as capital goods meant for use in the manufacture of taxable goods. Sub-clause (i) of Clause (b) is relatable to Sub-clause (iii) of Clause (a) as these deal with branch transfer of the goods. Likewise, Sub-clause (vi) read with Sub-clause (iii) of Clause (a) is concerned with Sub-clause (2) of Clause (b) as these deal with a situation where the goods so produced, in respect of which tax credit is given, are used as raw material in the manufacture or in the packing of goods and there is branch transfer of these goods as well outside the State. In such eventualities, tax credit is not fully given as it is reduced by 4%.14. It is clear that the material used even in the packing of goods is treated as raw material and, therefore, this definition is to be treated as term of Article This definition also clarifies that fuels used in the manufacture of goods would be treated as raw material with the only exception of those fuels which are used for the purpose of generation of electricity.15. Keeping in mind the aforesaid aspects, we advert to Section 11(3)(b).It is a non-obstante Clause as it starts with the word notwithstanding. Another aspect which is to be necessarily kept in mind is that it is the amount of tax credit which a dealer would be entitled to claim under Clause (a) that is to be reduced at the rate of 4% and this reduction is to be effected in three eventualities provided under Sub-clauses (i), (ii) and (iii). Insofar as Sub-clause (i) is concerned, it pertains to trading activity and there is no question of any overlap between Sub-clause (i) on the one hand and Sub-clauses (ii) and (iii) on the other. Further, insofar as Sub-clauses (i) and (ii) are concerned, same are disjunctive as the word or is inserted between these two clauses. However, when we come to Clauses (ii) and (iii), where there is a possibility of overlap (as it has happened in the instant case as well), there is no word or used between Clauses (ii) and (iii). Sub-clause (ii) finishes with the punctuation mark full stop and then Sub-clause (iii) starts. This depicts the intention of the Legislature, namely, reduction is not confined to one of the aforesaid two sub-clauses and it can occur under both these provisions. It is rightly pointed out by the Appellant State that these are event based sub-clauses and two events are totally different. Sub-clause (ii) is attracted in those cases where taxable goods are used as raw material (which may not necessarily be fuel but all raw materials are included) and also the other condition which is to be fulfilled is that these goods are dispatched outside the State in the course of branch transfer etc. Therefore, even if the taxable goods are used as raw material in the manufacture or in the packing of goods but they are consumed or sold within the State, Sub-clause (ii) would not apply. On the other hand, Sub-clause (iii) is referable to only fuels which are used for manufacture of goods. It is, thus, a totally separate category and the moment fuel is used in the manufacture of goods, this Sub-clause gets attracted and it would be immaterial whether the goods are sold within the State or outside the State.17. Moreover, there is no quarrel about the well-settled proposition of law that taxing statutes are to be interpreted literally See Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 , State of Madhya Pradesh v. Rakesh Kohli and Anr. (2012) 6 SCC 312  and V.V.S. Sugars v. Government of Andhra Pradesh and Ors. (1999) 4 SCC 192. 18. The aforesaid discussion leads us to the conclusion that it is a mega tax credit scheme which is provided under the VAT Act meant for all kinds of manufactured goods. The material in question, namely, furnace oil, natural gas and light diesel oil are admittedly subject to VAT under the VAT Act. The Legislature, however, has incorporated the provision, in the form of Section 11, to give tax credit in respect of such goods which are used as inputs/raw material for manufacturing other goods. Rationale behind the same is simple. When the finished product, after manufacture, is sold, VAT would be again payable thereon. This VAT is payable on the price at which such goods are sold, costing whereof is done keeping in view the expenses involved in the manufacture of such goods plus the profits which the manufacturer intends to earn. Insofar as costing is concerned, element of expenses incurred on raw material would be included. In this manner, when the final product is sold and the VAT paid, component of raw material would be included again. Keeping in view this objective, the Legislature has intended to give tax credit to some extent. However, how much tax credit is to be given and under what circumstances, is the domain of the Legislature and the courts are not to tinker with the same.19. The upshot of the aforesaid discussion would be to hold that reduction of 4% would be applied whenever a case gets covered by Sub-clause (ii) and again when Sub-clause (iii) is attracted.20. This, however, would be subject to one limitation. In those cases where VAT paid on such raw material is 4%, as in the case of furnace oil, reduction cannot be more than that. After all, Section 11 deals with giving credit in respect of tax that is paid. Therefore, if some reduction is to be made from the said credit, it cannot be more than the credit given.We may refer to the judgment in Godrej & Boyce Mfg. Co. Pvt. Ltd. and Ors. v. Commissioner of Sales Tax and Ors. (1992) 3 SCC 624  and the relevant extract which is relevant for our purposes is as follows:9. Sri Bobde appearing for the Appellants reiterated the contentions urged before the High Court. He submitted that the deduction of one per cent, in effect, amounts to taxing the raw material purchased outside the State or to taxing the sale of finished goods effected outside the State of Maharashtra. We cannot agree. Indeed, the whole issue can be put in simpler terms. The Appellant (manufacturing dealer) purchases his raw material both within the State of Maharashtra and outside the State. Insofar as the purchases made outside the State of Maharashtra are concerned, the tax thereon is paid to other States. The State of Maharashtra gets the tax only in respect of purchases made by the Appellant within the State. So far as the sales tax leviable on the sale of the goods manufactured by the Appellant is concerned, the State of Maharashtra can levy and collect such tax only in respect of sales effected within the State of Maharashtra. It cannot levy or collect tax in respect of goods which are despatched by the Appellant to his branches and agents outside the State of Maharashtra and sold there. In law (apart from Rules 41 and 41-A) the Appellant has no legal right to claim set-off of the purchase tax paid by him on his purchases within the State from out of the sales tax payable by him on the sale of the goods manufactured by him. It is only by virtue of the said Ruleswhich, as stated above, are conceived mainly in the interest of publicthat he is entitled to such set-off. It is really a concession and an indulgence. More particularly, where the manufactured goods are not sold within the State of Maharashtra but are despatched to out-State branches and agents and sold there, no sales tax can be or is levied by the State of Maharashtra. The State of Maharashtra gets nothing in respect of such sales effected outside the State. In respect of such sales, the rule-making authority could well have denied the benefit of set-off. But it chose to be generous and has extended the said benefit to such out-State sales as well, subject, however to deduction of one per cent of the sale price of such goods sent out of the State and sold there. We fail to understand how a valid grievance can be made in respect of such deduction when the very extension of the benefit of set-off is itself a boon or a concession. It was open to the rule-making authority to provide for a small abridgement or curtailment while extending a concession. Viewed from this angle, the argument that providing for such deduction amounts to levy of tax either on purchases of raw material effected outside the State or on sale of manufactured goods effected outside the State of Maharashtra appears to be beside the point and is unacceptable. So is the argument about apportioning the sale-price with reference to the proportion in which raw material was purchased within and outside the State.To the same effect are the judgments in the case of Hotel Balaji and Ors. v. State of Andhra Pradesh and Ors. (1993)Supp 4 SCC 536 and Jayam and Company v. Assistant Commissioner and Anr. (2015) 15 SCC 125.