Input Tax Credit Under APVAT Act | Entitlement For Government Undertakings Selling At Subsidized Rates : Andhra Pradesh High Court

The Andhra Pradesh High Court has clarified the scope of Input Tax Credit (ITC) under the Andhra Pradesh Value Added Tax Act, 2005 (APVAT Act), holding that government undertakings engaged in public welfare activities are entitled to claim full ITC on purchases, even when selling commodities at subsidized rates. The judgment underscores the distinction between commercial transactions and state-mandated welfare schemes, reinforcing the principle that tax laws must align with public policy objectives.

Background & Facts

The Dispute

The petitioner, Andhra Pradesh State Civil Supplies Corporation Limited (APSCSCL), is a government undertaking tasked with procuring and distributing essential commodities like rice, wheat, sugar, and pulses under the Public Distribution System (PDS). The commodities are sold at prices fixed by the state government, often below procurement costs, to ensure affordability for economically weaker sections. APSCSCL claimed Input Tax Credit on its purchases under Section 4(4) of the APVAT Act, but the Assistant Commissioner of Commercial Taxes (1st Respondent) disallowed the claim, alleging under-declaration of output tax and treating by-products from paddy milling as taxable disposals.

Procedural History

The dispute arose from an assessment order dated 10.08.2016, passed by the 1st Respondent for the period June 2014 to March 2015. The key steps in the proceedings were:

• 02.01.2016: Show-cause notice issued proposing tax levy on by-products and restricting ITC on sugar and red gram dhal.
• 04.02.2016, 05.08.2016, 10.08.2016: Petitioner filed objections, contending that the commodities were sold in the same form and that by-products remained with millers as per the agreement.
• 10.08.2016: Impugned assessment order passed, restricting ITC and levying tax on by-products under Section 4(4)(iii) of the APVAT Act.
• 2019: Writ petition filed under Article 226 of the Constitution of India, challenging the order as arbitrary and contrary to settled legal principles.

Relief Sought

The petitioner sought:

• A writ of mandamus declaring the assessment order illegal, arbitrary, and violative of Articles 14 and 265 of the Constitution.
• Stay of recovery proceedings pending disposal of the writ petition.
• Setting aside of the impugned order and full entitlement to ITC on purchases.

The Legal Issue

The court was called upon to resolve two critical questions:

1. Whether a government undertaking selling essential commodities at subsidized rates under the PDS is entitled to full Input Tax Credit under Rule 20(4)(a) of the APVAT Rules, 2005, despite selling at prices below procurement costs.
2. Whether by-products like broken rice, bran, and husk, retained by millers as per contractual terms, can be treated as taxable disposals under Section 4(4)(iii) of the APVAT Act.

Arguments Presented

For the Petitioner

The petitioner contended that:

• The commodities were purchased and sold in the same form, entitling it to full ITC under Rule 20(4)(a) of the APVAT Rules, 2005.
• The sale price was fixed by the state government, and the petitioner had no discretion to alter it, making the restriction of ITC unjust and arbitrary.
• By-products like broken rice, bran, and husk were not transferred to millers but remained their property as per the milling agreement, and thus could not be treated as disposals under Section 4(4)(iii).
• The petitioner relied on the precedent in Food Corporation of India v. State of Andhra Pradesh, where the court held that by-products from paddy milling could not be added to the petitioner’s turnover for tax purposes.

For the Respondent

The respondents argued that:

• The writ petition was not maintainable due to the availability of an alternative remedy under the APVAT Act.
• The petitioner sold sugar and red gram dhal at prices lower than the purchase value, warranting a proportional restriction of ITC.
• By-products like broken rice, bran, and husk were transferred to millers as consideration for converting paddy into rice, making them taxable disposals under Section 4(4)(iii).

The Court's Analysis

The court conducted a meticulous analysis of the statutory provisions and the factual matrix, focusing on two key aspects:

Entitlement to Full Input Tax Credit

The court examined Rule 20(4)(a) of the APVAT Rules, 2005, which states:

"Where any VAT dealer buys and sells the goods in the same form, the input tax credit can be claimed fully in respect of all the taxable goods purchased for every tax period excluding the tax paid on the purchase of any goods mentioned in subrule (2)."

The court observed that the petitioner purchased and sold commodities like sugar and red gram dhal in the same form, and the subsidized sale price was mandated by the state government. It held that the restriction of ITC was unsustainable because:

1. The petitioner was a government undertaking with no profit motive, and its activities were aligned with public welfare objectives.
2. The sale price was fixed by the state, and the petitioner had no control over it, making the restriction of ITC arbitrary and contrary to the scheme of the APVAT Act.
3. Rule 20(2)(m), relied upon by the respondents, was inapplicable as it pertained to cases where goods were sold at prices lower than the purchase value for commercial reasons, not for public welfare.

Taxability of By-Products

The court analyzed whether by-products like broken rice, bran, and husk could be treated as taxable disposals under Section 4(4)(iii) of the APVAT Act. It noted that:

1. The milling agreement between the petitioner and millers explicitly stated that by-products would remain the property of the millers, with no transfer of title to the petitioner.
2. Section 4(4)(iii) required a transfer of title for a transaction to be treated as a disposal, which was absent in this case.
3. The respondents’ contention that by-products were transferred as consideration for milling services was misplaced, as the agreement did not provide for such transfer.

The court relied on the precedent in Food Corporation of India v. State of Andhra Pradesh, where it was held that by-products from paddy milling could not be added to the petitioner’s turnover for tax purposes. It distinguished the present case from commercial transactions, emphasizing that the petitioner’s activities were driven by public policy, not profit.

The Verdict

The court allowed the writ petition and set aside the impugned assessment order dated 10.08.2016. It held that:

1. The petitioner was entitled to full Input Tax Credit on its purchases of sugar and red gram dhal under Rule 20(4)(a) of the APVAT Rules, 2005, as the commodities were sold in the same form and the subsidized price was state-mandated.
2. By-products like broken rice, bran, and husk could not be treated as taxable disposals under Section 4(4)(iii) of the APVAT Act, as there was no transfer of title to the millers.

What This Means For Similar Cases

Government Undertakings Entitled to Full ITC

This judgment reinforces the principle that government undertakings engaged in public welfare activities are entitled to full ITC under the APVAT Act, even when selling commodities at subsidized rates. Practitioners should note:

• Subsidized sales mandated by the state government do not disentitle the dealer from claiming full ITC, provided the goods are sold in the same form.
• Rule 20(4)(a) must be interpreted in light of the public policy objectives underlying the PDS and similar welfare schemes.
• Restrictions on ITC under Rule 20(2)(m) are inapplicable where the sale price is fixed by the state and not driven by commercial considerations.

By-Products Cannot Be Taxed Without Transfer of Title

The judgment clarifies that by-products retained by millers as per contractual terms cannot be treated as taxable disposals under Section 4(4)(iii) of the APVAT Act. Key takeaways include:

• Section 4(4)(iii) requires a transfer of title for a transaction to be taxable. Mere retention of by-products by millers does not constitute disposal.
• Milling agreements must be scrutinized to determine whether by-products are transferred or retained. If retained, they cannot be added to the dealer’s turnover.
• The precedent in Food Corporation of India v. State of Andhra Pradesh remains good law and can be relied upon to challenge similar assessments.

Alternative Remedy Not a Bar to Writ Jurisdiction

While the respondents argued that the writ petition was not maintainable due to the availability of an alternative remedy, the court did not address this issue in its final verdict. However, practitioners should note:

• Courts are increasingly inclined to entertain writ petitions where the impugned order is arbitrary or contrary to settled legal principles, even if an alternative remedy exists.
• Public welfare undertakings may have a stronger case for invoking writ jurisdiction, given the larger public interest involved.