M/S. Thiagarajar Mills vs. The State Of Tamil Nadu

Held

The Court held that the impugned orders were liable to be interfered with because they were passed solely by applying the proviso to Section 19(2) of the TNVAT Act. The Court followed the precedent set in M/s.Everest Industries Limited vs. The State of Tamilnadu (2017) 100 VST 158 (Mds), which established that the proviso in question cannot be made applicable to dealers/manufacturers like the petitioners who use inputs in manufacturing or processing of goods within the State. Therefore, these petitioners are entitled to full credit of ITC, and the reversal of ITC by deducting 3% based on the said proviso is not permissible. The Court quashed the impugned orders and allowed the writ petitions. In one case (W.P.(MD) No.215 of 2015), where 25% of the demanded tax was paid conditionally, the Court directed that this amount be returned or adjusted towards future tax liabilities. No costs were awarded.

Facts

The petitioners, M/s.Thiagarajar Mills (P) Ltd., Tvl.Maruthi Poly Bags (P) Ltd., M/s.J.K.Fenner (India) Limited, and M/s.Servalakshmi Paper Limited, are dealers registered under the Tamil Nadu Value Added Tax (TNVAT) Act, 2006. They challenged orders from the respondent revenue authorities that reversed Input Tax Credit (ITC) availed by them. The reversal was based on the proviso inserted by the Fifth Amendment Act, 2013, to Section 19(2) of the TNVAT Act. The petitioners argued that this proviso was wrongly applied to them, as they are manufacturers using inputs for manufacturing or processing goods within the State, and not solely for inter-state sales as specified in Section 19(2)(v). The impugned orders were passed by Assistant Commissioners (CT) of various circles in Tamil Nadu.

Key Issues

1. Whether the proviso to Section 19(2) of the TNVAT Act, inserted by the Fifth Amendment Act, 2013, which limits ITC to 3% of the tax for purposes specified in Clause (v), can be applied to manufacturers who use tax-paid inputs in manufacturing or processing of goods within the State, as covered under Clause (ii) of Section 19(2)? Petitioner's arguments: The petitioners contended that the proviso to Section 19(2) of the TNVAT Act should only apply to inter-state sales as specified in Section 19(2)(v) and not to manufacturers falling under Section 19(2)(ii). They relied on the High Court's decision in M/s.Everest Industries Limited vs. The State of Tamilnadu (2017) 100 VST 158 (Mds), which held that manufacturers should be allowed full ITC on tax-paid inputs used in manufacturing or processing. Revenue's arguments: The respondents' counsel fairly submitted that the issue had been decided in the Everest Industries case, acknowledging that the proviso should only be applicable to Section 19(2)(v) and not to other sub-clauses like (ii).