ITC Not Admissible on Purchase of DEPB Licences Under TNVAT Act: Madras High Court Affirms Binding Precedent
Background and Context
The Madras High Court recently adjudicated upon two intra-court writ appeals arising from reassessment orders dated 13.11.2015 issued by the Commercial Tax Officer for Assessment Years 2012-13 and 2013-14. The central issue before the Division Bench was whether an assessee engaged in importing plastic granules could legitimately claim Input Tax Credit (ITC) under Section 19 of the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act) on tax paid at the time of purchasing Duty Entitlement Passbook (DEPB) licences.
The matter had a layered procedural history — beginning at the assessment stage, progressing through writ petitions before a Single Judge, and ultimately culminating before a Division Bench of the Madras High Court on appeals by the aggrieved assessee.
Facts of the Case: P. I. Polymers Vs Commercial Tax Officer
Nature of Business and ITC Claim
The assessee, a registered dealer under the TNVAT Act, had procured DEPB licences and utilised them to import plastic granules from abroad. The imported granules served a dual commercial purpose — a portion was processed further to manufacture finished plastic products, while the remaining stock was sold in its original form as raw granules used by other manufacturers for producing items such as PET bottles.
Having paid tax on the purchase of DEPB licences, the assessee sought to utilise that tax paid as ITC, to be set off against output tax liability arising from the local sale of imported plastic granules. The assessee's primary argument rested on the following planks:
- DEPB licences qualify as "goods" under
Section 2(21)of the TNVAT Act, as affirmed by the Supreme Court in Yasha Overseas v. Commissioner of Sales Tax (2008) 17 VST 182 (SC) - DEPB licences also constitute "input" within the meaning of
Section 2(23)of the TNVAT Act, since they were purchased in the course of business - The tax paid on such licences qualifies as "input tax" under
Section 2(24)of the TNVAT Act - Accordingly, the assessee was entitled to ITC under
Section 19(1)of the TNVAT Act - The purchase of DEPB licences was an ancillary activity integrally linked to the core business of importing and selling plastic granules
- No one-to-one correlation between a specific input and the output goods was mandated under
Section 3(3)of the TNVAT Act read with Rule 10 of the TNVAT Rules, 2007
The assessee further placed reliance on a Commissioner of Commercial Tax clarification dated 12.03.2007, arguing that it supported the position that input tax credit need not be traced on a one-to-one basis between the input purchased and the output goods sold.
Revenue's Position and Reassessment Orders
The Commercial Tax Officer, while acknowledging that the assessee was a registered dealer eligible in principle for ITC, held that eligibility alone was insufficient. Actual entitlement was contingent on satisfying the specific conditions enumerated under Section 19(2) of the TNVAT Act, which restricts ITC to purchases made within the State from registered dealers, where such purchases are intended for:
- Resale within the State
- Use as input in manufacturing or processing of goods within the State
- Use as containers, labels, or packing materials within the State
- Use as capital goods in the manufacture of taxable goods
- Sale in the course of inter-State trade or commerce under
Section 8(1)of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) - Agency transactions by the principal within the State in the prescribed manner
The assessing authority observed that the DEPB licences were used to import goods from abroad, not to purchase goods locally from a registered dealer within the State. Consequently, the fundamental prerequisites of Section 19(2) were not met. The Commissioner's clarification dated 12.03.2007 — which pertained to yarn and fabric manufacturing — was found inapplicable. Instead, reliance was placed on a subsequent Commissioner's clarification dated 25.07.2007, which categorically stated that no ITC was admissible on the purchase of DEPB licences under Section 19(2) where imported plastic granules were purchased abroad and sold locally.
Following this, notices were issued to the assessee for both assessment years:
- AY 2012-13: Tax demand of Rs. 3,94,100/- and penalty of Rs. 1,97,050/- (being 50% of the tax due)
- AY 2013-14: Tax demand of Rs. 3,70,447/- and penalty of Rs. 1,85,224/-