M/S Hindustan News Print Ltd. Kottayam v. State of Kerala

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MRS. JUSTICE MARY JOSEPH** **THURSDAY,THE 30TH DAY OF AUGUST 2018 / 8TH BHADRA, 1940** **OT.Rev.No. 4 of 2015** **AGAINST THE ORDER/JUDGMENT IN OTHERS 443/2011 of KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM DATED 26-08-2014** ## **REVISION PETITIONER/RESPONDENT/REVENUE:** **STATE OF KERALA** **BY SR.GP.SRI V.K.SHAMSUDDIN** ## **RESPONDENT/APPELLANT/ASSESSEE:** **M/S.HINDUSTAN NEWS PRINT LTD. KOTTAYAM, PIN - 686 001.** **BY ADVS. SRI. U.K. DEVIDAS SMT. J. SURYA SMT. P. VIJAYAMMA SRI. E.K. MADHAVAN SRI. PRINSUN PHILIP SRI. V. KRISHNA MENON** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 30.08.2018, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:** **OT.Rev No.04/2015 -:2:-** ## **O R D E R** ## **Vinod Chandran, J:** The question of law arising from the order of the Tribunal is re-framed as follows : 1) Whether the assessee/respondent was entitled to claim input tax credit with respect to the raw material purchased for generation of electricity; when electricity is included as an exempted item under Schedule I of the Kerala Value Added Tax Act and Section 11(5) prohibits such input tax credit with respect to purchase of raw material for manufacture of exempted goods ? 2. The brief facts to be noticed are that the assessee is engaged in manufacture of newsprint which is taxable under the Kerala Value Added Tax Act, 2003 (for short 'the KVAT Act'). For the purpose of manufacture, the assessee requires electricity which was obtained through self generation. The assessee generated 0.56 lakh kwh of electricity through diesel generators and 1,137.82 lakhs kwh through steam turbine generators. The electricity so generated is used in the production activities as also for illuminating factory premises. For the purpose of generation of electricity, oil and coal were used as fuel in the boilers for generating steam to be used in the steam turbines. OT.Rev No.04/2015 -:3:- The raw materials used for production of electricity were purchased on payment of tax. The said tax payment is sought to be claimed as input tax credit on the manufacture and sale of newsprint. 3. The assessing officer found that since electricity is exempted and included under Schedule I of the KVAT Act, Section 11(5) prohibits such input tax credit. The First Appellate Authority concurred with the same. Both the authorities rejected the contention of the assessee that the electricity produced is only an intermediary product, which is captively consumed for the purpose of manufacturing activity in the factory. The decisions relied on by the assessee being in the context of CENVAT credit was also found to be not applicable. The Tribunal, however, relying on the said decisions, took a contrary approach and allowed the claim to the extent of the percentage of electricity used for the purpose of manufacture. To differentiate the quantum used for manufacture and illumination of the premises, there was a remand made. The State is in Revision before us raising the aforesaid question of law. OT.Rev No.04/2015 -:4:- 4. The learned Senior Government Pleader argues for the State that the Tribunal misdirected itself insofar as relying on the decisions wherein the consideration was of CENVAT Credit. It is pointed out that the CENVAT Credit Rules specifically provided for credit of the duties paid on any inputs used in the manufacture of intermediary products in relation to the manufacture of final products. No such provision is available in the KVAT Act and there could be no reliance placed on the decisions as proffered by the assessee before the authorities. 5. We have to notice that the Tribunal while referring to the decisions cited by the assessee did not at all rely on the dictum laid down with respect to CENVAT Credit Rules. The reliance was more on the concept of electricity generation being an integral part of the manufacturing activity. Useful reference can be made to paragraphs 29 & 31 of the decision in **Maruti Suzuki Limited** **v. Commissioner of Central Excise, Delhi III** [(2009) 9 SCC 193] which read as follows : “29. In _J.K. Coton Spg.& Wvg. Mills Co.Ltd. v. STO_ this Court held that the expression “in the manufacture of goods” should normally encompass the entire process carried on by the OT.Rev No.04/2015 -:5:- dealer of converting raw material into finished goods. It was further held hat where any particular process (generation of electricity) is so integrally connected with the ultimate production of goods, that, but for such process, manufacture of goods would be inexpedient, then goods required in such process would fall within the expression “in the manufacture of goods”. **==> picture [297 x 7] intentionally omitted <==** 31. Electricity generation is a separate and distinct activity. It is an independent activity. It has its own economics. It does not form part of the process in which “inputs” are transformed into separate identifiable commodity, though it may stand connected to such processes. It may not have any concern with the manufacture of the finished product. However, it is an ancillary activity. It is an activity which is anterior to the process of manufacture of the final product. It is on account of the use of the above expression “used in relation to manufacture” that such an activity of electricity generation comes within the ambit of the definition because it is integrally connected with the manufacture of the final product.” 6. Adopting the principle that electricity generation is a process having its own economics, the Tribunal found that in the assessee's case the electricity generation is a captive arrangement and the requirement of such power generation is for carrying out the manufacturing activity and the inputs used in the process of electricity generation is an input used in the manufacture of the final product. We are in prefect agreement OT.Rev No.04/2015 -:6:- with the reasoning of the Tribunal and as found by the Tribunal, generation of electricity, on the facts arising in this case, is an integral part of the manufacturing activity. 7. In this context it is to be noticed that sub-section (5) of Section 11 prohibits input tax credit on purchase of goods _inter alia_ used in the manufacturing process or packing of goods specified in the First Schedule and the Fourth Schedule which are exempted from Value Added Tax. The prohibition is insofar as advancing the proper functioning of a Value Added Tax Regime. When tax is paid on purchase of the raw material used in the manufacture of goods, which again is taxable, the measure of input tax is introduced to ensure that the inability to the State is only on the value addition that occurs on manufacture, despite the entire turnover of the manufactured goods being liable to tax. This is subject only to the tax payment at the time of purchase being proved by sufficient documents, for claiming input tax credit. In the present case, there is no ground as to the assessee not having sufficient documents to prove the tax payment for the raw material purchased and used in power generation. The prohibition under sub-section(5) of Section 11 is also to ensure OT.Rev No.04/2015 -:7:- that the State does not loose tax on a commodity(raw material), which is used in the manufacture of exempted goods, by virtue only of a claim of input tax credit. 8. In the present case, the said prohibition would have been applicable, if the manufactured electricity was sold by the assessee, on which there is no levy of tax. As far as the assessee is concerned, the entire electricity generated is captively consumed for manufacturing purposes and for electrifying the factory premises. Hence the proportion of the raw material employed in the production of electricity, used in the manufacturing process of newsprint, is an input used in the manufacture of the final product of the assessee being newsprint, which is assessable to tax under the KVAT Act. To that extent, the assessee is entitled to claim input tax credit. In this context, it is also to be noticed that electricity though included under the First Schedule is specifically excluded from the definition of “goods” as available under Section 2(xx) of the KVAT Act. 9. The Tribunal has correctly remanded the matter for segregating that proportion of the raw material which was employed in the generation of electricity and used for OT.Rev No.04/2015 -:8:- illuminating the factory premises. The assessee would also be liable to produce sufficient documents to prove the payment of tax on purchase of raw material for which input tax credit is claimed. The assessee should also produce sufficient materials before the Assessing Officer to segregate the percentage of electricity used for manufacturing purpose and for illuminating purpose. If the assessee is not able to produce such material to the satisfaction of the Assessing Officer, then on best judgment, the Assessing Officer could determine the proportion of the electricity used in the manufacturing process and in illuminating the factory premises. The input tax credit can be allowed only insofar as the raw materials used for production of electricity, employed in the manufacturing process. We answer the question in favour of the assessee and against the revenue and reject the appeal with the above observations. No order as to costs. Sd/- **K. VINOD CHANDRAN JUDGE** Sd/- ## **MARY JOSEPH** **JUDGE** ttb/31.08. OT.Rev No.04/2015 -:9:- ## **APPENDIX** ## **PETITIONER'S EXHIBITS:** **ANNEXURE A: A TRUE COPY OF THE ASSESSMENT ORDER DATED 30/03/2010 ISSUED BY THE ASSISTANT COMMISSIONER (KVAT) SPECIAL CIRCLE.** **ANNEXURE B: A TRUE COPY OF THE ORDER DATED 03/11/2010 IN KVATA 2288/2010.** **ANNEXURE C:CERTIFIED COPY OF THE ORDER OF THE KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM, DATED 26/08/2014 IN TA (VAT) NO. 443/2011.** ## **RESPONDENT'S ANNEXURE : NIL**