No Input Tax Credit for Exempted Sales to Exporters: Supreme Court

The Supreme Court of India heard the case of Neha Enterprises Vs Commissioner, Commercial Tax, Lucknow, Uttar Pradesh, concerning the denial of input tax credit to a registered dealer under the Uttar Pradesh Value Added Tax Act, 2008 (the Act). The appeal filed against the orders of the assessing officer, appellate authorities, Tribunal, and High Court, which had rejected the input tax credit availed by the dealer for the assessment year 2010-11.

The dealer-appellant had accounted for sales against the granting of Form-E to a manufacturer-exporter to the extent of Rs. 1,89,35,100/- and claimed input tax credit of Rs. 6,42,260/-. The assessing officer had initially permitted the credit but subsequently disallowed it under Section 28 of the Act on the ground that the dealer was not eligible for input tax credit on the payment of purchase tax on sales to the manufacturer-exporter.

The assessing officer and the following appellate authorities have depended on Section 7(c) of the Act and the proviso to Section 13(7) of the Act, which provides that input tax credit cannot be availed for transactions falling under Section 7(c). Notifications issued on 24.02.2010 and 25.03.2010 were also taken into account, which dealt with the procedure for handling turnover under Section 7(c) exempting direct sale of raw materials to manufacturer-exporters on filing Form-E but not allowing input tax credit to the sellers.

The High Court also dismissed the dealer's revision, affirming orders of appellate authorities & Tribunal that Section 13(7) clearly reflects the ineligibility for input tax credit on goods which are exempted under Section 7(c).

**The Apex Court found it difficult to give effect to the appellant's argument based on the intent or policy behind the notifications to grant input tax credit, stating that in the face of the clear statutory expression in Section 13(7), the prohibition is a statutory mandate.

Supreme Court ultimately dismissed the appeal, upholding the consistent view of appellate authorities, Tribunal and of the High Court by observing that the subject turnover admittedly fell under Section 7(c) of the Act read with the relevant notifications. Which meant that no tax was levied on the sale to the manufacturer-exporter.

**The Apex Court emphasized the clear language of Section 13(7) of the Act, which explicitly prohibits the facility of input tax credit to a dealer regarding the purchase of any goods where the sale of such goods by the dealer is exempt from tax under Section 7(c). **

Supreme Court, thus noted that the scheme of availing input tax credit is specifically determined by Section 13 of the Act. Therefore, a dealer availing the benefit under Section 7(c) is presumed to be aware of the extent to which input tax credit could be claimed.

Coram: Justice Pankaj Mithal and Justice V. N Bhatt
Date of Judgment: 09-04-2025