THE COMMISSIONER OF INCOME TAX vs. PRAVEEN V DODDANAVAR

IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 23rd DAY OF MARCH 2017 PRESENT THE HON’BLE DR. JUSTICE VINEET KOTHARI AND THE HON’BLE DR. JUSTICE H. B. PRABHAKARA SASTRY SALES TAX REVISION PETITION No.100001 OF 2014 Connected with SALES TAX REVISION PETITION No.100002 OF 2014 SALES TAX REVISION PETITION No.100003 OF 2014 BETWEEN: M/S J.K. CEMENT WORKS, NO. 529/1, SAI NAGAR, MUDDAPUR-587122, UNIT: J K CEMENT LTD., TQ: MUDHOL, DIST: BAGALKOT (REPTD. BY ITS UNIT HEAD ANTRIKSHA KUMAR JAIN) ... PETITIONER [COMMON] (By SRI. V.R.DESAI, SRI.ATUL K ALUR, SRI.N.P.VIVEK MEHTA & SMT.J.TEJAVATHI, ADVOCATES) R

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 2 / 39 AND: THE STATE OF KARNATAKA REPTD. BY THE COMMISSIONER OF COMMERCIAL TAXES ( KARNATAKA) VANIJYA TERIGE KARYALAYA GANDHINAGAR, BANGALORE-560009. ... RESPONDENT [COMMON] (By Sri.M.KUMAR, ADDL. GOVT ADV.) STRP No.100001 OF 2014 IS FILED U/SEC.65(1) OF THE KARNATAKA VALUE ADDED TAX ACT 2003, AGAINST THE ORDER DATED:03.09.2013 PASSED IN STA.2055/2011 ON THE FILE OF THE KARNATAKA APPELLATE TRIBUNAL, BANGALORE, ALLOWING THE APPEAL FILED U/S. 63 OF THE KARNATAKA VALUE ADDED TAX ACT 2003. STRP No.100002 OF 2014 IS FILED U/SEC.65(1) OF THE KARNATAKA VALUE ADDED TAX ACT 2003, AGAINST THE ORDER DATED: 03.09.2013 PASSED IN STA.2056/2011 ON THE FILE OF THE KARNATAKA APPELLATE TRIBUNAL, BANGALORE, ALLOWING THE APPEAL FILED U/S. 63 OF THE KARNATAKA VALUE ADDED TAX ACT 2003. STRP No.100003 OF 2014 IS FILED U/SEC.65(1) OF THE KARNATAKA VALUE ADDED TAX ACT 2003, AGAINST THE ORDER DATED:03.09.2013 PASSED IN STA.2057/2011 ON THE FILE OF THE KARNATAKA APPELLATE TRIBUNAL, BANGALORE, ALLOWING THE APPEAL FILED U/S. 63 OF THE KARNATAKA VALUE ADDED TAX ACT 2003.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 3 / 39 THESE SALES TAX REVISION PETITIONS COMING ON FOR FINAL HEARING ON 10TH MARCH 2017 AND THE SAME HAVING BEEN HEARD AND RESERVED FOR PRONOUNCEMENT OF ORDER, THIS DAY, Dr.VINEET KOTHARI, J., PRONOUNCED THE FOLLOWING: ORDER RESERVED ON : 10.03.2017, ORDER PRONOUNCED ON : 23.03.2017. O R D E R Mr.V.R.Desai, Mr.Atul K.Alur, Mr.N.P.Vivek Mehta & Mrs.J.Tejavathi Advocates for petitioner. Mr.M.Kumar, Addl.Govt. Advocate for respondent. 1. The petitioner assessee, M/s.J.K.Cement Works, Muddapur, Mudhol Taluk, Bagalkot District, Karnataka, has filed these Revision Petitions under Section 65 of the Karnataka Value Added Tax Act, 2003 (for short ‘KVAT Act’) raising a question of law for consideration by this Court, being aggrieved by the order passed by the learned Karnataka Appellate Tribunal, Bengaluru, on 03rd September 2013, dismissing the appeals of the assessee in STA Nos.2055 to 2057 of 2011 (M/s. J.K.Cement Works V/s. State of Karnataka).

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 4 / 39 2. The question of law which arises from the order of the Tribunal for our consideration is as under: “ Whether the tax paid by the assessee, a manufacture of cement, is entitled to claim input tax credit in respect of the tax paid by it on the purchase of cement prior to its commencement of commercial production and such cement being used for laying the foundation and erection of cement manufacturing plant and machinery, in view of Sections 11 and 12 of the KVAT Act? ” 3. The learned Tribunal below has decided the issue against the petitioner assessee while giving the following reasons in paragraphs 11 and 12 of its order, while on other points for the claim of the assessee of input tax credit on consumables like oxygen gas, welding rods, lubricants and grease, etc. since the matter was remanded back by the Tribunal to the lower authority, therefore, we are not concerned with such other issues, except the issue of allowability of input tax credit in respect of the tax paid on the cement purchased by the

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 5 / 39 assessee and such cement being used for civil work of foundations and other civil erection works for establishment of plant and machinery by the petitioner-assessee. Paragraphs 11 and 12 of the order of the Tribunal are quoted below for ready reference: “ 11. First of all, it is essential to note that by virtue of Entry No.54 of the State List/Seventh Schedule of the Constitution, the States have been empowered to legislate law on sale or purchase of goods other than newspapers subject to Entry No.92A and 92B of the Union List. The word ‘goods’ appearing in Entry No.54 of the State List has to be understood as defined under Article 366 (12) which defines goods as ‘goods’ includes all materials, commodities and articles; . Thus, the meaning of goods assigned under the General Sales Tax Law or the VAT Law is with reference to the goods which are moveable in nature rather than immovable goods. No doubt capital goods are defined under clause (7) of Section 2 of the Act, which includes the expression ‘plant’ also.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 6 / 39 There is no dispute to the fact that factory building is plant but the input tax rebate or credit is not claimed on the factory or silos or foundation but on cement which is used as raw material for the construction of the same. There is no tax under the General Sales Tax Law or KVAT Law on the sale of factory building or any immovable property, since the same do not come under the purview of definition of goods. It has to be understood in this background alone. As per the principle laid down by the Hon’ble Apex Court, when ‘functional test’ is applied, factory building is plant. If input tax has been paid on the purchase of plant, then certainly the appellant is entitled for input tax credit. But this is not the case in the present appeals but rather the appellant is claiming the input tax credit on cementwhich is one of the building materials along with other goods like sand, jelly etc. What is contemplated under the Act is input tax credit on plant. Section 2(7) commences with the expression plant including cold storage and similar plant, machinery, goods vehicles,

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 7 / 39 equipments, moulds, tools and jigs, and used in the course of business other than for sale; what is to be noted here all the goods, after the expression plant, cold storage and similar plant, the other goods enumerated therein are all moveable goods or moveable assets. By applying the principle of ‘ejusdem generis’ to factory building and silos which are immoveable property or immoveable goods, cannot be considered as ‘capital goods’ for the purpose of KVAT Act 2003. Secondly, factory building and silos as well as foundation, even though immoveable property, as goods in the nature of plant, by no stretch of imagination, the cement which is one of the raw materials used for the construction of factory building or silos or foundation cannot be considered as capital goods. The very expression capital goods imply assets which are having longer life and such assets are of in the nature of depreciation value. The case laws relied by the appellant are all related to plant in different contexts and the same are not applicable in the instant appeals as they have direct bearing on the

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 8 / 39 interpretation of the expression plant and not on the the raw materials or inputs which are used to construct such plant. Secondly, the decisions rendered by the CESTAT under the Central Excise Law is with reference to Rule 2(k) and Rule 57Q where the specific meaning has been assigned for the expression input and in fact the said rules provides for input tax credit on inputs purchased and used to manufacture capital goods. Hence, these two decisions of CESTAT do not apply in the present case as neither Section 12 or any other Section under the Act or any rule does not contemplate the input tax credit on the inputs which are used for the construction of the factory building. What is to be noted that in case of factory building or foundation, the phrase construction is used rather than manufacture or process or production or fabrication. This itself clearly distinguishes the factory building, silos and foundation from the other capital goods like machinery, goods vehicles etc. The decisions of this Tribunal cited by the appellant are of no help since, the same deals with moveable goods like

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 9 / 39 printing machinery. The decisions rendered under the Income Tax Act, 1961 are with reference to the immoveable assets and not on the materials which are used for the purpose of constructing such immoveable assets. Therefore, all the case laws cited and relied by the appellant in the instant case is not at all applicable for the purpose of claiming tax credit on cement. Thus it has to be held that the cement which is used as raw material or input for the construction of immoveable property is not eligible for input tax credit as it does not qualify as capital goods. 12. Further to this, Section 11(a)(4) stipulates that in order to qualify as capital goods, two conditions are to be satisfied. First condition is that such goods are capital goods and second condition is that they should not come under the purview of Section 11(a)(2) or 11(a)(3) of the Act. In the instant case, cement is a commodity enumerated under Sl. No.5 of the Fifth Schedule of the Act. Thus cement by itself not being capital goods does not satisfy the first condition. Secondly, Section 11(a)(2) and 11(a)(3) of the Act

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 10 / 39 overrides Section 11(a)(4) of the Act, as cement finds place under Sl. No.5 of the Fifth Schedule of the Act, attracts the restriction imposed under Section 11(a)(2) of the Act and thereby does not satisfy the second condition also. In view of the above analysis, we answer point No.1 in the Negative. ” 4. The learned counsels for the petitioner assessee Mr.V.R.Desai and Mr.Atul K.Alur urged before us that the cement in question purchased by the petitioner assessee, which itself commenced the commercial production of cement later on, would constitute the part of cost of “plant” itself and therefore, it should be construed as “plant” and thus, falling within the definition of “capital goods” as defined in Section 2(7) of the KVAT Act read with Section 11(a)(2) and Section 12 of the KVAT Act, as such, the petitioner assessee would be entitled to claim the input tax credit in respect of tax paid by it on purchase of such cement against the output tax later on payable by it on the sale of cement manufactured by it, as the

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 11 / 39 authorities below, including the Tribunal, have failed to appreciate the correct position of law in this regard and the provisions of the Act and therefore, the question of law deserves to be answered in favour of the petitioner assessee and the orders by the authority below deserve to be quashed and set aside to this extent. They relied upon several case laws in support of their this principal contention which would also be briefly discussed hereinafter. 5. On the other hand, Mr.M.Kumar, learned Additional Government Advocate appearing for the State, vehemently submitted that cement cannot form part of the “plant” by any stretch of imagination and being a specified commodity in Fifth Schedule prescribed under Section 11(a)(3) of the KVAT Act, which specifies the restricted goods for denying the input tax credit, Item No.5 therein specifically includes cement and other construction materials including bricks, timber, etc. Therefore, the assessee cannot be allowed

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 12 / 39 such input tax credit. He, therefore, submitted that the Revision Petitions preferred by the assessee deserve to be dismissed answering the question of law against the petitioner assessee. 6. We have heard the learned counsels at length and perused the records, relevant statutory provisions and the case laws cited at the Bar. 7. To answer the aforesaid question of law, we need to first look into some of the definitions given in the Karnataka Value Added Tax Act, 2003. They are quoted below for ready reference: “ 2. Definitions.- In this Act unless the context otherwise requires.— x x x (7) ‘Capital goods’ for the purposes of Section 12 means plant, including cold storage and similar plant, machinery, goods vehicles, equipments, moulds, tools and jigs, and used in the course of business other than for sale. ”

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 13 / 39 -- “ 11. Input tax restrictions. — (a) Input tax shall not be deducted in calculating the net tax payable, in respect of: (1) tax paid on purchases attributable to sale or manufacture or processing or packing or storage of exempted goods exempted under Section 5, except when such goods are sold in the course of export out of the territory of India; (2) tax paid on goods as specified in the Fifth Schedule subject to such conditions as may be specified, purchased and put to use for purposes other than for,-- (i) resale, or (ii) manufacture or any other process of other goods for sale; (3) tax paid on purchase of goods as may be notified by the Government or Commissioner subject to such conditions as may be specified;

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 14 / 39 (4) tax paid on purchase of capital goods other than those falling under clause (2) or (3) except as provided in Section 12; (5) tax paid on purchase of goods, that are despatched outside the State or used as inputs in the manufacture, processing or packing of other taxable goods despatched to a place outside the State, other than as a direct result of sale or purchase in the course of inter-State trade or commerce except as provided in Section 14. (6) tax paid on purchases attributable to naptha, liquified petroleum gas, furnace oil, [XXX] superior kerosene oil, kerosene and any other petroleum product, when used as fuel in motor vehicles, but when used as fuel in production of any goods for sale in the course of export out of the territory of India or taxable goods or captive power, input tax shall be deducted as provided in Section 14.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 15 / 39 (7) tax paid under sub-section (2) of Section 3 on the purchase of fuel; (8) tax paid under sub-section (2) of Section 3 on the purchase of goods excluding fuel, until output tax is payable on such goods or other goods in which such goods are put to use except when the said goods are exported out of the territory of India; (9) tax paid on goods purchased by a dealer who is required to be registered under the Act, but has failed to register. (b) Input tax shall not be deducted by an agent purchasing or selling goods on behalf of any other person other than a non-resident principal. (c) Input tax shall not be deducted by any dealer executing a works contract, (i) in respect of the amount paid or payable to any sub-contractor as the consideration for execution of part or whole of such works contract for him, that is claimed as deduction; and

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 16 / 39 (ii) in respect of the amount actually expended towards labour and other like charges not involving any transfer of property in goods in connection with the execution of works contract, that is claimed as deduction. (d) Notwithstanding anything contained in this Act, where any dealer has sold goods at a price lesser than the price of such goods purchased by him, the amount of input tax credit shall be restricted to the amount of output tax of such goods” “ 12. Deduction of input tax in respect of Capital goods.— (1) Deduction of input tax shall be allowed to the registered dealer in respect of the purchase of capital goods on or after the commencement of this Act for use in the business of sale of any goods in the course of export out of the territory of India and in the case of any other dealer in respect of the purchase of capital goods wholly or partly for use in the business of taxable goods.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 17 / 39 (2) Deduction of input tax under this Section shall be allowed only after commencement of commercial production, or sale of taxable goods or sale of any goods in the course of export out of the territory of the India by the registered dealer [xxx].” -- “ Act No.32 of 2004 [From 1.4.2005] FIFTH SCHEDULE INPUT TAX RESTRICTED GOODS [Section 11(3)] . Serial Number Description of Goods 1 2 1. x x x 2. x x x 3. x x x 4. x x x 5. Furniture including slotted angles and ready to assemble parts of furniture, stationery articles including paper, sanitary fittings, cement and other construction materials including bricks, timber, wood, glass, mirrors, roofing materials, stones, tiles and paints, toilet articles. ”

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 18 / 39 8. Having given our earnest consideration to the rival submissions, we are of the considered opinion that the present Revision Petitions filed by the assessee deserve to succeed and the question of law framed above deserves to be answered in favour of the petitioner assessee and against the Revenue. The reasons are as follows: 9. Chapter II dealing with “the incidence and levy of tax” under KVAT Act, comprising of Sections 3 to 21 deals with the provisions regarding levy of tax, liability of tax and rates thereof, exemption of tax, etc. While Section 10 of the KVAT Act provides the mode of computing output tax, input tax and net tax payable by the assessee, Section 11 of the KVAT Act, reproduced above, provides for input tax restrictions, while Section 12 of the KVAT Act deals with the Deduction of input tax in respect of Capital Goods. Under Section 11(a)(2) of the KVAT Act, whereto a reference to Fifth Schedule is given, has its own exception. Section 11(a)(2) of

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 19 / 39 the KVAT Act, while it provides for input tax restrictions stipulates that tax paid on goods as specified in the Fifth Schedule, shall not be deducted in calculating the net tax payable if such Fifth Schedule goods are purchased and put to use for the purpose other than for (i) resale; (ii) manufacture or any other process of other goods for sale. Therefore, if the Fifth Schedule goods are purchased and put to use for manufacturing of other goods, restriction of claiming input tax credit in respect of such Fifth Schedule goods will not apply to the assessee and the assessee would be entitled to claim input tax credit even in respect of Fifth Schedule goods against the output tax payable by him. 10. In the present case, though the cement is specified in item No.5 of Fifth Schedule, since the cement in the present case was admittedly utilised for laying down of foundation and civil works for erection of cement manufacturing plant and machinery itself, such cement, along with the plant and

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 20 / 39 machinery itself, should be deemed to be used for the purpose of manufacturing of other goods for sale, namely cement itself, after the commencement of commercial production. Therefore, it falls in exception of negative clause of Section 11 of the KVAT Act and the assessee would be entitled to input tax credit. 11. We see no justification in the contention of the learned Additional Government Advocate appearing for the Revenue that a narrow meaning should be given to the word “Plant” and restrict it to the value or cost of purchase of plant itself. The plant and machinery for manufacturing of cement by itself would be nothing and would be useless, unless they are properly installed and erected with proper foundations and civil work for erection thereof and in that process, the use of cement would constitute an integral part of the overall cost of the plant and machinery itself. Such overall immoveable asset in the form of plant and machinery purchased, installed and erected by

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 21 / 39 the petitioner assessee, would only be fit for use for manufacturing of cement itself later on. But, the term “Plant” is not defined in the KVAT Act and therefore, one can take a broad view and interpret the meaning of the word ‘Plant’ with the help of precedents or case laws, which we would shortly refer. 12. Once the Court comes to the conclusion that the cement, used for erection and setting up of the Plant and machinery, would constitute a “Plant” and therefore, is Capital Goods, as defined under Section 2(7) of the KVAT Act, the recourse can also be made to Section 12 of the KVAT Act quoted above and the input tax in respect of the purchase of capital goods, including the cost of “Plant and machinery” and cost of cement for erection thereof, would constitute jointly capital goods, which are used for manufacture and sale of the cement ultimately produced with such plant and machinery.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 22 / 39 13. Thus, while Section 11 of the KVAT Act provides for restriction on input tax credit, in its exception carved out under Section 11(a)(2) as well as Section 12 of the KVAT Act, providing for deduction of input tax credit in respect of the capital goods, both would support the case of the present assessee. We do not find any force in the contention of the learned Additional Government Advocate or the premise taken by the authorities below, that merely because item Cement is mentioned in item No.5 of the Fifth Schedule, the input tax credit in respect of the same should be disallowed in the hands of the petitioner assessee. 14. We are fully fortified in our view by the recent decision of another Division Bench of this Court in the case of Hindustan Uniliver Limited Vs. State of Karnataka [2016] 90 VST 236 (Karn), wherein the Division Bench of this Court, relying upon the decision of the Hon’ble Supreme Court in the case of Maruti Suzuki Limited Vs. Commissioner of Central

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 23 / 39 Excise, [2010] 1 GSTR 200 (SC) : [2009] 240 ELT 641 (SC) : [2009] 9 SCC 193, held that installation of electrical and electronic goods which have nexus to the manufacturing process like the Speeder System used in that case to provide backup electricity in the manufacturing process, the Court allowed the input tax credit in respect of the tax paid on such Speeder System under the provisions of KVAT Act dealing with Section 11(a)(2) and Fifth Schedule of the KVAT Act in the following manner: “ If the goods specified in the Fifth Schedule to the Act are purchased and put to use for the purpose of resale or for manufacture or for the process of other goods for sale, the input-tax credit would be available. Once the goods are purchased in furtherance to or for aiding the manufacturing process, the same will have a direct nexus to the manufacturing activity and there is no reason why they could be treated as an independent capital goods disentitling the benefit. They cannot be

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 24 / 39 segregated just on a mere ground that they are capital goods.” “ (iii) That considering section 11(a)(2) of the Act and entry 3 of the Fifth Schedule to the Act, all electrical and electronic goods including air- conditioners, air coolers, telephones, fax machines, etc., used would fall in the category of the goods for which the input-tax credit would be inadmissible unless the goods are for resale or for manufacturing of any other goods for sale. The electrical or electronic goods should have nexus to the manufacturing process if they are purchased and put to use for the purpose of or in furtherance to the manufacturing process. The various items mentioned at entry 3 include air-conditioner, air- cooler, fax machines which can be broadly considered as capital goods. The language for all electrical or electronic goods is inclusive and not exhaustive. The speeder system was used to back up the electricity in the manufacturing process and the input-tax credit could not be denied to the dealer.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 25 / 39 Maruti Suzuki Ltd. v. Commissioner of Central Excise, [2010] 1 GSTR 200 (SC) applied.” 15. On an earlier occasion, another Division Bench of this Court in the case of State of Karnataka Vs. Ashok Iron Works Private Limited, Industrial Estate, Udyambag, Belgaum, 2014 (78) Kar.L.J. 376 (HC) (DB), even allowed the input tax credit in respect of the consumables used in manufacturing of finished goods, explaining the provisions of Section 11 of the KVAT Act in the following manner: “ ….Section 11 deals with input tax restriction. Now, from the wordings of the aforesaid provision, it is clear that the output tax is calculated on the basis of taxable turnover on sale of goods made in the course of business, whereas the benefit of input tax rebate is available when the goods which has suffered input tax are used in the course of the business of the dealer. It has no nexus between the manufacturing of the goods and sale of goods. In the course of a job work,

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 26 / 39 consumables are used. When the dealer purchases these consumables, he is liable to pay input tax. After using the consumables, employing the labour job, work is completed and the finished product is delivered to the customer. What the customer pays is the labour charges on which the assessee is not liable to pay any output tax. However, he has utilized the consumables in manufacturing the finished product and he has paid input tax on such consumables. But, this business of job work is in the course of his business. Therefore, by virtue of sub-section (2) of Section 10, if he has paid input tax on consumables which is used in the course of his business, though in the course of job work he is not liable to pay any output tax, still in the taxable turnover of the said business, he is entitled to claim deduction of this input tax, however, subject to the restriction specified in Sections 11, 12, 13, 14, 17 and 18 of the Act. Therefore, the argument that as no output tax is payable on this turnover of the job work, the assessee is not entitled to the benefit of input tax rebate cannot be accepted. When the consumables are used in the job work in

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 27 / 39 respect of which no output tax is payable by the assessee or used in the manufacturing activity and used in the manufacturing activity undertaken by the assessee on his own and when the said manufactured goods are sold there is liability to pay output tax by the assessee. The assessee is entitled to the benefit of input tax rebate on the total taxable turnover of his business. Therefore, the approach of the lower authorities that the assessee is not entitled to the benefit of input tax rebate in respect of consumables used in relation to the job work in respect of which no output tax is paid by the assessee is erroneous. The Tribunal rightly set aside the said order and extended the benefit of the tax rebate to the assessee. Therefore, the said finding is affirmed.” 16. While dealing with a central excise matter, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in the case of Lloyds Steel Industries Limited Vs. Commissioner of Central Excise, Nagpur, 2007 (211) E.L.T. 275 (Tri.-Mumbai), held that the cement and steel used for

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 28 / 39 laying foundation for installation of very heavy plant, machinery and equipments, required to carry out manufacturing activity would fall within the definition of Capital Goods and CENVAT/MODVAT credit in respect of the same would be admissible under Rule 57Q of the erstwhile Central Excise Rules, 1944. Though it is a judgment from the Tribunal, but it has a persuasive value and touches upon the point almost akin to what we are concerned with and therefore, we quote the relevant portion of the said order of the Tribunal with approval: “ 3. The cement and steel were used for making foundations for installation of very heavy plant machinery and equipment required to carry out manufacturing activity. In view of this admitted position, goods credit under Rule 57Q is admissible on these items, in the light of Tribunal’s final order No.1384-90/2003/WZB/C- II dated 13-6-2003 in the assessee’s own case which has been followed once again in the assessee’s own case as reported in 2003 (162) E.L.T. 847. In the latter decision the contention of

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 29 / 39 the learned SDR, which is the same as in today’s appeal, that building material used as raw material for construction of plant cannot be said to be used as plant in the manufacture of goods so as to qualify under section 8(3)(b) of the Central Sales Tax Act 2956, relaying upon paragraph 20 of the larger bench decision in Jawahar Mills Ltd. –1999 (108) E.L.T.47, has been rejected for the reason that the larger bench had categorically held that the expression employed in Rule 57Q (defined capital) is given wider that the expression contained in section 8(3)(b) of the Central Sales Tax Act. Following the ratio of the above orders, we hold that cement and steel used in foundation for machinery, plant and equipment are eligible to capital goods credit under Rule 57Q. ” 17. Now, we may refer to some cases under the Income Tax laws dealing with the definition of ‘Plant’ which have a bearing on the present controversy before us as well.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 30 / 39 18. In the case of M/s.Jayadev Oil Mill, Hubli, Vs. The Additional Commissioner of Commercial Taxes, Belgagum, a Division Bench of this Court in STA No.23 of 1994 decided on 20th February 1996, heavily relying upon the decision of the Hon’ble Supreme Court in the case of Scientific Engineering House Private Limited Vs. Commissioner of Income Tax, Andhra Pradesh, (1986) 157 ITR 0086 (SC), held as under: “ 10. In deciding whether a ‘building’ or a structure is a plant, the functional test has to be applied as indicated in the said decisions. If the ‘building’ is an apparatus or tool used by the Assessee for carrying on the business or manufacturing activity, then it would be part of the ‘plant’. If on the other hand, if a building or a part of a building has no connection with the business or manufacturing activity that is being carried on, then obviously such a building or portion of the building will not be part of the plant. These aspects of the matter have not been considered or dealt with by the Revisional

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 31 / 39 authority. He has merely proceeded on the basis that the decisions relied on by the appellant are not applicable as they were rendered with reference to Income-Tax Act. 11. Therefore, the word ‘installed’ is used in connection with the words ‘ plant and machinery’, can also refer to ‘installation’ of a factory building. After all, the intention of the Notification is to encourage setting up of new industries in Karnataka. There is nothing in the Act or the Notification to exclude the factory building from ‘plant’. We find no reason why the meaning attached to the said work, while examining the provisions of the Income-Tax Act, cannot be applied while construing the meaning of the said word in the exemption Notification issued under the Karnataka Sales Tax Act. Therefore, the mere use of the word ‘installed’ with reference to ‘plant and Machinery’ is not sufficient to exclude the factory building, from the scope of the ‘plant and machinery’ used in the Notification dated 15.10.1981. Hence, we feel that the Revisional Authority ought to have examined these aspects

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 32 / 39 with reference to the functional tests. In fact, none of the authorities have examined the matter with reference to the functional tests, repeatedly prescribed by the Supreme Court and this Court. 12. In the circumstances, we set aside the orders of the Revisional Authority, Appellate Authority and the Assessing Authority and remit the matter to the Assessing Authority for reconsideration of the matter. ” 19. The Hon’ble Supreme Court in the case of Scientific Engineering House Pvt.Ltd (Supra) relied upon certain following foreign decisions while dealing with the explanation ‘Plant’ and gave it a wide meaning under the provisions of Income Tax law in the following manner: “ The classic definition of 'plant' was given by Lindley, L.J. in Yarmouth v. France, [1887] 19 Q.B.D. 647, a case in which it was decided that a cart-horse was plant within the meaning of section 1(1) of Employers' Liability Act, 1880. The

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 33 / 39 relevant passage occurring at page 658 of the Report runs thus :- "There is no definition of plant in the Act: but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business, -not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business.” In other words, plant would include any article or object fixed or movable, live or dead, used by businessman for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. In order to qualify as plant the article must have some degree of durability, as for instance, in Hinton v. Maden & Ireland Ltd., 39 I.T.R. 357, knives and lasts having an average life of three years used in manufacturing shoes were held to be plant. In C.I.T. Andhra Pradesh v. Taj Mahal Hotel, 82 I.T.R. 44, the respondent, which ran a hotel, installed sanitary and pipeline fittings in one of its branches in respect whereof it claimed

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 34 / 39 development rebate and the question was whether the sanitary and pipe-line fittings installed fell within the definition of plant given in Sec.10(5) of the 1922 Act which was similar to the definition given in Sec. 43(3) of the 1961 Act and this Court after approving the definition of plant given by Lindley L.J. in Yarmouth v. France as expounded in Jarrold v. John Good and sons Limited, 1962 40 T.C. 681 C.A., held that sanitary and pipe-line fittings fell within the definition of plant. In Inland Revenue Commissioner v. Barly Curle & Co. Ltd., 76 I.T.R. 62, the House of Lords held that a dry dock, since it fulfilled the function of a plant, must be held to be a plant. Lord Reid considered the part which a dry dock played in the assessee company's operations and observed: “It seems to me that every part of this dry dock plays an essential part....The whole of the dock is, I think, the means by which, or plant with which, the operation is performed.” Lord Guest indicated a functional test in these words:

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 35 / 39 “In order to decide whether a particular subject is an 'apparatus' it seems obvious that an enquiry has to be made as to what operation it performs. The functional test is, therefore, essential at any rate as a preliminary” 20. In the following case, disposed of by the learned Single Judge of this Court in Santosh Enterprises Vs. CIT, (1993) 200 ITR 353 (Kar), observed that the Indian Courts as well as English Courts, depending upon the context of income tax law, have treated even the assets like dry dock, silos built in the ship yard, freezing chamber in the case of cold storage, cinema building, etc. as falling within the definition of ‘Plant’. The relevant extract from the said judgment is also quoted below to emphasize that there is no justification for giving a restrictive meaning to the word ‘Plant’ as only meaning of machinery which would be useless without proper foundation and fixation attaching it with the earth and making it immoveable asset rather than a moveable property: “ IRC v. Barclay, Curle and Co. Ltd. [1970] 76 ITR 62 (HL). The question that arose for

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 36 / 39 consideration was whether a dry dock could be construed as plant for the purposes of the trade of the company within section 279(1) of the English Act. In that case, the dry dock had been made, the walls and bottom of which had to be strong and impervious to water so that large vessels could get into it for the purposes of repairs. In the facts and circumstances of the said case, it was held that the entire dry dock together with the ancillary structures constituted plant. The next case is Schofield v. R and H. Hall Ltd. [1974] 49 TC 538 (CA) concerning silos built in the ship yard. The company carried on a trade which consisted of storage of grain. The question was whether the silos is part of the setting in which such trade was carried on. It was found that considering the function of the silos in relation to the assessee's trade, the silos served as an essential part of the overall trading activity. Their function was to hold the grain in a position from which it could be conveniently discharged in varying quantities. Hence, it was held that the silos would rank for capital allowance.

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 37 / 39 In CIT v. Kanodia Cold Storage, the question was whether the building with insulated walls used as a freezing chamber, though it is not machinery or part thereof, is part of the air- conditioning plant of the cold storage of the assessee, entitled to special depreciation on its written down value. In the specific facts of the case, the whole freezing chamber including walls and structure was held to be a plant with which the assessee was carrying on his business activity. On the analogy of the above cases, Sri Prasad, learned counsel for the assessee, contended that the whole theatre should be treated as plant with which the assessee carries on his show business. The other decision to which specific reference may be made here is Benson v. Yard Arm Club Ltd. [1978] 2 All ER 958,968; [1979] Tax LR 778, 785 (Ch D), upon which strong reliance is placed by Sri K. Srinivasan, learned counsel for the Revenue. In this case, the subject- matter was a ship which was converted into a restaurant by the assessee. The whole ship was

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 38 / 39 claimed as an apparatus for carrying on their business of a floating restaurant, and as such it was a plant to claim allowance. On a review of various earlier decisions, the Chancery Division has held that the vessel is the place or setting where the restaurant business was carried on and was not plant and hence, the expenditure on them did not qualify for capital allowance. ” 21. Thus, on a conspectus of the legal precedents cited above, when we view the facts and controversy in the present case, we find considerable force in the submissions made by the learned counsel for the petitioner assessee and we do not find any good reason to hold that cement used for civil works and laying foundation and erection of plant and machinery by the assessee during the relevant period should not constitute a part and parcel of “plant” and thus, Capital Goods used for manufacturing of cement by the petitioner assessee later on and, in our opinion, the petitioner would thus be entitled to claim input tax credit in respect of the tax paid by it in respect of such

Date of Order: 23.03.2017 STRP Nos.100001, 100002, 100003 of 2017 M/s.J.K. Cement Works, Bagalkot Vs. The State of Karnataka 39 / 39 cement purchased and used by it during the relevant period, prior to the commencement of its commercial production, for the purpose of erection of the plant and machinery. 22. We accordingly allow the Revision Petitions of the petitioner assessee and answer the question of law in favour of the assessee and against the Revenue and we direct the authorities below to allow such input tax credit to the petitioner assessee under Section 10 of the KVAT Act to compute its net tax payable against the output tax payable by it in the subsequent periods after commencement of commercial production. No order as to costs. Sd/- JUDGE Sd/- JUDGE RK/-