SC Allows Partial Input Tax Rebate on Sale of Exempt By-Products Under KVAT Act

State of Karnataka Vs M.K. Agro Tech Pvt. Ltd. (Supreme Court of India)

The Supreme Court considered appeals involving the interpretation of Section 17 of the Karnataka Value Added Tax Act, 2003 (KVAT Act) read with Rule 131 of the Karnataka Value Added Tax Rules, 2005. The respondent-assessee manufactured sunflower oil by extracting oil from sunflower oil cake through a solvent extraction process. During this process, de-oiled sunflower cake emerged as a by-product. While VAT was payable on the purchase of sunflower oil cake as input and on the sale of sunflower oil, no VAT was payable on the sale of de-oiled cake, as it was an exempt commodity under Section 5 of the KVAT Act. The dispute was whether the assessee was entitled to full input tax deduction or only partial input tax rebate under Section 17 because exempt goods were also sold.

The prescribed authority, after scrutinising the returns for March 2005 to March 2007, held that the assessee was entitled only to partial input tax rebate under Section 17(1) read with Rule 131(3), as taxable sunflower oil and exempt de-oiled cake were both obtained and sold. The First Appellate Authority and the Karnataka Appellate Tribunal affirmed this view. The Karnataka High Court, however, allowed the assessee’s revision petitions and held that the assessee was entitled to full input tax deduction, reasoning that sunflower oil cake was wholly used for extracting sunflower oil and that de-oiled cake was merely a by-product rather than a manufactured product.