M/S Dynatech Tools And Devices vs. State Of Karnataka By - Karnataka High Court, 12 March 2021

Cause title — parties, addresses and appearances

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 12TH DAY OF MARCH, 2021 PRESENT THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA AND THE HON'BLE MR. JUSTICE V.SRISHANANDA S.T.R.P.NO.92/2018 BETWEEN: M/S DYNATECH TOOLS AND DEVICES NO.355, 9TH CROSS, 4TH MAIN, 4TH PHASE, PEENYA INDUSTRIAL AREA, BANGALORE 560 058. …PETITIONER (BY SRI M R NARAYAN, ADVOCATE.,) AND: 1. STATE OF KARNATAKA BY JCCT – APPEALS 6, BMTC, TTMC, ‘B’ BLOCK, SHANTHINAGAR, BANGALORE 27. 2. THE ASSISTANT COMMISSIONER, OF COMMERCIAL TAXES (AUDIT 62), DVO -6, NO.488, KIADB BUILDING, 3RD FLOOR, 4TH PHASE, 14TH CROSS, PEENYA II STAGE, BANGALORE 560 058. ... RESPONDENTS (BY SRI VIKRAM HUILGOL, AGA) THIS STRP IS FILED UNDER SECTION 65(1) OF THE KARNATAKA VALUE ADDED TAX ACT, 2003, AGAINST THE ORDER DATED 4.1.2018 PASSED IN STA NO.122/2016 ON THE FILE OF THE KARNATAKA APPELLATE TRIBUNAL AT BENGALURU, PARTLY ALLOWING THE APPEAL 2 AND PARTLY UPHOLDING THE ORDER DATED 5.12.2015 PASSED IN VAT AP NOS.381 to 404/11-12 ON THE FILE OF THE JOINT COMMISSIONER OF COMMERCIAL TAXES (APPEALS) 6, BENGALURU AND PARTLY UPHOLDING THE RE-ASSESSMENT ORDER DATED 30.4.2011 PASSED BY ASSISTANT COMMISSIONER OF COMMERCIAL TAXES (AUDIT-62) VAT DIVISION -6 BANGALORE, PASSED U/S 39(1) OF THE ACT AND PENALTY ORDER PASSED U/S 72(2) OF THE ACT, FOR THE TAX PERIOD FROM APRIL 2006 TO MARCH 2007. THIS STRP HAVING BEEN HEARD AND RESERVED ON 18.02.2021, COMING ON FOR ‘PRONOUNCEMENT’ OF ORDERS THIS DAY, SATISH CHANDRA SHARMA J., MADE THE FOLLOWING:

ORDER

This Sales Tax Revision Petition arises from an order dated 4.1.2018 passed by the Karnataka Appellate Tribunal at Bengaluru, by which the appeals filed by the petitioner has been dismissed.

The facts giving rise to filing of this petition briefly stated are that petitioner is a partnership firm engaged in the manufacture and sale of machine components, jigs and fixtures, in the name and style of M/s Dynatech Tools and Devices. The petitioner is an assessee under the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as KVAT Act). The petitioner had filed returns in Form VAT 100 disclosing the total and net output turnover under the KVAT Act and admitted net output tax

after claiming the benefit input tax credit on the local Registered Dealer purchases.

The case of the petitioner was taken up for audit and the assessing officer has verified the books of accounts produced by the petitioner as well as the claim of input tax credit made on local Registered Dealer purchases and, on such verification, it was noticed that the petitioner effected purchases of capital goods from local Registered Dealers and his claim for input tax credit on the entire purchase of capital goods even though the petitioner has manufactured both taxable and non taxable finished goods i.e., on job work basis, without restricting input tax credit to the extent of goods manufactured on job work basis as provided under Section 12 of the KVAT Act r/w Rule 133(c) of the Karnataka Value Added Tax Rules, 2005 (hereinafter referred to as KVAT Rules).

The assessing officer has adopted the formula prescribed under Rule 131 of the KVAT Rules and restricted the input tax credit claimed by the petitioner on purchases of capital goods by issuing show cause notice, for which the petitioner had filed objections. Finally, an order of assessment was passed for the tax period in question restricting the input tax credit as

proposed in the show cause notice and penalty and interest was levied under Section 72(2) and Section 36 of the Act.

Re-assessment was done under Section 39(1) of the KVAT Act for 12 tax periods from April 2006 to March 2007 and for 12 tax periods from April 2007 to March 2008 vide order dated 30.4.2011 by restricting the input tax credit on capital goods proportionately by adopting the formula prescribed under Rule 131 of the KVAT Rules and thereby disallowing the input tax credit claimed on the job work portion. Not only additional demand was created but also levied penalty under Section 72(2) of the KVAT Act.

Against the order passed by the assessing officer dated 30.4.2011, the petitioner preferred appeals before the first appellate authority and the first appellate authority, namely Joint Commissioner of Commercial Taxes affirmed the order passed by the assessing officer vide order dated 5.12.2015. Thereafter, second appeals were preferred before the Karnataka Appellate Tribunal (hereinafter referred to as ‘the Tribunal’) and the Tribunal has dismissed the appeals by order dated 4.1.2018. In the aforesaid factual background, this petition has been preferred raising the following substantial questions of law:-

1) Whether the Tribunal is right in ignoring the mandatory provisions of Section 12 of the KVAT Act ?(As per this Section, a dealer is entitled to claim in-put tax credit on purchase of capital goods which are wholly or partially used in the business of the taxable goods) 2) Whether the Tribunal is right in applying the Provisions of Section 17 of the KVAT Act, which deals with input Tax credit applicable to trading goods and not capital goods?

3) Whether the Tribunal has committed an error in not differentiating the difference between the trading goods and capital goods in case of utilizing them for other purposes other than trade? (in the case of trading commodity, which are used both for sale as well as for other purposes there will be one to one relationship between the unit of purchase and sale or the same can be apportioned on the basis of turnover for which formula under section 131 is provided. On the other hand, in the case of capital goods there can be no one to one relationship and input tax paid on Capital goods can be set off only in the output tax collected from the manufacture goods by using the capital goods).

The matter was heard at the initial stage with the consent of the parties and the petition was admitted on the aforesaid substantial questions of law.

Heard the learned counsel for the parties and perused the record.

The undisputed facts of the case reveal that the petitioner is involved in manufacturing of goods on it’s own as well as for other dealers, on job work by collecting labour charges. The assessing officer has restricted input tax credit proportionately on job work by applying the formula prescribed under Rule 131 of the KVAT Rules.

10.

To decide the controversy, it is necessary to take note of Section 17 of the KVAT Act and Rule 133 of the KVAT Rules, which are reproduced as hereunder:

“ Section 17. Partial rebate.-

Where a registered dealer deducting input tax.-

(1) makes sales of taxable goods and goods exempt under Section 5, or (2) in addition to the sales referred to in clause (1), despatches taxable goods or goods exempted under Section 5 outside the State not as a direct result of sale or purchase in the course of inter-State trade, or (3) puts to use the inputs purchased in any other purpose (other than sale, manufacturing, processing, packing or storing of goods), in addition to use in the course of his business, apportionment and attribution of input tax deductible between such sales and despatches of goods or such purpose, shall be made in accordance with Rules or by special methods to be approved by the Commissioner or any other authorised

person and any input tax deducted in excess shall become repayable forthwith.”

Rule 133 of KVAT Rules "133. Capital goods scheme.- (1) Deduction of input tax under section 12 shall be subject to the following conditions.- (a) No deduction of input tax shall be allowed where the use of capital goods relates wholly to the sale of exempt goods, other than when such goods are sold in the course of export out of the territory of India. (b) Where there is a change in use of the capital goods from sale of exempt goods or non-taxable transactions to sale of taxable goods wholly or partially, within twelve months from the date of its purchase, the dealer shall be eligible for rebate on such capital goods. (c) Where the use of capital goods relates, to both the sale of goods in the course of export out of the territory of India or sale of taxable and exempt goods and also to taxable goods that are disposed otherwise than by way of sale or non-taxable transactions, the non-deductible element of input tax shall be calculated on the basis of the formula specified under Rule 131. (d) No deduction of input tax in respect of capital goods shall be allowed to a dealer registered under the Act where the taxable turnover of the dealer is less than the limit specified in sub-section (2) of section 22 during the year in which the capital goods are purchased. (e) The deduction shall be claimed by the dealer in his monthly return. Provided that any balance of deduction of input tax in respect of capital goods purchased prior to the first day of April, 2006 and in respect of which input tax rebate has already been granted in Form VAT 175, shall be claimed by the dealer in his return for the month of April, 2006. 8

(2) Where there is a change in use of the capital goods, after taking deduction of input tax, and the dealer is no longer eligible for such input tax rebate, the dealer shall inform the juri ictional Local VAT officer or VAT Sub- officer within ten days of such change in use. (3) Where the capital goods are disposed of otherwise than by way of sale after, the date of the commencement of commercial production or the sale of taxable goods or the sale of any goods in the course of export out of the territory of India, the dealer shall repay input tax deducted in respect of such capital goods and such amount repayable shall be calculated on the prevailing market value of such capital goods at the time of such disposal."

11.

The aforesaid statutory provisions of law make it clear that in case the petitioner has purchased capital goods and used the capital goods for job work along with using the same for it’s manufacturing activity and taxable sale of goods, such a transaction is covered under sub-section (3) of Section 17 and input tax deduction is to be apportioned as provided under Rule 131 of KVAT Rules. Therefore, in the considered opinion of this Court the assessing officer has rightly apportioned the input tax deduction in accordance with Rule 131 of the KVAT Rules.

12.

Learned counsel for the petitioner has also argued that deduction of input tax credit in respect of capital goods as provided under Section 12 is allowable deduction even if purchase of capital goods wholly or partly in use in the business of taxable goods and hence, input tax credit is also available for job work

and that since job work is out of the purview of the provisions of the KVAT Act and Rules, the same is not covered under Section 17 of the KVAT Act and hence Rule 131 cannot be applied.

13.

We have carefully perused the findings arrived at by the Tribunal in respect of the aforesaid issue. By a bare reading of Sections 12 and 17 of the KVAT Act, it is crystal clear that when the goods are partly used in their business of taxable goods and partly used for any other purpose (other than sale, manufacturing, processing, packing or storing of goods), then the apportionment has to be done keeping in view the formula prescribed under Rule 131 of the KVAT Rules.

14.

In the present case, the petitioner has purchased capital goods from local Registered Dealers and claimed the benefit of input tax credit on such purchase. It is an admitted fact that the petitioner has not only used the capital goods for the purpose of manufacturing or processing the taxable goods but also for non taxable transactions, like job work. The claim of input tax credit on local Registered Dealers purchases of capital goods is governed by the provisions of Section 12 of the KVAT Act. Section 12(1) of the KVAT Act provides for input tax credit on purchase of capital goods and as per Section 12(1) of the

KVAT Act, the input tax credit paid on purchases of capital goods qualifies for deduction subject to the terms and conditions stipulated in Section 11(3) and 11(4) of the KVAT Act. The procedure to claim the benefit of input tax rebate in respect of local Registered Dealer purchases of capital goods is laid down under Rule 133 of the KVAT Rules. The amended Rule 133 came into force w.e.f., 1.4.2006 and provides that where a registered dealer carries on the business in taxable as well as exempted goods or exempted transactions and taxable transactions, the input tax deduction on capital goods be allowed proportionately, keeping in view the formula laid down under Rule 131 of the KVAT Rules.

15.

Rule 133(c) of the KVAT Rules clearly specifies that where the use of capital goods relates, to both the sale of goods in the course of export out of the territory of India or sale of taxable and exempt goods and also to taxable goods that are disposed otherwise than by way of sale or non taxable transactions, the non deductiable element of input tax shall be calculated on the basis of the formula specified under Rule 131 of the KVAT Rules.

16.

For the aforementioned reasons, the orders passed by the authorities and the Tribunal do not warrant any interference as apportionment was rightly done keeping in view the formula provided under Rule 131 of the KVAT Rules. The substantial questions of law are answered against the petitioner and in favour of the Revenue. We, therefore, do not find any merit in this petition. The same fails and is hereby dismissed.

No orders as to costs. JUDGE JUDGE