State Of Kerala vs. M/S.Hindustan News Print LTD.

Facts

The assessee, Hindustan Newsprint Ltd., manufactures newsprint, a taxable item under the Kerala Value Added Tax Act, 2003 (KVAT Act). The company generates its own electricity using diesel and steam turbine generators, consuming oil and coal as fuel. The raw materials for this electricity generation were purchased on payment of tax, and the assessee sought to claim this tax as input tax credit (ITC) against the sale of newsprint. The assessing officer and first appellate authority rejected the claim, citing Section 11(5) of the KVAT Act, which prohibits ITC on raw materials used for manufacturing exempted goods, and electricity is listed as exempted in Schedule I. The Tribunal, however, allowed the claim to the extent electricity was used for manufacturing, remanding the matter to differentiate usage for manufacturing and factory illumination. The State has filed a revision petition against the Tribunal's order.

Held

The Court held in favour of the assessee, affirming the Tribunal's reasoning that electricity generation, in this case, is an integral part of the manufacturing activity. The Court agreed that the prohibition under Section 11(5) of the KVAT Act would have been applicable if the manufactured electricity was sold, as it would then be an exempted sale. However, since the electricity was captively consumed for manufacturing newsprint (a taxable product) and for factory illumination, the proportion of raw materials used for electricity generation for manufacturing purposes qualifies for ITC. The Court noted that electricity is excluded from the definition of 'goods' under Section 2(xx) of the KVAT Act. The Court upheld the Tribunal's remand order for segregating the electricity used for manufacturing versus factory illumination, directing the assessee to provide sufficient documentation. If documentation is insufficient, the Assessing Officer can determine the proportion on a best judgment basis. ITC is to be allowed only for raw materials used in electricity generation for the manufacturing process.

Key Issues

1. Whether the assessee is entitled to claim input tax credit on raw materials purchased for electricity generation, given that electricity is an exempted item under Schedule I of the KVAT Act and Section 11(5) prohibits ITC for raw materials used in manufacturing exempted goods? The State argued that the Tribunal erred by relying on CENVAT credit decisions, as the KVAT Act lacks specific provisions for ITC on intermediary products like electricity, unlike CENVAT credit rules. The State contended that electricity generation is a distinct activity and not covered by the KVAT Act's provisions for ITC on inputs used in manufacturing taxable goods. The assessee contended that electricity generation is an integral part of their manufacturing activity and that the raw materials used for it should be eligible for ITC. They relied on judicial pronouncements that consider processes integrally connected to the ultimate production of goods as part of the manufacturing process.