Bullion merchants have won a major battle against the State government with the Madras High Court declaring as invalid a section that denied Input Tax Credit (ITC), in the nature of rebate, with respect to worn-out gold jewellery purchased in Tamil Nadu on payment of tax, sent to other States such as Kerala and Karnataka for being converted into new jewels and then brought back for sale on payment of tax once again.
Allowing a batch of writ petitions filed by jewellers from across the State challenging the Commercial Taxes Department’s refusal to give ITC, a Division Bench of Justices Rajiv Shakdher and R. Suresh Kumar held: “The mere fact that the manufacturing unit is located outside the State of Tamil Nadu cannot be the basis for denial of Input Tax Credit under Section 19(1) of the 2006 Act. Clause (ii) of Sub-Section (2) of Section 19 of the 2006 Act is, thus, declared bad in law.”
The jewellers, in their affidavits, had contended that they were in the business of purchasing bullion as well as worn-out jewellery from registered dealers after remitting requisite tax and then sending them to other States for conversion into new jewellery since there was a great demand in the State for designs made by craftsmen in States such as Kerala.
Since the finished new jewellery was brought back to Tamil Nadu and sold against tax invoices, they claimed a right to get Input Tax Credit.
‘Giving State a boost’
Contesting their claim, the Commercial Taxes Department contended that the ITC was a concession granted to select assessees on fulfilment of certain conditions.
Economic development
Such a concession could be extended only if the bullion or worn-out jewellery had been converted into new jewels within the State, the department said and added that the reason behind imposing such a condition was to further the economic development of the State and provide job opportunities.
Rejecting the contention, the Division Bench said such reasoning was bad in law since Article 304(a) of the Constitution explicitly bars State governments from discriminating between goods imported from other States or Union Territories and those manufactured/produced within their States when it comes to taxation.
Authoring the judgment, Mr. Justice Shakdhr observed: “The argument of the respondents... is flawed in the facts of this case. This is because the impugned provision applies across the board making neither a distinction between old and new business/industry nor limiting its impact to a specified period. The result is that goods which are similar in quality and nature bear a different tax burden, thus, violating Article 304(a) of the Constitution.”
The judge went on to add: “The impugned provision seeks to pivot the denial of tax credit on the basis of circumstance and not on the basis of quality or nature of goods. The fact that ITC is denied on the basis of where the manufacturing unit of the assessee is located results in hostile discrimination against those who have their manufacturing unit located outside the State of Tamil Nadu.”
