By TIOL News Service

NAINITAL, OCT 03, 2015: THE issue before the Bench is - Whether assessee is entitled to benefit of input tax credit on tax paid on packing materials used in manufactured products which were stock transferred outside the State concerned. NO is the answer.

Facts of the case

The assessee Company, which has manufacturing unit in the State of Uttarakhand, purchases raw material and packing material for manufacture of soaps, detergents, creams and tooth-pastes in the State of Uttarakhand. The Uttarakhand Value Added Tax Act, 2005 provides for Input Tax Credit ("ITC"). After the Act came into force in 2005, assessments were completed for the years 2005-2006, 2006-2007 and 2007-2008, wherein returns were finalized, which countenanced grant of ITC in respect of packing materials of products, which were sent outside the State by way of stock transfer. A Circular was issued on 28.06.2008. In relation to Assessment Year 2008-2009 for which assessment proceedings took place in the year 2012, the officer purported to disallow the claim for ITC on packing materials. Thereafter, another Circular dated 23.01.2013 was issued which provideed that ITC is not available in respect of packing materials when used for manufacturing products, which are stock transferred out of the State. Assessee filed writ petition which was dismissed by Single Judge.

Having heard the parties, the Court held that,

++ A Circular cannot deprive the court of its power or, rather, detract from the duty of the court to construe the provisions and to interpret the law. Section 6(1), undoubtedly, provides that ITC is available only to a registered dealer. It further provides that ITC is to be determined under the provisions of the Act to the registered dealer and for the tax paid or payable in respect of taxable sales other than sales specified in Schedule III or any other sales as may be prescribed. Sub-section (2) of Section 6 provides that ITC to which the registered dealer is entitled shall be the amount of tax paid to the seller on his purchases intended to be used for the purposes and further it would be subject to the conditions, which are specified in Section 6 and calculated in such manner as may be prescribed by Rules. After having provided that the credit is to be on the turnover of purchases during the tax period, which are intended for the purposes, the Legislature took care in providing in sub-section (3) of Section 6 the purposes, which will entitle a registered dealer for ITC. Under clause (a), if goods are purchased for sale in Uttarakhand, they qualify for the benefit of ITC. Likewise, if goods are purchased for sale in the course of inter-State trade and commerce, it is a recognised purpose. Likewise, if it is intended for sale in the course of export out of the territory of India, the dealer concerned would be entitled to claim the benefit of ITC. Clause (d) of Section 6(3) deals with purchase of goods from the State of Uttarakhand by a registered dealer and from a registered dealer holding a valid certificate of registration under Section 15 or Section 16 for the purpose of using the said goods as raw materials and consumables in manufacturing or processing of goods or for use as containers or other packing materials of such manufactured goods. It is not the mere use of the goods as raw materials or consumables or containers or packing materials that alone is required. The manufactured goods must be for sale or for re-sale within the State, or, sale or re-sale in the course of inter-State trade or commerce. The goods specified by the manufactured goods must be other than those specified in Schedule I or Schedule III. Schedule I of the Act deals with exempted goods within the meaning of Section 4(2)(a) of the Act. Schedule III of the Act deals with goods, which are treated as special category goods, and, in respect of which, the point of taxation is the point, which is specified in Column (C) and at the rate which is provided therein. It is relatable to Section 4(2)(b)(ii) of the Act. Therefore, it is clear that ITC cannot be claimed in respect of either the raw material or packing material in regard to manufacture of exempted goods within the meaning of Schedule I;

++ the Legislature has chosen in its wisdom to include purchase of goods to be used as ‘raw materials' alone for the manufacture of finished products, which are covered otherwise by clause (d); in that, it does not fall under Schedule I or Schedule III, when they are dispatched outside the State which takes in dispatch by way of stock transfer in the proviso. The Legislature has used the words raw materials, consumables, containers or other packing materials in clause (d) in the context of an intra-State sale or inter-State sale; whereas, in the proviso, while a common factor is ‘the manufactured products', which are common to both clause (d) and the proviso, the proviso relates only to dispatch of goods otherwise than by way of sale. The words used are "dispatched outside the State other than by way of sale". Therefore, stock transfer being one of the transactions, which would be covered by way of dispatch outside the State other than by way of sale, the only conclusion possible is that a limited relief of ITC is available in respect of stock transfer of finished goods; in that, it is, in the first place, limited to the raw materials and, secondly, it is limited as regards the quantum, namely, the tax paid in excess of 2 per cent on the purchase of raw materials, which apparently is the CST (Central Sales Tax) rate, is allowed.

++ Section 6(4)(a) is intended to provide for a contingency when a registered dealer purchases goods (other than capital goods) on which he is entitled to ITC under the provisions of this Section and the purchases are used partially for various purposes as provided in sub-section (3) and he also uses it for other purposes [meaning the purposes which are not provided in Section 6(3)], then ITC is not to be denied totally. On the other hand, the Legislature intended that the dealer would be entitled to ITC in proportion to the extent that the goods are used for the purposes which are covered by Section 6(3) and, thereafter, the provision contains the words "and such different purposes include". The words "various purposes" have been used in connection with sub-section (3) as that is made clear expressly in Section 6(4)(a) itself. The use of the purchases, which have been made, may be made by a dealer partially for the different purposes; but the ITC is to be confined to the extent that they are used for those purposes, which are mentioned in Section 6(3) only and it is, thereafter, that Section 6(4)(a) provides that such different purposes include the various categories of transactions mentioned in clauses (i), (ii) & (iii). Therefore, the words "different purposes" are intended to differentiate between purposes, which are sanctioned under Section 6(3) as purposes, which will entitle the registered dealer to the benefit of ITC, and other purposes, which would not so entitle him. On sale of goods, which are exempted from tax, there cannot be a claim for ITC. It is, in the said fashion, that we must understand the words sales outside the State consisting of sale of goods and dispatch of goods in the form of consignment or stock transfer to other States;

++ Legislature intended to refer to purposes in connection with which ITC could be claimed as against the purposes which are not sanctioned under Section 6(3) when it used the expression "different purposes". It is also noteworthy that the Legislature has used the word "include", which is before referring to clauses (i), (ii) & (iii);

++ the provision of Section 6(3)(d) and the cognate provisions contained in the proviso thereto, leave us in no doubt that the Legislature never intended to give the benefit of ITC in regard ‘packing materials' in connection with stock transfer of finished products. The Circular also cannot be clearly understood in the manner as it is suggested. At any rate, the Circular is not free from ambiguity. The subsequent Circular of 2013, in fact, clarifies this aspect dispelling the doubts, which possibly could have been engendered in the minds of the assessees as a result of the stray sentence in the 2008 Circular;

++ in regard to Circulars issued under Section 37-B, we would think they fall in a special category. This is for the reason that Circulars have been issued in regard to the attainment of uniformity in classification of goods when the authorities themselves, on a conspectus of various entries, seek to guide the world by issuing Circulars indicating that a particular good would fall in a particular entry and the business world and those connected therewith, on scrupulously following the said Circulars, arrange their business affairs, it would be totally unfair to allow the interpretation to be supplanted at the hands of the officers, who are bound by such Circulars;

++ the Circular, which has been issued in the year 2013, propounds the correct position in law and no case is made out for grant of relief against the same;

++ Assessee is not entitled to the benefit of ITC in respect of packing materials used for its finished goods, which were stock transferred. Even the Circular of 2008 does not as such clearly provide for the grant of such benefit.

(See 2015-TIOL-2284-HC-UKHND-VAT)