Supreme Court Grants Full Input Tax Credit to Modi Naturals Ltd. in UP VAT Dispute

The case of M/S Modi Naturals Ltd. vs. The Commissioner of Commercial Tax UP involves a dispute over Input Tax Credit (ITC) under the Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act). The Supreme Court ruled in favor of the appellant, Modi Naturals Ltd., allowing full ITC and overturning the decision of the Allahabad High Court, which had denied the benefit.

Background of the Case

Modi Naturals Ltd., a company engaged in the manufacture and sale of Rice Bran Oil (RBO) and Physical Refined RBO, procured raw Rice Bran as an input for its solvent extraction process. The process also resulted in a by-product known as De-Oiled Rice Bran (DORB), which was classified as an exempted good under the UP VAT Act.

The dispute arose for the assessment years 2013-14 and 2015-16. The company sought full ITC on tax paid for purchasing Rice Bran, arguing that it was used in the manufacture of taxable goods (RBO and refined RBO). However, the Uttar Pradesh Commercial Tax Department rejected the claim, arguing that ITC should be limited only to the taxable goods portion and that the presence of an exempted by-product (DORB) reduced the entitlement.

Petitioner’s Arguments

The appellant, Modi Naturals Ltd., contended:

The UP VAT Act allows ITC on inputs used for manufacturing taxable goods, even if a by-product is produced.
The High Court misapplied the law by treating ‘goods’ in Section 13(1)(f) as referring only to taxable goods.
The legislature had explicitly included by-products and waste products in ITC calculations under Section 13(3)(b).
The company’s main output, RBO, was taxable, and ITC should not be denied simply because an exempt by-product was generated.

Respondent’s Arguments

The State of Uttar Pradesh, through the Commissioner of Commercial Tax, argued:

Since DORB was exempt from tax, ITC should be proportionally reduced.
Allowing full ITC would lead to revenue loss for the state.
ITC should be restricted to the extent of taxable sales, as per Section 13(1)(f) of the UP VAT Act.
The decision in M.K. Agro Tech Pvt. Ltd. vs. State of Karnataka supported a limited ITC approach when by-products were involved.

Key Legal Issues Considered

1. Whether Full ITC Can Be Claimed When Exempted By-Products Are Generated

The Court analyzed whether the presence of an exempted by-product (DORB) affected the company’s right to claim full ITC on raw materials.

2. Interpretation of ‘Goods’ in Section 13 of the UP VAT Act

The Court considered whether the term ‘goods’ in ITC provisions referred exclusively to taxable goods or included all manufactured goods.

3. Applicability of the M.K. Agro Tech Precedent

The Court examined whether the Karnataka VAT case (M.K. Agro Tech) was relevant to the UP VAT dispute.

Supreme Court’s Verdict

The Supreme Court ruled in favor of Modi Naturals Ltd., stating:

Full ITC should be granted even if an exempted by-product is produced during manufacturing.
The term ‘goods’ under Section 13 includes both taxable goods and by-products.
By-products cannot limit ITC, as Section 13(3)(b) explicitly covers scenarios where exempted goods are produced as by-products.
The M.K. Agro Tech ruling did not apply because Karnataka VAT laws differed significantly from UP VAT provisions.
The UP VAT Act’s intent was to allow full ITC when taxable goods were produced, even if exempt by-products were generated.

Key Takeaways from the Judgment

ITC Cannot Be Denied Due to By-Products: Companies manufacturing taxable goods can claim full ITC even if by-products are exempt.
Legislative Intent Protects Manufacturers: The ruling ensures businesses are not unfairly burdened by tax restrictions due to incidental by-products.
State Revenue Loss Argument Rejected: The Court held that revenue considerations cannot override statutory ITC rights.
UP VAT and Karnataka VAT Differ: The judgment clarifies that Karnataka VAT rulings do not impact UP VAT interpretations.

This judgment strengthens ITC provisions under VAT laws and prevents state authorities from unfairly restricting tax credits based on technicalities.

Petitioner Name: M/S Modi Naturals Ltd..
Respondent Name: The Commissioner of Commercial Tax UP.
Judgment By: Justice Dr. Dhananjaya Y. Chandrachud, Justice J.B. Pardiwala, Justice Manoj Misra.
Place Of Incident: Uttar Pradesh, India.
Judgment Date: 06-11-2023.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: ms-modi-naturals-lt-vs-the-commissioner-of-supreme-court-of-india-judgment-dated-06-11-2023.pdf

Directly Download Judgment: Directly download this Judgment

See all petitions in GST Law
See all petitions in Income Tax Disputes
See all petitions in Judgment by Dhananjaya Y Chandrachud
See all petitions in Judgment by J.B. Pardiwala
See all petitions in Judgment by Manoj Misra
See all petitions in allowed
See all petitions in Modified
See all petitions in supreme court of India judgments November 2023
See all petitions in 2023 judgments

See all posts in Taxation and Financial Cases Category
See all allowed petitions in Taxation and Financial Cases Category
See all Dismissed petitions in Taxation and Financial Cases Category
See all partially allowed petitions in Taxation and Financial Cases Category