Thursday, February 28, 2013

Whether input tax credit can be claimed on purchase of inputs such as pesticides, fertilizers, manure etc., for raising coffee, pepper, arecanut, cardamom, etc., and selling the same ?

M/s. Anaparai Estates Limited In re
Dated: 28th November 2012
 
Whether input tax credit can be claimed on purchase of inputs such as pesticides, fertilizers, manure etc., for raising coffee, pepper, arecanut, cardamom, etc., and selling the same ?
 
Held, the Applicant is not entitled for the claim of input tax credit on the purchases of pesticides, manure, chemicals, fertilizers, etc., which are used in the cultivation and growing of coffee, pepper, arecanut, cardamom plantation as the said activity is only an agricultural operation and it cannot be termed as "business" activity,
Advance Ruling authority found assessee contention was untenable and unsustainable for the following reasons:
(a) It is an undisputed fact that the Applicant is not only involved in the cultivation of coffee, pepper, arecanut, cardamom, etc., plantation grown on their land but also engaged in the manufacture and sale of some of the produces obtained out of such plantation owried by the Applicant. For the purposes of enriching the soil and plant-growth promoted by the-Applicant in the growing of plantation, the Applicant has purchased fertilizers, chemicals, manure, pesticides, etc.', from local registered .dealers by paying VAT on such purchases and used the same in the course of growth of coffee, pepper, arecanut and cardamom plantation. After obtaining coffee, pepper, arecanut, cardamom from  the' plantation,  the  Applicant has  undertaken  processing /manufacture of coffee, pepper, arecanut, cardamom which are commercial  commodities for the purposes of sale in the course of its business activity. At this stage we deem it appropriate to reproduce the definition of  "Agricultural produce or horticultural.produce" as defined under Section 2(3) of the KVAT Act, 2003, which reads thus:     
"(3) Agricultural produce or horticultural produce  shall not be deemed to include tea, beedi leaves, raw cashew, timber, wood, tamarind and such produce, except coffee as has been subject to any physical chemical, or other process for being made fit for consumption, save mere cleaning, grading, sorting or  drying."
From the reading of the above definition it is obvious that the deeming provision does not include pepper, arecanut, cardamom with the exception of coffee as has been subject to any physical chemical or other process for being bade fit for consumption, save mere cleaning, grading, sorting or drying. In other words, these goods are regarded as agricultural produce for the purposes of KVAT Act, 2003 with the exception of further processing done to raw coffee obtained as enumerated above. No doubt, coffee, pepper, arecanut and cardamom cultivated and grown by the agriculturist or by any person in his plantation is a 'agricultural produce', but-coffee is kept out of the above said definition by deeming prevision for the reason that trfe raw coffee cannot be sold by the agriculturists/or person as the same is required to undergo manufacturing / processing activity in order to make it suitable and fit for human consumption and marketing, purpose. . For better clarity, the Legislature has inserted Explanation 4(a) and 4(b) to Section 2(2) of the KVAT Act, 2003 as per' which when an agriculturist who sells exclusively agricultural produce grown on land cultivated'by him personally has been kept out of the purview of the definition of 'dealer' and where the agriculturist is a company and is selling coffee, pepper, arecanut and cardamom is deemed to be a dealer in respect of turnovers relating to sales of such produce. The provisions of Explanation ,4(b) referred to. above defines "dealer" in relation to turnovers of sales of such produce. In: order to understand the implication of the above definition to the facts; of the case of the Applicant before us, it would be appropriate to reproduce the Explanation 4(a) and 4(b) annexed to Section 2(12) of the KVAT Act, 2003, which reads thus:
"Explanation (4)(a) - An agriculturist who sells exclusively agricultural produce gown on land, cultivated by him personally or a person who is exclusively engaged in poultry farming and sells the products of such poultry farm shall not be deemed to be a dealer within the meaning of this clause;
(b) Where the agriculturist is a company and is selling pepper, arecanut, cardamom, rubber, timber, wood, raw cashew or coffee grown«on land cultivated' by it personally, directly or otherwise, such company shall be deemed to be a dealer in respect of turnovers relating to sales of such produce."
The provisions, of Section 2(12) of the KVAT Act, 2003 defines the word "dealer". However, on a con-joint reading of the definition of agricultural produce or horticultural produce as defined under Section 2(3) of the KVAT Act, 2003 along with Explanation 4(a) and 4(b) annexed to the provisions of Section 2(12) of the KVAT Act, 2003, a conclusion is obvious that a Company incorporated  under the Companies Act, 1956 and carrying on agricultural operations to grow crops like pepper, cardamom, rubber, timber, wood, raw cashew or coffee for sale or such produce, is a dealer for the purposes of KVAT Act, 2003.
(b) In the case of the Applicant before us, there is no dispute that the Applicant is not only engaged in the growing of various plantation which are consisting of minor and major crops but also engaged in the processing of raw coffee  obtained  from  such  plantation which  is used  put  to  any physical chemical or other process for being made fit for consumption,  save mere cleaning, grading,  sorting or drying along with other ingredients to obtain finished coffee which its sold as a commercial commodity.   The main business activity of the Applicant is to sell these goods which  are  obtained out of cultivation and growth of minor and major crops.  Thus there are two activities involved in the case of the Applicant,   Firstly, the Applicant is engaged in the activity of growing of coffee, pepper, arecanut, cardamom plantation which constitutes agricultural activity and the second is processing and sale of these goods from the plantation grown by the Applicant.  Both these activities are independent and distinct in nature. For the purposes of-carrying on the agricultural activity of growing of coffee, pepper, arecanut, cardamom plantation,  the Applicant has purchased inputs viz.,  pesticides,  fertilizers, manure,   chemicals,   etc.,   from   local   registered   dealers   and   used   for   the enrichment of the soil and growth of the coffee, pepper, arecanut, cardamom plantation.
(c)   The word "agriculture" is also defined under Section 2(1) of the KVAT Act, 2003. The word agriculture is understood to mean the cultivation of the field which involves tilling of the land, sowing of the seeds, planting and similar operations on the land. These are the-basic operations and would require the expenditure of human skill and labour upon the land itself. However, there are other operations which have got to be resorted to and which are absolutely necessary for the purpose of effectively raising, the produce from the land. They are operations to be performed after The produce, sprouts from the land, namely, weeding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which foster the, growth and preserve the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market. One cannot dissociate the basic operations from the subsequent operations and say that the subsequent operations, even though they are divorced from the basic operations can constitute agricultural operations by themselves. With this background in view, we have to move on to the definition of agricultural produce as reproduced elsewhere in this order. The definition itself gives recognition to the fact that any produce, in order, to be marketable and fit for human consumption, must undergo some primary processing. The Hon'ble Supreme Court in the case of Commissioner of Sales Tax, Lucknow V/s. D.S. Bist and others in their-decision reported in AIR 1979 SO 169 has" observed that "almost every kind of agricultural produce has to undergo some kind of processing or treatment by the agriculturist himself in his farm or elsewhere in order to bring them to a condition, of non-perishability and to make them transportable and marketable" and that the mere fact that in the case of a particular produce the process is a bit longer or even a bit complicated will not rob the produce of its character of being an agricultural produce.
(d) The word "business" is defined under Section 2(6) of the KVAT Act, 2003, to mean;
"(a)Any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trader-commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues there from; and
(b) Any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern."
From the above definition it is clear that the activity of producing agricultural produce is not regarded as business activity. When there is no business activity insofar as the agricultural produce is concerned, the purchases made for plantation growth by the Applicant does not fall within the meaning of "business" as defined under Section 2(6) of the KVAT Act, 2003. Further, the activity of growing of coffee, pepper, arecarrat and cardamom plantation and obtaining goods out of such plants would not amount to manufacture or processing so as to say that it is incidental or ancillary to the business activity of the appellant of manufacturing and selling of coffee, pepper, arecanut, cardamom, etc.,. The growing of coffee, pepper, arecanut, cardamom, etc., plantation is only am activity of cultivation of agricultural produce and the final products produced out of such plantation is an agricultural 'produce which does not answer to the description' of "manufacture" or "processing" of finished commodities. In this connection it would be of relevance to refer to the judgment of the Hon'ble-Supreme Court in the case of IVl/s. Travancore Tea  Estates- Co. Ltd., V/s. State of Kerala reported in 1976 AIR 2469, wherein the Apex Court at the fag end.of the judgment has rule.d as under:
".....Cultivation and  growth of tea plants no "doubt results in the production of raw. material in the form of green tea leaves which are ultimately processed into tea meant for Sale, but cultivation and growth are in the very nature of things prior to the manufacturing process and do not answer to the description of manufacture and processing of tea meanttbr sale. 'There is a vital difference between an agricultural operation and a manufacturing process, and the same should not be lost sight of. What is needed for being used purely in an agricultural operation cannot be held, to be goods required for use in a manufacturing process....,...,..."
Even in the case of the Applicant, the cultivation and growth of coffee, pepper, arecanut, cardamom plants no doubt results in the production of raw form of these goods which are ultimately processed into finished form of coffee, pepper, arecanut, cardamom meant for sale subsequently. This; cultivation and growth are in the very nature of agricultural operations prior to the manufacturing process  and  therefore   the  pesticides, chemicals, manure, fertilizers, etc., purchased by the Applicant is used prior to the manufacturing process and with the use of these inputs what is obtained is agricultural produce whichjis not' a commercial commodity so as to be eligible to claim, input tax credit on such purchases. Therefore, the purchases of chemical?, fertilizers, manure, etc., are not in the course of its business activity but for the purposes' of' . agriculture activity which does not fall within the meaning of "business". In addition to this "factor,; the Applicant'is not.paying any output tax on the "raw coffee, pepper, ^arecanut,, cardamom" obtained out of cultivated and grown plantation so as to hold that the Applicant is eligible for input tax credit on the purchases-of fertilizers, manure, chemicals, etc., used for growing of coffee, pepper, arecanut, cardamom, etc., plantation.
(e) The issue at dispute has already been dealt with by the Hon'ble High Court of Karnataka in their recent judgment dated 16.8.2012 rendered in the case of M/s.Balanoor Plantations and Industries Ltd., v/s. State of Karnataka and others in W.P.No.5739/2011 & W.P.Nos. 18322-332/2012 and others.   At para 36 and 37 of the said judgment,' it has been succinctly ruled as under:
"36. But, in the instant case, petitioners seek to claim deduction of input !tax for having purchased agricultural machineries, motor car, fertilizers and chemicals on the ground that they are purchased by them for use in their business which includes growing of and maintaining tea plantation apart from processing and manufacturing tea. This contention cannot be accepted. Fertilizers and Chemicals or for that matter agricultural machineries, such as tractors, trailers, transformers^ motor car, pump sets and electrical goods, which are used for tea cultivation cannot be regarded as goods falling within the definition of the term 'input' for the purpose of the business of the petitioners, which in the instant case is manufacturing and processing of tea for the sale of which output tax is claimed. The 'output tax', in the instant case, is not claimed on the sale of tea leaves, on the other hand, the output tax is paid on the sale of manufactured tea. Therefore, the business of the dealer for the purpose has to be understood confining it to the manufacturing process resulting in production of tea and any transaction in connection therewith or incidental or ancillary to it. Viewed in this background, even though the petitioners are engaged in cultivating tea plantation and in growing tea leaves, this cannot be regarded'as business and has no relevance for the purpose of granting input tax credit to the inputs used by way of purchase of fertilizers, chemicals etc., in the course of cultivation of tea.
37. The expression 'business' used in Section 2(6), in this background, cannot be stretched to include the tea plantation and cultivation by the dealer for the purpose of claiming a input tax credit. Therefore, fertilizers, chemicals, pesticides and other agricultural machineries, which are used for 'the purpose of growing tea leaves cannot be termed as goods purchased by the petitioners in the course of their business in manufacturing processing or packing of tea produced by them or storing of other goods or any other use in that business........
This judgment applies in all force to the facts of the case of the Applicant before us.   In addition to this, the Commissioner of Commercial Taxes, Karnataka, Bangalore, in his Proceedings bearing No.CLR.CR.83/09-10 dated 22.11.2010 has clarified as under: 
"12. In the circumstances, the. petitioner's activity relating to raising or growing of tea plants is an agricultural activity and any transaction relating to it does not attract any of the provisions of the KVAT Act.
13. In view of the above position of law, it is clarified that the tax paid on fertilizers, chemicals, manures, pesticides etc, 'for use in cultivation of tea crop, is not eligible for deduction from the output tax* payable by the applicant under the Karnataka Value Added Tax Act, 2003."
(f) Now, we analyze the- judgments relied upon: by the Applicant in support of their contention and we. express our opinion about the applicability or otherwise of the said judgments to the facts of the case of, the Applicant before us.
(i)    The judgment of Hon'ble High Court of Karnataka in the case of  M/s. Diwan Bahadur S.L. Mathias & Sons V/s. State of Karnataka & Others reported in 2010-11 (15) KCTJ 39 in no way helps the Applicant's case as the Hon'ble High Court did not express its opinion on the issue before it instead the matter was repored to the Commissioner of Commercial Taxes for passing speeding order. Hence pursuant to remand by the High Court, the Commissioner has drawn the proceedings dated 22.11.2010 referred to above holding that no input tax credit is applicable in respect of purchases of fertilizers, manure, chemicals, pesticides, etc., used for cultivation of tea. Hence;- this judgment is of no help to the appellant.
(ii) In the case of Commissioner of Sales Tax V/s. Jaswant Singh Charan reported in 19 STC 469, the Apex Court has referred to the judgment rendered in the case of K.V. Varkey v. Agricultural Income Tax; and Rural Sales Tax officer, Peelmedu and others wherein it is held that tea leaf and tea powder is one and the same commodity. This decision was rendered on the basis of definition of turnover in Section 3 of the Travancore General Sales Tax Act which while including sales of agricultural or horticultural produce included tea, coffee, rubber etc., in the turnover. This judgment in no way supports the stand of the Applicant as it  was decided  on the basis of the words and phrases prevailed under the relevant statute and on the basis of non-occurrence of word "tea" in the statute. But under the KVAT Act, 2003, the definition of agricultural produce or-horticultural produce is very well defined to include tea. Hence this judgment is also, of no relevance to the facts of the case of the Applicant.
(iiiJ In the case of  M/s. Girdharlal Jaiwanlal Vs. The Assistant Commissioner of Sales Tax (Appeals), Nagpur and another reported in 8 STC 732, the Bombay High Court held that an agriculturist may sell the produce from his lands but, his activity cannot be regarded as a business of sale or supply of agricultural produce. 'Even under the KVAT Act, 2003, the agriculturist producing the agricultural produce is not regarded as sale by virtue of the provisions of Section 2(6) of the KVAT Act, 2003 as such activity does not fit into the word "business". Therefore, this judgment - also does not support the stand taken by the Applicant.
(iv) The Andhra Pradesh High Court in the case of T.V. Chetty and Sons Vs. CTO reported in 33 STC 497 the deeming provision of AP General Sales Tax Act contained a deeming provision which says that an agricultural grower of sugarcane who converts the same to jaggery and sells it should be regarded as a "dealer for all purposes of the Act. Under the KVAT Act, 2003 also there is a deeming provision in the form of Explanation 4(a) and (b) in Section 2(12), which prescribes that an agriculturist selling the agricultural produce is not a dealer, but- where a Company sells such agricultural produce then, such company is deemed to be a dealer under the KVAT Act,. 2003. Since sugarcane is an agricultural produce  and jaggery is  a  commercial  commodity,   the  Andhra Pradesh High Court has rightlyTierld that the agriculturist growing sugarcane when converts the same to jaggery and sells he should be regarded as "dealer". This judgment in no way helps the Applicant, as the Applicant has undertaken growing and cultivation of minor and major, crop plantations and out of such cultivation the raw form of coffee, pepper, arecanut, cardamom, etc.,' is obtained which is an agricultural produce and thereafter the Applicant has processed and obtained finished form of coffee, pepper, arecanut, cardamom which are different commercial commodities. (v) The Hon'ble Karnata'ka Appellate Tribunal in the case, of M/s.Deluxe Coffee Company V/s. State of Karnatakarreported in 2011 (70) KLJ 500 (Tri.) was dealing with the issue wherein the dealer had claimed exemption fronvpayment of CST on inter-State ' sales of coffee, seeds by virtue of Notificatioji No.FD 112 CSL 2002(5) dated: 31.5.-2002. The Tribunal while interpreting this ' notification had come to the conclusion that VAT is a multi-point system of taxation and the dealer is entitled toi the benefit of input tax credit on the output tax payable either under the State Act or under the CST. But the Tribunal had further held that the claim •of deduction of CST by the appellant on the VAT paid coffee seeds would defeat, the purpose of the enactment of \(AT for the reason that under the KST Act the benefit "olHnput tax was not available. This judgment is altogether on a different footing and this will not help the facts prevalent in the case oTthe Applicant.
5. Before concluding our discussion on the subject-matter we would like to give our opinion in this case that since the Applicant is a Company carrying on the agricultural / horticultural produce operations to grow crops of coffee, pepper, arecanut, cardamom, etc., will be liable for registration as well as liable to pay tax under the KVAT Act, 2003. There are no special provisions with regard to allowance of deduction of input tax paid on purchases effected to carry on the agricultural / horticultural operations, especially where such companies carry on inter-plantation of crops. No doubt, no provisions like the provisions of Section 11. of the KVAT Act, 2003 restricting the input tax credit are enunciated under the Act for restricting the input tax credit in the case like the Applicant's case, such benefits are not automatically extendable for the reason that the input so utilized are for the purpose of agricultural operations and not for business activity as, elaborately discussed above.     Thus,  not restricting the inputs, like this under Section 11 for the activity of agricultural as well as business, the Applicant would not be eligible for entitlement of such benefit?.           
6. For the foregoing reasons, we do not find any legality in the claim of the Applicant in the application filled under Section 60 of the KVAT Act, 2003, seeking input tax credit on the purchases of pesticides, manure, chemicals, fertilizers etc, used in the cultivation and growing of coffee, pepper, arecanut, cardamom plantation. Hence the Applicant is not entitled for the benefit of input tax credit claimed oh such purchases.'

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