Safiya Malik

In a judgement concerning transitional tax claims, the High Court of Andhra Pradesh at Amaravati, Division Bench comprising Justice Ninala Jayasurya and Justice Tarlada Rajasekhar Rao, set aside the disallowance of Input Tax Credit (ITC) for purchases of coolers by a soft drink manufacturer during the transition from the Andhra Pradesh General Sales Tax (APGST) regime to the Value Added Tax (VAT) system. The court held that the amendment inserting clause (n) in Rule 20(2) of the AP VAT Rules could not be applied retrospectively to deny ITC. However, the court upheld the rejection of ITC related to broken glass bottles used in the business.

The petitioner, M/s Pearl Beverages Ltd., a manufacturer of soft drinks under the brand name Pepsi, claimed Input Tax Credit under the transitional provisions of the AP VAT Act for taxes paid on the opening stock of glass bottles, coolers, stores, and spares as of April 1, 2005. These purchases were made during the financial year 2004-05 under the APGST Act.

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The claim included:

• Rs. 12,65,333/- on coolers

• Rs. 9,75,085/- on glass bottles

• Rs. 1,98,224/- on stores and spares

The Assistant Commissioner (CT), Large Tax Payer Unit, Guntur, disallowed these claims through proceedings dated 06.09.2025. The authority reasoned that coolers were not meant for resale, glass bottle breakages amounted to Rs. 1 crore, and stores and spares did not fall within eligible goods under Section 13 of the AP VAT Act.

In response, the petitioner submitted a detailed representation dated 27.09.2005, asserting:

• Under Section 13(1) and Section 2(6) of the AP VAT Act, any goods used in business, including capital goods, raw materials, and consumables, qualify for ITC.

• Coolers are integral to the business as soft drinks must be served chilled.

• Glass bottles, though subject to breakage, are akin to raw materials, and taxes are paid even on scrap sales.

• Stores and spares are essential goods for operations and not listed in the negative list under Rule 20(2).

Despite these submissions, the Commercial Tax Officer rejected the claim via proceedings dated 27.10.2005. He held that coolers are not capital goods or consumables and are transferred to retail outlets for value. The breakage amount on bottles was attributed to older stocks under a misapplied FIFO principle, disallowing Rs. 58,505/- from the claim. The ITC on stores and spares was rejected in full.

The petitioner appealed to the Appellate Deputy Commissioner (CT), Guntur, who allowed:

• The cooler claim, stating that the business cannot function without them.

• The glass bottle claim for Rs. 58,085/-, citing proper records and excise duty accounting.

However, a suo moto revision by the Commissioner of Commercial Taxes led to a show cause notice dated 12.08.2008. The Joint Commissioner (CT) (Legal), through an order dated 24.03.2009, disallowed both claims. The authority cited Rule 20(2)(n), which excluded refrigerators, coolers, and freezers from ITC for soft drink manufacturers, holding the provision applicable retrospectively.

This order was challenged before the AP VAT Appellate Tribunal, which dismissed the appeal on 25.04.2024. The Tribunal held:

• The coolers were not used in manufacturing premises and fell under the negative list.

• Breakages were not shown in closing stock, and ITC was not admissible.

The petitioner subsequently filed Tax Revision Case No.10 of 2024 under Section 22(1) of the APGST Act, read with Sections 34(1) and 80 of the AP VAT Act.

The Division Bench focused on whether clause (n) of Rule 20(2) of the AP VAT Rules could be applied retrospectively. The petitioner relied on Asian Peroxide Ltd. v. State of AP (39 VST 529), where retrospective application of clause (h) was struck down.

"The challenge in this tax revision case is that the delegated legislation of amendment to Rule 20(2)(n)... denying the ITC for coolers would not affect retrospectively," the court recorded.

The Bench observed: "A clarificatory amendment will have retrospective effect, but not a declaratory amendment. As seen from the amendment, it was not a clarificatory amendment, it was a declaratory and effective."

On the right to claim ITC, the court held: "The right accrued to the assessee on the date when they paid the tax on the materials or the inputs and the right would continue until the facility available there gets worked out or until the goods existed."

Addressing Rule 20(2)(n), the Bench stated: "According to a plain reading of Rule 20(2) of the AP VAT Rules, 2005, the revision petitioner, M/s Pearl Beverages, is entitled to and eligible for the Input Tax Credit (ITC) on refrigerators, coolers, and deep freezers... The amendment is not clarifying... a vested right cannot be taken away retrospectively."

However, on the issue of glass bottle breakages, the court disagreed with the petitioner. It held:"Where in the case on hand the petitioner/assessee who purchased glass bottles... for storing of the liquid which does not fall under the manufacturing of another product."

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Further, on the FIFO principle: "There is no evidence the product moved of stock those remaining in stock and they are invoiced."

Thus, the court stated: "The second issue is answered against the revision petitioner."

The court directed: "The impugned order under challenge of the Sales Tax Appellate Tribunal is hereby set aside to the extent indicated above. The amount paid by the revision petitioner is refundable to the extent of input tax credit on the coolers and refrigerators. The revision petitioner is entitled to the input tax credit for the coolers and refrigerators, while the rest of the claim is rejected."

It concluded: "The Tax Revision Case is, therefore, allowed partly. There shall be no order as to costs."

Advocates Representing the Parties:

For the Petitioner: A. Sarveswara Rao

For the Respondent: GP FOR COMMERCIAL TAX 

Case Title: M/s. Pearl Beverages Ltd. v. The State of Andhra Pradesh

Neutral Citation: APHC010379452024

Case Number: TAX REVISION CASE No.10 of 2024

Bench: Justice Ninala Jayasurya and Justice Tarlada Rajasekhar Rao

[Read/Download order]