Input Tax Credit on Liquefied Petroleum Gas used by Hotels/ Restaurants under PVAT Act, 2005

Varun Chadha (Advocate)

Now a day’s cooking of foods products by the Hotel Industry/ Restaurants are mostly done with the help of Liquefied Petroleum Gas. Liquefied Petroleum Gas is the major ingredient used for converting raw food into final product. However the Excise & Taxation Department is disallowing Input Tax Credit on the purchase of Liquefied Petroleum Gas on the basis of Section 13 (5) of the Act while ignoring 1st Proviso to Section 13(1). This had led to many controversies all over the State.
Section 13 of the PVAT Act, 2005 provides for the entitlement of Input Tax Credit on the purchases made by a Taxable Person subject to such Conditions as may be prescribed. Relevant portion of Section 13 (1) & 13(5) are reproduced as under:

“Section 13(1)  A taxable person shall be entitled to the input tax credit, in such manner and subject to such conditions, as may be prescribed, in respect of input tax on taxable goods, including capital goods, purchased by him from a taxable person within the State during the tax period:

Provided that such goods are for sale in the State or in the course of inter-State trade or commerce or in the course of export or for use in the manufacture, processing or packing of taxable goods for sale within the State or in the course of inter-State trade or commerce or in the course of export:

xxxx”   

Section 13(5) A taxable person under this section, shall not qualify for input tax credit in respect of the tax paid on purchase of, –

(a)    xxxx;

(b)    petrol, diesel, aviation turbine fuel, liquefied petroleum gas and condensed natural gas, unless the taxable person is in the business of selling such products;”

The conditions required to qualify for availing Input Tax Credit as per Section 13(1) is “for use in the manufacture, processing or packing of taxable goods for sale”.

There is no dispute over the issue that the Liquefied Petroleum Gas is used in the manufacture of taxable goods by the Hotels/ Restaurants. The raw food which as such taxable @ 5.5% after being manufactured/ processed with the help of Liquefied Petroleum Gas gets converted into final product sold and taxed at higher rate of 13%.

Excise & Taxation Department is merely disallowing Input Tax Credit allowable to the Hotels/ Restaurants on the purchase of Liquefied Petroleum Gas on the presumption that Liquefied Petroleum Gas are not sold by them. The officers of Excise & Taxation Department had failed to interpret and understand the Section in its true sense. Harmonious construction of both the Sections is required to .

Selling of the Liquefied Petroleum Gas is also done by the Hotels/ Restaurants though in an indirect manner as the same gets consumed while preparing the final product. When a food is served to the customer in a Hotel or Restaurant it is not only the food which is transferred to the customer but also a part of the Liquefied Petroleum Gas used in the manufacturing of such food passes on to the customer. Price paid by the customer also includes the price of the Liquefied Petroleum Gas used/ consumed in the Manufacturing/Processing of his food sold to him and due tax is charged on the same.

The sale of Liquefied Petroleum Gas by the Hotel or Restaurant to the customers though in an indirect manner takes the Hotels/ Restaurants out of the ambits of Section 13(5) of the Act and makes the Hotels/ Restaurants sellers of Liquefied Petroleum Gas.

Section 13(5) is also against the very spirit of the VAT Act where in the purchaser of the goods is entitled to the claim Input Tax Credit on the purchases made by him for converting them into the final product and reduce the same from his final liability. Denial of the Input Tax Credit on one hand and charging the tax on the final product amounts to taxing the same commodity twice within the same Act and the same is bad in law and in violation of Article 14 & 19(1) (g) of the Constitution of India.

Hon’ble Supreme Court of India in case of Commercial Taxation Officer, Udaipur Vs Rajasthan Taxchem Ltd. where the question was “Whether diesel can be called raw material in the manufacture of polyester yarn” held that Diesel is a raw material for the respondents which is being purchased and utilized in the process of manufacturing by way of generation of power through which the plant and machinery are being operated. Hon’ble Allahabad High Court in the case of Commissioner of Trade tax Vs Goel India, Moradabad held fuel or lubricants used in the manufacture or processing of goods for sale or in mining or in generation or distribution of electricity or any other form of power would be entitled to pay concessional tax under the provisions of Sec. 8(3)(b) of the CST Act, 1956. Diesel oil and other fuels in such circumstances held to be part of manufacturing process as has been held in M/s VAM Organics Chemicals Vs State of UP. However SLP against the judgment of the Hon’ble Jurisdictional High Court is pending in the Hon’ble Supreme Court of India wherein the Hon’ble Jurisdictional High Court has held that Dealer is not eligible to claim Input Tax Credit on purchase of Diesel used in generation of electric power for captive use in the factory.

The need of the hour is to get the things sought either by persuading the Government by way of representation or by challenging the vires of the same before the Hon’ble High Court so as to lessen some burden of tax on the final consumer as he is the one who is the ultimate sufferer.