Supreme Court of India
THE STATE OF KARNATAKAversusM/S. M. K. AGRO TECH. PVT. LTD.
- Citation
- 2017 INSC 983
- Decided
- 22 September 2017
- Disposal
- Appeal(s) allowed
- Bench
- A K SIKRI
Holding
Section 17 of the Karnataka VAT Act is attracted, mandating a partial rebate of input tax and rendering the High Court’s order granting full deduction erroneous.
Summary
M/s. M.K. Agro Tech Pvt. Ltd. (the assessee) purchased sunflower oil cake, paid input VAT, extracted oil (taxable) and sold the de‑oiled cake (exempt under Section 5). The State of Karnataka argued that only a partial rebate of input tax was permissible under Section 17 of the Karnataka Value Added Tax Act read with Rule 131(3), while the assessee claimed full deduction. The High Court allowed full deduction, applying a purposive construction of Section 17. The Supreme Court held that the plain language of Section 17(1) applies to the sale of both taxable and exempt goods, that Rule 131(3) must be used to apportion input tax, and that literal construction is appropriate for a taxing statute. Consequently, the Court affirmed that only a partial rebate is due and set aside the High Court’s order.
Issues considered
- Whether Section 17 of the Karnataka VAT Act applies to the sale of an exempt by‑product when input tax was paid on the raw material.
- Whether the assessee is entitled to a full input tax deduction or only a partial rebate under Section 17 and Rule 131(3).
- Whether the term ‘sale’ in Section 17 includes the sale of a by‑product and whether the by‑product is a ‘manufacture’ for tax purposes.
- Whether the High Court erred in departing from literal interpretation of a taxing statute in favor of purposive construction.
Legislation cited
- Karnataka Value Added Tax Act, 2003s. 10, s. 11(1), s. 17, s. 5
- Karnataka Value Added Tax Rules, 2005s. Rule 131
Subjects
VATinput tax creditpartial rebateby‑productliteral interpretationpurposive constructionKarnataka VAT Actde‑oiled caketaxable vs exempt goods
Judgment
(2017] 12 S.C.R. 1007
THE STATE OF KARNATAKA A
v.
Mis. M. K. AGRO TECH. PVT. LTD.
(Civil Appeal Nos.15049-15069 of20l7)
SEPTEMBER 22, 2017 B
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.)
Karnataka Value Added Tax (Act). 2003 - ss. 5, 17 -
Karnataka Value Added Tax Rules, 2005 - 1: 13 { - Partial rebate of
input tax u/s.17 of KVAT Act -Applicability of -Assessee purchases C
.. oiled sunflower cake a:~ an input, extracts oil out of it and then oil
is sold in the market ~.However, when sunflower oil is extracted,
by-product in the form of de-oiled sunflower oil cake· also becomes
available -Assessee also sells de-oiled cake - De-oiled cake is an
exempt good and, therefore, it does not suffer any VAT- s.17(1)
relates to those contingencies where the Jina/products are more D
than one and output tax is payable on the sale of one such final
product but other final product is exempted from payment of the
said output tax - Keeping in view s.17(1), appellant-State took view
that the assessee would be entitled to only partial rebate of input
tax uls.17 of the Act on de-oiled cake because of the reason that E
though output tax is paid on sunflower oil, it is not paid on the sale
of de-oiled cake - However, asses.see contended that s.17 of the
Act would not be ·applicable - High Court accepted plea of asses.see
and gave full input tax deduction - On appeal, held: The view taken
by the High Court is e1•roneous - Plai~ language of s.17(1) afloH;s
partial rebate on the 'sales' of taxable goods and goods exempt F
uls.5 - s.17 of the Act gets attracted in the instant case, as De-piled
c(lke is a saleable commodity which i,~ actually sold by the re.1pondent
· assessee - De-oiled cake fits into the definition of 'goods' and this
commodity is exempt from payment of i:my VAT uls.5 of the Act -
Secondly, High Court has not taken note of t.131 (3) of the Rules, G
which is applied in cases where input tax relating to both sale and
taxable goods and exenipt goods is known and in that situation,
under this sub-rule formula is given to work out the partial deduction
- Thirdly, ivhen literal inte1pretation to s.17 is given, the.case of'
asses.see would get covered thereby, howeve1; High Court resorted
H
1007
1008 SUPREME COURT REPORTS (2017] 12 S.C.R.
A lo /he purposive consln1clion lo achieve /he object, which was
erroneous - Fourthly, the entire scheme of the KVAT Act is to be
· considered and s.17 to be applied in that con/ext - If Legislature
has decided to give partial rebate of input tax 11nder the
circumstances mentioned in that provision, that has to be strictly
applied.
B
Interpretation of Statutes - Taxing Statutes - Literal
constr11ction and p11rposive construction - High Court chose to
depart from the literal constn1ction of s.17 of KVAT Act, on the
ground that literal constmction would lead to absurdity and would
C defeat the object of the Karna/aka Value Added Tax (Act), 2003 - It
resorted to purposive construction to achieve the object for which
the provision of s.17 is enacted -Approach of the High Court -
Held: Not proper - There was no reason for departing from the
principle of literal constmclion in a taxing statute - Taxing statutes
are to be interpreted literally - Karnataka Value Added Tax (Act),
D 2003 - s.17.
Allowing the appeals, the Court
HELD: 1. Section 17 of the Karnataka Value Added Tax
(Act), 2003 gets attracted in the instant case and the view taken
by the High Court ls erroneous. The first mistake which is
E committed by the High Court is to ignore the plain language of
sub-section (1) of Section 17. This provision which allows partial
rebate makes the said provision applicable on the 'sales' of
taxable goods and goods exempt under Section 5. Thus, this sub-
section refers to 'sale' of the 'goods', taxable as well as exempt,
F and is not relatable to the 'manufacture' of the goods. The High
Court has been swayed by the fact that while extracting oil from
sunflower, cake emerges only as a by-product. Relevant event
is not the mahufacture of an item from which the said by-product
is emerging. On the contrary, it is the sale of goods which triggers
the provisions of Section 17 ofKVAT Act. Whether it is by-product
G or manufactured product is Immaterial and irrelevant. Fact
. remains that de-oiled cake is a saleable commodity which is
actually sold by the respondent-asscssee. Therefore, de-oiled
cake fits into the definition of "goods" and this commodity is
exempt from payment of any VAT under Section 5 of the KVAT
H
THE STATE OF KARNATAKA v. M/s. M. K. AGRO TECH. 1009
PVT. LTD.
Act. Thus, provisions of Section 17 clearly get attracted when A
'sale' of these goods takes place. [Para 28) [1023-B-D)
2. Secondly, the High Court has not considered the import
and effect of sub-rule (3) of Rule 131 of the KVAT Rules. Sub-
rule (3) covers those cases where input tax is not directly rclatable
to exempt goods and taxable goods. It is, therefore, applied in B
those cases where input tax relating to both sale and taxable
goods and exempt goods is known. In that situation, formula is
given under this sub-rule to work out the partial deduction. The
High Court has neither take note of nor discussed sub-rule (3).
(Para 29) [1023-E-G) ·
c
3. Thirdly, the High Court was conscious of the fact that
when literal interpretation to Section 17 is given, the case of the
asscssee would get covered thereby. It is for this reason the
High Court has chosen to depart from the rule of literal
construction, on the ground that the literal construction would
lead to absurdity and would defeat the object of the Act. D
Therefore, according to the High Court, the purposive
construction is to be resorted to achieve the object for which the
provision is enacted. It is here the High Court went wrong.
Literal construction in the present case does not lead to any
absurd results. On the contrary, the object behind Section 17 E
allowing partial rebate in such cases gets achieved when the said
provision is applied giving literal construction in the instant case.
Herc is a case where the respondent-asscssec has paid input tax
while purchasing the raw material, namely, sunflower oil cake.
This has been used for extraction of sunflower oil. Even after
extracting the sunflower oil what remains is de-oiled cake which, F
no doubt, is a by-product. However, it ls not to be discarded as
waste. Rather, it is not only marketable as "goods" but fetches
significant sale price. The ratio of sale of sunflower oil and de-
oiled cake is 55:45. The respondent-assessee is, thus, able to
generate 45% revenue from the sale of de-oiled cake. However, G
no output tax is paid on the sale of this item since this item is
exempted from payment of VAT under Section 5 of the KVAT
Act. Section 17 is meant to take care of these situations, which
is the purpose behind that provision. Approach of the High Court,
H
1010 SUPREME COURT REPORTS [2017] 12 S.C.R.
A in fact, defeats the said purpose. Therefore, there was no reason
for departing from the principle of literal construction in a taxing
statute. It is settled proposition of law that taxing statutes are to
be interpreted literally. [Para 30] [1023-G-H; 1024-A-EJ
4. Fourthly, the entire scheme of the KVAT Act is to be
B kept in mind and Section 17 is to be applied in that context.
Sunflower oil cake is subject to input tax. The Legislature,
however, has incorporatccl the provision, in the form of Section
10, to give tax credit in respect of such goods which arc used as
inputs/ raw material for manufacturing other go.ods. Rationale
behind the same is simple. When the finished product, after
c manufacture, is sold, VAT would be again payable thereon. This
VAT is payable on the price at which such goods arc sold, costing
whercofis done keeping in view the- expenses involved in the
manufacture of such goodsp/11s the profits which the manufacturer
intends to earn. Insofar as costing is concerned, clement o_f.
D 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
E and the courts arc not to tinker with the same. If the Legislature
has -decided to give partial rebate of input tax under the
circumstances mentioned in that provision, that has to be strictly
applied. [Para 31] (1024-F-G; 1025-A-C]
5. On literal interpretation of Section 17 it can be gathered
F that it docs not distinguish between by-product, ancillary product,
intermediary product or final product. The expressions used arc.
'goods' and •sale' of such goods is covered under Section 17.
Both these ingredients stand satisfied as de-oiled cakes arc goods
and the rcspondcnt-asscssce had sold those goods for valuable
G consideration. In instant case, the assessing authorities recorded
a clear finding, which was accepted by the Tribunal as well, that
records and statement of accounts of the rcspondcnt-assessee
clearly stipulates that after solvent extraction is completed, 88%
of de-oiled cake remains and only 12% remains is the oil which
H
THE STATE OF KARNATAKA v. M/s. M. K. AGRO TECH. 1011
PVT. LTD.
is further refined in the refinery. This clearly shows that major A
outcome (88%) of the solvent extraction plant is de-oiled cake
which in itself is a marketable good having market value. [Para
32) [1026-F-G; 1027-AJ
Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v.
Commissioner of Sales Tax and Others (1992) 3 SCC B
624 : [199~) 3 SCR 683; Hotel Balaji & Ors. v. State
of Andhra Pradesh & Ors. (1993) Supp 4 SCC 536 :
[1992) 2 Suppl. SCR 182; Jayam and Company v.
Assistant. Commissioner and Another (2016) .15 SCC.
1.25 : [2016] 6 SCR 787 - relied on.
c
Commissioner of Central Excise, Jaipur v. Mahavir
Aluminum Ltd. (2007) 5 SCC 260 : [2007] 6 SCR 423;
Ravi Prakash Refineries Private Ltd. v. State of
Karnataka (2016) 12 SCC 193 : [2016] 5 SCR 565;
State of Gujarat v. Raipur Manufacturing Co. Ltd. AIR
1967 SC 1066 : (1967] SCR 6l8;Co111111issio11er of D
Income Tax-III v. Calcutta Knitwears, Ludhiana (2014)
6 SCC 444; State of Madhya Pradesh v. Rakesh Kohli
& Anr: (2012) 6 sec 312 : 120121 6 SCR 661; v.v.s.
Sugars v. Government of Andhra Pradesh & Ors. (1999)
4 SCC 192 : [1999] 2 SCR 925 - referred to. E
Case Law Reference
[2007) 6 SCR 423 referred to Para 23
[2016) 5 SCR 565 referred to Para 24
[1967) SCR 618 referred to Para 25 F
c2014) 6 sec 444 referred to Para 30
(2012) 6 SCR 661 referred to Para 30
I 1999) 2 SCR 925 referred to Para 30
I 1992] 3 SCR 683 relied on Para 31 .a
[1992) 2 Suppl. SCR 182 relied on Para 31
[2016) 6 SCR 787 relied on Para 31
H
1012 SUPREME COURT REPORTS [2017] 12 S.C.R.
A CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 15049-
15069 of2017.
From the fina!Judgment and Order dated 17.07.2014 passed by
the High Court of Karnataka at Bangalore in S.T.R.P. Nos.774-794 of
2013.
B Basavaprabhu S. Patil, Sr. Adv., V.N. Raghupathy, Chininay
Deshpande, Parikshit P. Angadi, Ms. Rachitha K. Hiremath, Advs. for
the Appellant.
P. Chidambaram, Sr. Adv., Mahesh Agarwal, Rishi Agrawala,
T. N. Keshavmurthi, Vivek Jain, Vikrant Pachnanda, E.C. Agrawala,
C Advs. for the Respondent.
The Judgment of the Court was delivered by
A. K. SIKRI, J. I. In these appeals, a short but interesting
question oflaw arises for consideration. It pertains to the construction
D of Section 17 of the Karnataka Value Added Tax (Act), 2003 [hereinafter
referred to 'KVAT Act'] read with Rule 131 of the Karnataka Value
Added Tax Rules, 2005 (hereinafter referred to as the 'KVAT Rules,
2005').
2. The respondent is the manufacturer of sunflower oil, which is
E extracted from sunflower cake by employing solvent extraction process.
· Sunflower oil cake, is, thus, used as input/raw material. On purchase of
sunflower oil cake (input) VAT is payable under the KVAT Act. After
the extraction of sunflower oil, on its sale again VAT is payable under
the said Act. For this reason, provisions ofKVAT Act provides for tax
credit paid on the input. To this extent there is no issue. However, when
F the sunflower oil is extracted, by-product in the form of de-oiled sunflower
oil cake (hereinafter referred to as the 'de-oiled cake') also becomes
available. This by-product is sold by the respondent (hereinafter referred
to as the 'assesscc) but on the sale of this by-product, no VAT is payable
as it is exempted item under the KVAT Act. Section 17 of the KVAT
G Act takes care ofthose contingencies where the final products arc more
than one and output tax is payable on the sale of one such final product
but other final product is exempted from payment of the said output tax .
. Since, no output tax is payable on the sale of exempted goods, the input
tax credit in such cases is partially admissible. The manner in which
pmtial exemption is given is provided in Rule 131 ofKVAT Rules, 2005.
H·
THE STATE OF KARNATAKA v. Mis. M. K. AGRO TECH. 1013
PVT. LTD. [A. K. SIKRI, J.]
3. Keeping in view this provision, the appellant - State has taken A
the view that the assessee would be entitled to only partial rebate of
input tax because of the reason that though output tax is paid on sunflower
oil, it is not paid on the sale of de-oiled cake. The assessee, on the other
hand, contends that Section 17 of the KVAT Act would not be applicable
in the instant case because of the reason that sunflower oil cake, as an
B
input, is used in its entirety in the extraction of sunflower oil. De-oiled
cake is not the result of any manufacturing process but is only a by-
product. Therefore, sale of such by-product, even when it is exempted
from output .tax, would not have any bearing. The High Court in its
impugned judgment has accepted this position adopted by the assessee
thereby giving full input tax deduction. c
4. Having narrated the background in which the question of law
arises for consideration, we may now recapitulate the factual background
in some more detail.
5. The respondent is a private limited company registered under
the provisions of the KVAT Act and also under the provisions of Central D
Sales Tax Act, 1956. The assessee carried on business of manufacturing
and trading of various kinds of edible oil. For the purpose of manufacturing
edible oil, the assessee has three units solvent extraction unit, refinery
unit and a trading unit. It purchases oiled sunflower cake as an input
(pays input sales tax on that), extracts oil out ofit in the solvent extraction E
plant, the oil is then refined in the refinery and trading is carried on
through the trading unit. Indisputably the assessee also sells de-oiled
cake which is a marketable good in itself De-oiled cake is a byproduct
of solvent extraction process carried out in the solvent extraction plant
in which oil is removed from the oiled cake and the remains are 88% de-
oilcd product and 12% oil. De-oiled cake is an exempt good and, therefore, F
it.does not suffer any VAT. The other goods, viz., edible oils manufactured
and sold by the assessee suffer output tax which the assesscc collects.
6. Returns were filed by the assessee for the period from March,
2005 to March, 2007. The prescribed authority, after scrutinizing the
returns filed by the asscssce and after issuing proposition notice and G
also considering the objections filed, concluded the assessment
proceedings under Section 38(1) of the Act holding that the asscsscc
was eligible only for partial input tax rebate as per Section 17( I) of the
KVAT Act read with Ruic 131(3) of the KVAT Rules, 2005. It was
observed by the prescribed authority that the assessee, while H
. 1014 SUPREME COURT REPORTS [2017) 12 S.C.R.
A manufacturing/extracting sunflower oil from the sunflower cake, has
also obtained de-oifod cake. Sunflower oil being liable to tax and de-
oiled cake being exempted from tax under Section 5 of the Act vide
Government Notification No. FD 197 CSL 2005( 1) dated 30.04.2005,
partial input tax rebate was allowed.
B 7. The assessee being aggrieved by the said order, filed appeals
before the FirstAppellateAuthority who dismissed the same confirming
the order passed by the prescribed Authority. Undeterred by the said
order, the assessee preferred second appeals before the Karnataka
Appellate Tribunal, Bangalore. The Tribtmal confumed the order passed
by the First Appellate Authority. Without losing patience, the respondent
c preferred revision petitions before the High Court ofKarnataka. This
effort yielded favourable results for the assessee. The High Court
interpreted the provisions of Section 11 (a)(!) and Section 17(1) of the
Act read with Rule 131 of the KVAT Rules, 2005 applying the principle
of pmposi ve construction has allowed the revision petitions filed by the
D assessee vide its judgment dated July 17, 2014 holding that the assessee
is entitled to the benefit of full input tax deduction.
8. Before we proceed to write down the arguments advanced by
the counsel for the parties, it would be apposite to.take Iiote of the salient
provisions of the KVAT Act,2003 which are relevant to decide these
E appeals.
9. Section 2( 6) defines "business" broadly to include not only any
trade, commerce or manufacture but also any transaction in connection
with, or incidental to, or ancillary to such trade, commerce or manufacture.
10. Section 2(15) and Section 3 read as under:
F
"Section 2(15) - 'Goods' means all kinds of movable property
(other than newspaper, actionable claims, stocks and' shares and
securities) and includes livestock, all materials, commodities and
articks (including goods, as goods or in some other form) involved
in the execution of a works contract or those goods to be used in
G the fitting out, improvement or i·epair of movable property, and all
growing crops, grass or things attached to, or forming part of the
land which are agreed to be severed before sale or under the
contract of sale. ·
H
THE STATE OF KARNATAKA v. M/s. M.K. AGRO TECH. 1015
PVT: LTD. [A. K. SIKRI, J.]
Section 3 • Levy of tax.· A
(I) The tax shall be levied on every sale of goods in the State by
a registered de.al er or a dealer liable to be registered, in accordance
with the provisions ofthisAct.
(2) The tax shall also be levied, and paid by every registered dealer
or a dealer liable to be registered, on the sale of taxable goods to B
him, for use in the course of his business, by a person who is not
registered under this Act."
11. Section 5 provides that some goods which are specified in the
first schedule or under notification by state government shall be exempted
from tax. It is under this provision that the government by way of a C
notification in 2005, exempted de·oiled cakes.
12. Section 10 and Section ll(a)(l) read as under:
"Section 10 • Output tax, input tax and net tax.·
( 1) Output tax in relation to any registered dealer means the tax D
payable under this Act in respect of any taxable sale of goods
made by that dealer in the course of his business, and includes tax
payable by a commission agent in respect of taxable sales of goods
made on behalf of such dealer subject to issue of a prescrib~d
declaration by such agent.
E
(2) Subject to input tax restrictions specified in Sections '11, 12,14,
l [ 17 and 18], input trix in relation to any registered dealer means
the tax collected or payable under this Act on the sale to him of
any goods for use in the course of his business, and includes the
tax on the sale of goods to his agent who purchases such goods
F
on his behalf subject to the manner as may be prescribed to claim
input tax in such cases. 1. Substituted by Act 6 of 2005 w.e.f.
19.3.2005.
(3) Subject to input tax restrictions specified in Sections 11, 12,
14, 17, 18 and 19, the net tax payable by a registered dealer in
respect of each tax period shall be the amount of output tax payable
G
by him in that period less the input tax deductible by him as may
be prescribed in that period and shall be accounted for in
accordance with the provisions of Chapter V.
H
1016 SUPREME COURT REPORTS [2017] 12 S.C.R.
A (4) Forthe purpose of calculating the amount ofnet tax to be paid
or refunded, no deduction for input tax shall be made unless a tax
invoice, debit note or credit note, in relation to a sale, has been
issued in accordance with Section 29 or Section 30 and is with
2004: KAR. ACT 32] Value Added Tax 229 the registered dealer
taking the deduction at the time any return in respect of the sale is
B
furnished, except such tax paid under sub-section (2) of Section
3.
(5) Subject to input tax restrictions specified in Sections 11,12, 14,
17, 18 and 19, where under sub-section (3) the input tax deductible
by a dealer exceeds the output tax payable by him, the excess
c amount shall be adjusted or refunded together with interest, as
may be prescribed.
xxx xxx xxx
11. Input tax rcstrictions.-
D (a) Input tax shall not be deducted in calculating the net tax payable,
in respect of:
"(1) tax paid on purchases attributable to sale of exempted
goods exempted under Section 5, except when such goods are
sold in the course of export out of the territory of India;"
E
13. Section 17 of the KVAT Act, 2003 deals with "Partial Rebate"
and makes the following reading:
"17. Partial rebate.- Where a registered dealer deducting input
tax.-
F ( 1) makes sales of taxable goods and goods exempt under Section
5, or
(2) in addition to the sales referred to in clause (1 ), dispatches
taxable goods or goods exempted under Section 5 outside the
State not as a direct result of sale or purchase in the course of
G 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 ofinput tax deductible between such
sales and dispatches of goods or such purpose, shall be made in
accordance with Rules or by special methods to be approved by
H
THE STATE OF KARNATAKA v. Mis. M. K. AGRO TECH. 1017
PVT. LTD. [A. K. SIKRI, J.)
the Commissioner or any other authorised person and any input A
tax deducted in excess shall become repayable forthwith."
14. Rule 131 of the KVAT Rules, 2005 prescrib::s the formula/
accounting procedure prescribing the manner in which apportionment of
input tax is to be made for the purposes of giving partial rebate under
Section 17 of the KVAT Act, 2003. This Rules is as under: B
"Ruic 131. Apportionment.- Apportionment of input tax in
the case of a dealer falling under section 17 ,shall be calculated as
follows.-
( 1) All input tax directly relating to sale of goods exempt under
section 5 other than such goods sold in the course of export out of C
the territory oflndia, is non-deductible.
(2) All input tax directly relating to taxable sales may be deducted,
subject to the provisions of section 11.
(3) Any input tax relating to both sale of taxable goods and exempt D
goods, including inputs used for non-taxable transactions, that is,
the non-deductible input tax, may be calculated on the basis of the
following formula:
(Sales of exempt goods+ non-taxable transactions) X Total input
tax.
E
(i) Non-deductible input t a x = - - - - - - - - - - - -
Total sales (including non-taxable transactions)
(4) For the purpose of clause (3).-
(a) "Sale of taxable goods" would be the aggregate of the amounts F
specified in clauses (b), (c), (d), (e) and (t) of sub-rule ( l) of Rule
3 relating to sale of goods other than those exempt under Section
5 which are not sold in the course of export out ofth·e territory of
India; and
(b) "total sales" means total turnover Jess.- G
(i) the amount specified in clause (a) of sub-rule (1) of rule 3,
and
(ii) the deductions specified in clause (e) of sub-rule (2) ofrule 3.
(iii) the aggregate of sale prices received or receivable in respect
H
1018 SUPREME COURT REPORTS [2017] 12 S.C.R.
A of subsequent sale in the course ofinter-state trade or commerce
of any goods purchased in the course of inter-State trade or
commerce during their inter-state movement.
(iv) the aggregate of sale prices received or receivable in respect
of sale in the course of export out of the territory of India of any
B goods purchased in the course of export; and
( v) the aggregate Of sale prices received or recei vablc in respect
of sale in the course of import into the territory of India of any
goods purchased in the course of import.
(5) Where in the case of any dealer, the Commissioner is of the
c opinion that the application of the formula prescribed under clause
(3) docs not give the correct amount of deductible input tax, he
may direct the dealer to adopt a special formula as he may specify."
15. Referring to the aforesaid provisions, Mr. Patil, learned senior
counsel appearing for the appellant - State summarised the statutory
D scheme with the submission that Section 2(15) covers all movable
properties including live stocks etc. It docs not lay down any distinction
between by-products, ancillary products or intermediate products. Any
product which is marketable and sold will be covercd,within the definition
of'goods'.
E 16. Section 2( 13) defines "input" to mean any good purchased by
dealer in course of his business or for use in manufacture or processing
or packaging of other goods. Use of the plural expression goods clearly
implies that input maybe used for more than one goods as well. This is
to mean that there is no express or implied restriction to say that a
particular input may be used for manufacture/processing etc. of a single
F
goo_d. Moreover, the legislature has intended to cover not only
'manufacture' but a much wider term 'processing'. The rationale is
that as against excise law in which manufacture is relevant, under KVAT,
sale is the point oflevy.
17. Section 3, which is the levying provision, clearly stipulates
G
"sale" as the point oflevy. Thus, needless to say, what is relevant under
the Act in whether a 'sale ofgoods' is faking place irrespective of the
fact whether the goods are manufactured by the seller or not.
Manufacture becomes an important point in excise law and not for the
purpose of sales tax. However, manufacture docs b_ccome important
H
THE STATE OF KARNATAKA v. Mis. M. K. AGRO TECH. 1019
PVT. LTD. [A. K. SlKRI, J.]
for this act for the limited purpose because a good will be called input if A
it is used for manufacturing or processing or packaging of any goods.
18. Section 10 defines "input tax", "output tax" and "net tax".
Net tax with respect to a particular sale; output tax received on sale as
such goods and input tax used for manufacturing/processing/ packaging
such goods. B
19. Section l l(a)( l) stipulates that where a sale of exempted goods
is taking place, i.e., there is no output tax received on such sale, the input
lax paid for manufacturing/processing etc such exempt goods cannot be
credited while calculating net tax. The rationale behind such provision is
simple, where the dealer has not received any output tax on sale, there c
does not arise any question of deducting input tax. If input tax is allowed
to be deducted, it would necessarily lead to a situation where there will
be no taxation on purchase of inputs nor on the sale of product
manufactured by using such inputs.
20. He argued that in Section l l(a)(l) of the KVAT Act, two D
expressions arc noteworthy, namely' 'attributable to' and 'sale of
exempted goods". According to him, the legislature has wisely used the.
expression 'attributable to' as against the expression 'directly related
to'. Likewise, the expression 'tax payable on purchases attributable to
sale of exempted goods' clearly shows that legislature intends to attribute
. purchases to 'sale of exempted goods' and not merely 'manufacture of E
exempted goods'. ·
21. Mr. Patil further argued that Section 17(1) provides for a
situation where a dealer deducting input tax sells taxable and exempt
goods. First requirement of this section is that. the dealer must be
'deducting input tax' and secondly the dealer must )lave made sale of F
both taxable and exempt goods. Legislature has clearly foreseen such
situation and has provided a solution by 'apportionmentand attribution'
of input tax deductible between such sales. The expression 'attribution'
appearing under this section must be related to the expression 'attribution'
appearing under Section I 1( 1). Where Section 11 ( 1) provides that input G
tax attributable to sale of exempt goods is non-deductible, Section 17
goes a step ahead to cover those situations where, a dealer is engaged in
· both exempt and taxable goods in which it becomesr9levant to attribute
input tax paid on both the categories of such goods. It would not be
wroi1g to say that Section· 17( 1) seems to be giving a practical effect to
H
1020 SUPREME COURT REPORTS [2017) 12 S.C.R.
A Section 11 by providing formulae in the rules, for calculating the amount
. of input tax attributable or apportioned for sale of exempt and taxable
goods. Needless to say, even here the legislature has used the expression
'sale' as against 'manufacture' thus making itclear that sale is an end
point.
B 22. Coming to Rule 131 of the KVAT Rules, 2005, he emphasized
that it completes Section 17 by prescribing a formulae for apportioning
input tax between the sales of taxable goods and exempt goods. Sub-
rule (I) simply provides that input tax directly relating to sales of exempt
goods shall be non-deductible. Thus, this sub-rule would apply in those
c situations whert< it is easy to ascertain the input tax directly relating to
sale of exempt' goods. Similarly, sub-rule (2) simply provides that input.
tax directly relating to sale of taxable goods shall be deductible. Sub-
rule (3) covers a situation where input tax is not directly relatable to
exempt goods and taxable goods. It is for this reason that the term
'directly' is missing in sub-rule (3). It speaks ofa situation where input
D tax relating to both sale of taxable goods and exempt goods is known .
. But it provides that such input tax may be deducted only after applying a
formulae prescribed therein. The purpose of formulae is simply to attribute
and apportion the quantum of input tax relating to exempt goods so that
it may be excluded from the total input tax. The expression 'non-
identifiable input tax' clearly shows legislatures intention to cover even
E
those situations where it is difficult to identify as to how much of input
tax is attributable/apportioned for taxable goods and for exempt goods
so that the extent of rebate/credit a dealer is entitled to may be calculated.
23. Attacking the judgment of the High Court, Mr. Patil submitted
that the High Court has given emphasis on the aspect of"manufacture"
F in holding that insofar as sunflower cake is concerned it is used for the
manufacture of sunflower oil and since it is consumed in the said
manufacture and no manufacturing activity is involved for the production
of de-oiled cake, which is only a by-product, the question of partial rebate
would not arise. According to him, Section 17 makes the provision of
G partial rebate available whenever there is a sale of an exempted item.
In the instant case, even if de-oiled cake was a by-product, it was sold in
the market which fact is sufficient to attract the provisions of Section
17. It was pointed out by Mr. Patil that sale value of sunflower refined
oil was 54.01 % and that of de-oiled cake was 45.98%. Thus, this cake
was not in the nature of some waste product which was dumped as a
H
THE STATE OF KARNATAKA v. Mis. M. K, AGRO TECH. 1021
PVT. LTD. [A. K. SIKRI, J.]
waste or garbage but yielded substantial earnings for the assessee, on A
which no output tax was paid as this item is exempted from such a tax.
He argued that, in a situation like this, the assessee could not be given
the benefit of reduction offull input tax. He also submitted that the High
Court in its judgment has not mentioned about sub-rule (3) of Rule 131,
which Rule has been relied upon by the Assessing Authority. Without B
prejudice to the aforesaid contentions, Mr. Patil further submitted that
de-oiled cake is an outcome of the process called 'solvent extraction
process' carried on in the process extractfon plant of the respondents.
However, in addition to that the appellant has not hesitation in submitting
that the respondents are also carrying on manufacturing of de-oiled cakes.
The expression 'manufacture' has been subject to judicial interpretation C
in many cases. In Commissioner of Central Excise, Jaipur v. Maltavir
Alumi11um Ltd. 1, this Court held:
"19. In the present case, the assessee is not only capti vely
consuming Aluminium Billets for the production of Irrigation Pipes
but is also selling such commodity in open market. It is, therefore, D
clear that the process of 'manufacture' results in emergence of
new commercial commodity, namely, 'Billets'. The said commodity
has an independent marketability and the assessee itself has sold
Billets in open market by paying Excise Duty.
xxx xxx xxx E
21. Ingots and Billets are thus two different commercial
commodities. They have separate, distinct and identifiable
marketability and saleability. The assessee .• no doubt, used
Aluminium Billets captively but is also selling in open market. We
arc, therefore, of the view that the Commissioner was right in F
holding that the assessee was liable to pay Excise Duty and
CEGAT was wrong in interfering with the order-in-original. The
order of the CEGAT, therefore, is liable to be set aside."
24. According to Mr. Patil, de-oiled cake and oiled cake are
separate and distinct products having different marketability and G
commercial uses. The distinction between the two products had also
been held by this Court in Ravi Prakash Refineries Private Ltd. v.
State of Karnataka 2 in which it was held that they are two different
commercial commodities.
• c2001J s sec 260
2
(2016) 12 sec t93 H
1022 SUPREME COURT REPORTS [2017] 12 S.C.R.
A 25. He also referred to the case of State of Gujarat v. Raipur
Manufact11ri11g Co. Ltd. 3 holding that where a subsidiary product is
turned out regularly and continuously in the course of a manufacturing
business and is also sold regularly from time to time, an intention can be
attributed to the manufacture to sell not only the main item manufactured
but also the subsidiary product.
B
26. Putting an emphatic response, Mr. Chidambaram laid emphasis
on the scheme contained in Section 10 of the KVAT Act d1:aling with
output tax, input tax and net tax. His contention was that this Section
clearly provides for payment of net tax by a registered dealer. For this
reason, input tax which is paid, has to be deducted from the output tax.
C Sub-section (3) of Section 10 mandates a registered dealer to pay net
tax in respect of el!ch tax period which is the amount of output tax
payable by him in that period, less the input tax deductible by him.
Therefore, argued the learned senior counsel, the assessee was entitled
to deduct the input tax that was paid by it on purchase of sunflower oil
D cake. He also emphasised the word 'attributable'; occurring in Section
l l(a)(l). On that basis, he argued that Section 11 of the KVAT Act,
which prescribes restrictions on input tax categorically mentions that tax
paid on purchases 'attributable' to sale or manufacture etc. of exempted
goods exempt under Section 5 are not deductible in calculating the net
· tax payable by the ass'essee. According to him, the High Court, on that
E basis, rightly observed that the condition precedent for having the benefit
of input tax deduction is that the goods sold or manufactured by the
assessee should be liable to tax under the.Act and if no output tax is
payable then the question of deducting input tax in order to calculate the
net tax would not arise. Coming to the interpretation that needs to be
. F assigned to Section 17 of the KVAT Act, his pica was that the High
Court has.correctly interpreted the said provision in conjunction with
Ruic 131 of the KVAT Rules and rested his case adopting the said
reasoning by extensively reading paragraphs 10 and 11 of the impugned
judgment, as per which the assessee was in the sale or manufacture of
only one product which is taxable and merely because in the process of
G manufacture or in the process of sale certain ancillary or by-product
arises which can be sold for a certain period, provisions of Section J 7
would not get attracted.
3 (1967) !9STC l;AIR 1967SC1066
H
THE STATE OF KARNATAKA v. Mis. M. K. AGRO TECH. 1023
PVT. LTD, [A. K. SIKRI, J.]
27. After examining the relevant provisions of KVAT Act and A
bestowing our serious consideration to the respective arguments, we
find it difficult to accept the aforesaid approach of the High Court.
28. The first mistake which is committed by the High Court is to
ignore the plain language of sub-section ( 1) of Section 17. This provision
w_hich allows partial rebate makes the said provision applicable on the B
'sales' of taxable goods and goods exempt under Section 5. Thus, this
subcsection refers to 'sale' of the 'goods', taxable as well as exempt,
and is not relatable to the 'manufacture' of the goods. The High Cou1i
has been swayed by the fact that while extracting oil from sunflower,
cake emerges only as a by-product. Relevant event is not the
manufacture of an item from which the said by-product is emerging. C
On the contrary, it is the sale of goods which triggers the provisions of
Section 17 of KVAT Act. Whether it is by-product or manufactured
product is immaterial and irrelevant. Fact remains that de-oiled cake is
a saleable commodity which is actually sold by the respondent asscssec.
Therefore, de-oiled cake fits into the definition of "goods" and this D
commodity is exempt from payment of any VAT under Section 5 of the
KVAT Act. Thus, provisions of Section 17 clearly get' attracted when
'sale' of these goods takes place.
29. Secondly, as rightly pointed out by the learned counsel forthe
appellant, the High Court has not considered the import and effect of E
sub-rule (3) of Rule 131 of the KVAT Rules. We have already
reproduced Rule 131, including sub-rule (3) thereof. After perusing Rule
13 l in its entirety, it becomes clear that sub-rule ( l) pertains to input tax
directly relatable to sales of exempt goods which is non-deductible.
·Likewise, sub-rule (2) mandates that input tax directly relating to sale-of
goods shall be deductible. On the other hand, sub-rule (3) covers-those F
cases where input tax is not directly relatable to exempt goods and taxable
goods. It is therefore, applied in those cases where input tax relating to
both sale and taxable goods and exempt goods is known. In that situation,
formula is given under this sub-rule to work out the partial deduction.
The High Court has neither take note of nor discussed sub-rule (3). G
30. Thirdly, the reading of the impugned judgment would disclose
that the High Court was conscious of the fact that when literal
interpretation to Section 17 is given, the case of the assessee would get
covered thereby. It is for this reason the High Court has chosen to
H
1024 SUPREME COURT REPORTS [2017] 12 S.C.R.
A depart from the rule ofliteral construction, on the ground that the literal
construction would lead to absurdity and would defeat the object of the
Act. Therefore, according to the High Court, the purposive construction
is to be resorted to achieve the object for which the provision is enacted.
It is here we beg to differ with the High Court. Literal construction in
the present case docs not lead to any absurd results. On the contrary,
B
the object behind Section 17 allowing partial rebate in such cases gets
· achieved when the said provision is applied giving literal construction in
the instant case. Here is a case where the respondent assessee has
paid input tax while purchasing the raw material, namely, sunflower oil
cake. This has been used for extraction of sunflower oil. Even after
C extracting the sunflower oil what remains is de-oiled cake which, no
doubt, is a by-product. However, it is not to be discarded as waste.
Rather, it is not only marketable as "goods" but fetches significant sale
price. The ratio of sale of sunfloweroil and de-oiled cake is 55:45. The
respondent assessec is, thus, able to generate 45% revenue from the
D sale of de-oiled cake. However, no output tax is paid on the sale of this
item since this item is exempted from payment of VAT under Section 5
of the KVAT Act. Section 17 is meant to take care of these situations,
which is the purpose behind that provision. Approach of the High Court,
in fact, defeats the said purpose. Therefore, there was no reason for
departing from the principle ofliteral construction in a taxing statute. It
E is settled proposition of law that taxing statutes are to be interpreted
: literally {See Commissioner ofIncome Tax-III v. Calcutta Knitwears,
Ludhiana 4, State of Madhya Pradesh v. Rakeslt Kohli & Anr. 5 and
V.V.S. Sugars v. Government of And/Ira Pradesh & Ors. 6 } •
. 31. Fourthly, the entire scheme of the KVAT Act is to be kept in
F mind and Section 17 is to be applied in that context. Sunflower oil cake
is subject to input tax. The Legislature, however, has incorporated the
provision, in the form of Section 10, 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, VATwould be again payable thereon. This
G 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
'(2014) 6 SCC444
'<2012) 6 sec 312
• <1999>4 sec 192
H
THE STATE OF KARNATAKA v. Mis. M. K. AGRO TECH. 1025
PVT. LTD. [A. K. SIKRI, J.]
such goods plus the profits which the manufacturer intends to earn. A
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
B
given and under what circumstances, is the domain of the Legislature
and the courts are not to tinker with the same. This proposition is
authoritatively determined by this Court in series of judgments. We may
refer to the judgment in Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v.
Co111111issio11er ofSales Tax a11d Others 7 and the relevant extract which
is relevant for our purposes is as follows: c
"9. Sri Bobde appearing for the appellants rci terated 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. D
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 E
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 F
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 Rules -which. as stated above. are conceived G
mainly in the interest of public -that 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
.
1
(1992)3 sec 624
H
1026 SUPREME COURT REPORTS (2017] 12 S.C.R.
A 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 sl:•:h sales effected outside the State. In respect of such sales.
the 1 cde-making authority could well have denied the benefit of
set-off. But it chose to be generous and has extended the said
B
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
c 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
D
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.
(emphasis added)"
E To the same effect are the judgments in the case of Hotel Balaii
& Ors. v. Sil/le ofAndhrll Pradesh & Ors. 8 and Jayam and Company
v. Assistant Commissiotter and Anotller9 • In this context, if the
Legislature has decided to give partial rebate of input tax under the
, circumstances mentioned in that provision, that has to be strictly applied.
F 32. On literal interpretation of Section 17 it can be gathered that it
does not distinguish between by-product, ancillary product, intermediary
product or final product. The expressions used are 'goods' and 'sale' of
such goods is covered under Section 17. Both these ingredients stand
satisfied as de-oiled cakes arc goods and the respondent assessec had
sold those goods for valuable consideration. We may point out there
G that the assessing authorities recorded a clear finding, which was accepted
by the Tribunal as well, that records and statement of accounts of the
respondent asscsscc clearly stipulates that after solvent extraction is
completed, 88% of de-oiled cake remains and only 12% remains is the
'(1993) Supp 4 sec 536
H •c2015J 15 sec 125
THE STATE OF KARNATAKA v. M/s. M. K. AGRO TECH. 1027
PVT. LTD. [A. K. SI.KR!, J.]
oil which is further refined in the refinery. This clearly shows that major A
outcome (88%) of the solvent extraction plant is de-oiled cake which in
itself is a marketable good having market value.
33. The aforesaid reasons given by us are sufficient to hold that
Section 17 gets attracted in the instant case and the view taken by the
High Court is erroneous. Therefore, it is not necessary for this Court to B
deal with the other contention of the appellant State viz. whether de-
oiled cake itself amounts to manufacture or not.
34. The appeals are, accordingly, allowed with cost and the
judgment of the High Court is set aside.
c
Ankit Gyan Appeals allowod.
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