Indirect Tax News Letter
GST Calendar –Compliances for the month of December’2023
| Nature of Compliances | Due Date |
| GSTR-7 (Tax Deducted at Source ‘TDS’) | December 10, 2023 |
| GSTR-8 (Tax Collected at Source ‘TCS’) | December 10, 2023 |
| GSTR-1 | December 11, 2023 |
| IFF- Invoice furnishing facility (Availing QRMP) | December 13, 2023 |
| GSTR-6 Input Service Distributor | December 13, 2023 |
| GSTR-2B (Auto-Generated Statement) | December 14, 2023 |
| GSTR-3B | December 20, 2023 |
| GSTR-5 (Non-Resident Taxable Person) | December 20, 2023 |
| GSTR-5A (OIDAR Service Provider) | December 20, 2023 |
| PMT-06 (who have opted for the QRMP scheme) | December 25, 2023 |
Madras High Court permits petition on ‘flavored milk’ categorization dispute, asserting that the GST Council lacks the authority to ascertain classification.
Summary
The Madras High Court ruled that ‘flavored milk’ from dairy sources falls under Heading 0402 (5% tax) and not Heading 2202. The court emphasized that the GST Council’s classification was incorrect, stating that the council’s decisions are non-binding recommendations, and it lacks the authority to determine classification.
Facts
M/s. Parle Agro Private Limited contested the GST Council’s decision to classify ‘flavored milk’ under HS Code 2202 instead of HS Code 0402, arguing it contradicts the Supreme Court’s decision in the Amrit Food case and violates the Constitution of India. Additionally, the petitioner challenged the Tamil Nadu AAAR ruling in the Britannia Industries case, which upheld the AAR’s decision to categorize ‘flavored milk’ under HS Code 2202, aligning with the GST Council’s stance. Notably, the tax rate for HS Code 2202 is 12%, higher than the 5% rate under HS Code 0402.
Legal Objections
The petitioner maintained that the GST Council is solely authorized to recommend the rate of goods or services and lacks the authority to determine the classification of goods or services. Furthermore, they cited established legal principles under the Central Excise Act, asserting that ‘flavored milk’ naturally falls under Heading 0402. Additionally, for licensing purposes, the petitioner highlighted the classification under the Food Safety and Standards Act, 2006 (FSS), where ‘flavored milk’ is categorized as ‘dairy products,’ aligning categorically with Heading 0402.
Madras HC’s observations and judgment [WP Nos. 16608 & 16613/2020; Order dated 31 October 2023]
The High Court underscored that the role of the GST Council is not to determine classification. It explicitly pointed out that the decisions of the GST Council are essentially recommendations and lack a binding effect on the government.
The High Court noted that there is no independent legislation exclusively governing classification under GST. In contrast to the previous system, the classification of goods and services is not dictated by a separate enactment. Instead, the court highlighted that applicable tax rates are explicitly notified under relevant goods and services rate notifications. The court further emphasized the reliance on the classification outlined in the Customs Tariff Act, 1974 (Customs Tariff), indicating its adoption to classify goods and services under GST.
‘Flavored milk’ made from dairy milk is not classified under ‘beverages containing milk’: The High Court clarified that such flavored milk should be categorized under Tariff Heading 0402, explicitly covering ‘dairy produce.’ It cannot be placed under Heading 2202, which includes non-alcoholic beverages with specified alcohol content, under sub-heading 2202 90 ‘beverages containing milk.’ The court applied the noscitur a Sociss principle, asserting that this sub-heading pertains only to beverages containing plant/seed-based milk with specified alcoholic content. The court also referred to FSS provisions grouping and classifying dairy products. Therefore, the High Court concluded that the GST Council wrongly recommended the classification of flavored milk under Heading 2202.
Supreme Court permits full Input Tax Credit (ITC) on inputs used in the production of taxable goods, including exempt by-products, under the Uttar Pradesh Value Added Tax (UP VAT) Act.
Summary
This Tax Alert provides an overview of a recent Supreme Court (SC) ruling that interprets the provisions related to an input tax credit (ITC) under the Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act). The taxpayer, involved in the production of taxable rice bran oil (RBO), concurrently generated an exempt by-product, de-oiled rice bran (DORB).
Under Section 13(1)(f) of the UP VAT Act, ITC is permissible when goods are sold below the cost price, limited to the tax payable on the sale value of the final goods. Since the sale price of RBO was less than the manufacturing cost, the assessing authority disallowed full ITC, contending that the term “goods” in Section 13(1)(f) exclusively refers to “taxable goods.”
The SC noted that the inclusion of Section 13(1)(f) aimed to restrict ITC when goods, encompassing taxable, exempt, by-products, or waste products, were sold below the cost price. The definition of “goods” in Section 2(m) makes no distinction between exempt and taxable goods. Likewise, the term “goods” in Section 13(1)(f) should not be confined to “taxable.”
Disagreeing with the Allahabad High Court’s reliance on the SC decision in the case of M.K. Agro Tech Private Limited, the SC highlighted the dissimilarities in the ITC frameworks of the Karnataka Value Added Tax Act, 2003, and the UP VAT Act. Consequently, the SC determined that, for Section 13(1)(f), “goods manufactured” encompasses exempt goods, allowing full ITC on inputs used in the production of both RBO and DORB by the taxpayer.
Background
The taxpayer, a registered dealer under the Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act), is involved in the manufacture and sale of taxable goods, specifically rice bran oil (RBO) and physically refined RBO. Throughout the RBO manufacturing process, a by-product, de-oiled rice bran (DORB), is generated, falling under the category of exempted goods as outlined in Schedule – I, S.No. 4 of the UP VAT Act.
Through the processing of inputs, the taxpayer produces 13.77% of RBO (taxable goods) and 83.63% of the by-product, DORB (exempted goods).
Section 13(1)(a) of the UP VAT Act allows the dealer to claim input tax credit (ITC) on purchases made by them up to a specified extent. Furthermore, as per Section 13(1)(f), in situations where goods manufactured using purchased goods are sold at a price lower than the cost price, the ITC amount is permitted up to the tax payable on the sale value of the manufactured goods.
By Section 13(3)(b), if, during the manufacturing process of Value Added Tax (VAT) goods, both exempt and non-VAT goods (excluding by-products or waste products) are produced, input tax credit (ITC) can be claimed to the extent that they are utilized in the manufacture of taxable goods, excluding non-VAT and exempt goods.
Explanation (iii) to Section 13 specifies that if, during the production of taxable goods, exempt goods are generated as by-products or waste products, it will be considered that the purchased goods were used in the manufacturing of taxable goods.
Based on these provisions, the taxpayer sought full ITC for the tax paid on inputs. However, the assessing authority rejected the claim, arguing that as per Section 13(1)(f), ITC can only be availed concerning taxable sales. Since the selling price of the final taxable goods (excluding the exempt by-product sales) was lower than the manufacturing cost, the ITC should be limited to the tax payable on the final goods.
In simpler terms, the term “goods” in Section 13(1)(f) is interpreted to mean only “taxable goods.”
The disagreement escalated to the Allahabad High Court (HC). Citing the Supreme Court’s (SC) ruling in the matter of M.K. Agro Tech Private Limited3, the HC held that the taxpayer was not eligible to assert full Input Tax Credit (ITC) on inputs, contending that the situation fell within the purview of Section 13(1)(f).
Dissatisfied with this decision, the taxpayer appealed to the Supreme Court (SC).
Assessee’s arguments
The assessee contended that the High Court (HC) overlooked the fact that the current case is squarely covered by the provisions of Section 13(1)(a) read with Section 13(3)(b) and Explanation (iii) to Section 13 of the Uttar Pradesh Value Added Tax Act (UP VAT Act).
The assessment argued that the entire foundation of the HC judgment is flawed due to the incorrect application of the decision in M.K. Agro Tech. They emphasized that the statutory provisions under the Karnataka Value Added Tax Act, 2003 (KVAT Act), which the HC relied on, are distinct and differ substantially from those of the UP VAT Act.
Furthermore, the UP VAT Act specifically carves out an exception for by-products and waste products, allowing Input Tax Credit (ITC) on them even if they are exempt or non-VAT goods. The assesse stressed that the definition of the word “goods” under Section 2(m) makes no distinction between exempted and taxable goods. Similarly, the term “goods” under Section 13(1)(f) should not be restricted by the word “taxable.” If the legislature intended to qualify “goods” with “taxable,” it could have explicitly stated so in Section 13 itself.
The assesse emphasized the strict rule of interpretation applicable to taxation statutes. They argued that when the competent legislature specifies taxing certain businesses or objects in particular circumstances, it cannot be interpreted to include those that were not intended by the legislature.
SC Ruling
The assesse argued that the statement of objects and reasons for the enactment of Section 13(1)(f) through the 2010 Amendment Act reveals the legislative intent. The primary objective was to limit input tax credit to the extent of tax payable on the sale value of goods or manufactured goods in cases where the purchased goods are resold or the goods manufactured using those purchased goods are sold at a price lower than the purchase or cost price.
The assessment contended that a plain reading of this statement indicates that the legislative intent was never to restrict the scope of “goods” in Section 13(1)(f) solely to “taxable goods.” The mischief addressed by the introduction of Section 13(1)(f) was when goods, including taxable, exempt goods, by-products, or waste products, were sold at a price lower than the cost price. In such cases, the permissible or allowable input tax credit would be limited to the tax payable on the //sale value of the goods.
The argument emphasized that if the legislative intent had been to limit the scope of “goods” under Section 13(1)(f) only to “taxable goods,” the legislature could have expressly used the phrase “taxable goods” in the provision. Wherever the legislative intent was to qualify “goods” with the term “taxable,” it has been explicitly done in Section 13 itself.
The assesse further asserted that a taxing statute must be construed strictly. Accepting the revenue’s case would allow the assessing authority to indirectly achieve what cannot be done directly, circumventing the exception carved out by Section 13(3)(b) read with Explanation (iii) by invoking Section 13(1)(f) of the UP VAT Act.
Additionally, the assesse argued that the decision in M.K. Agro Tech does not apply to the present case as the provisions under the Karnataka Value Added Tax Act (KVAT Act) differ significantly from the UP VAT Act regarding the scheme of Input Tax Credit (ITC). The Supreme Court in the M.K. Agro Tech case examined Section 17 of the KVAT Act read with Rule 131 of the KVAT Rules, 2005, and held that ITC was admissible to the extent of inputs used in the “sale” of taxable goods. However, in the present case, the ITC pertains to “manufacture” and not “sale.”
Explanation (iii) to Section 13, coupled with Section 13(3)(b) of the UP VAT Act, establishes a legal fiction. It stipulates that during the production of taxable goods, if any exempt goods are generated as by-products or waste products, it shall be deemed that the purchased goods were utilized in the manufacturing of taxable goods.
The High Court’s reliance on M.K. Agro Tech is deemed incorrect. This decision is not applicable to the circumstances of the current case, and it cannot be used as a basis to withhold full Input Tax Credit (ITC) from the assessee.
Given these considerations, the Supreme Court allowed the assessee’s appeal and annulled the order issued by the High Court.
To read more: