A) ABSTRACT / HEADNOTE

The judgment in Neha Enterprises v. Commissioner, Commercial Tax, Lucknow, Uttar Pradesh addresses whether a selling dealer who effected direct sales to a manufacturer-exporter under the State notifications (via Form-E) and thereby qualified for exemption under section 7(c) of the Uttar Pradesh Value Added Tax Act, 2008 can nonetheless claim input tax credit on purchase tax paid in relation to that turnover.

The factual matrix is tightly drawn: the dealer recorded sales of Rs. 1,89,35,100/ to a manufacturer-exporter, claimed input tax credit of Rs. 6,42,260/, was initially allowed the credit by the assessing officer, and thereafter had the credit reversed under section 28 with concurrent upholding by the appellate authority, the Tribunal and the High Court.

The Supreme Court, after examining the statutory scheme notably section 7(c) (power to exempt specified sales or purchases by notification) read with the input credit provisions under section 13 and the explicit embargo in section 13(7) concluded that where sale of goods by a dealer is exempt under clause (c) of s.7, the statutory bar in s.13(7) operates to deny input tax credit to the selling dealer; therefore the reversal of credit was warranted and the appeal was dismissed.

The Court declined to import an overarching purposive exception that would allow input credit in aid of the policy to promote exports, placing primacy on the statutory text, the separate architecture for levy/exemption and credit, and the language of the proviso that explicitly curtails credit in the circumstances under consideration.

Keywords: input tax credit; section 7(c); section 13(7); Form-E; exemption notifications; Uttar Pradesh Value Added Tax Act, 2008.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The legal question in this appeal emerges at the intersection of two distinct, though related, statutory mechanisms under the Uttar Pradesh Value Added Tax Act, 2008:

(i) the power under section 7(c) to exempt specified sales or purchases by notification  employed by the State to exempt direct sales to manufacturer-exporters (implemented by notifications of 24.02.2010 and 25.03.2010 and operationalised through Form-E);

(ii) the input tax credit architecture established by section 13, governing when a dealer who pays tax on purchases may claim credit against tax payable on subsequent taxable sales.

The background facts demonstrate a common commercial arrangement in which sellers supply raw materials/spares/packing to manufacturer-exporters and, pursuant to administrative instructions, complete the prescribed declaration formalities, yet the statutory treatment bifurcates the exemption from tax at the point of sale from the availability of input credit to the selling dealer.

The appellant-dealer availed the Form-E route for sales totalling Rs. 1,89,35,100/ and sought input credit of Rs. 6,42,260/. The assessing officer initially allowed the credit but reversed the position under section 28; the appellate edifice (first appellate authority, Tribunal and High Court) uniformly affirmed the reversal, prompting the present appeal to the Supreme Court.

The State’s policy rationale behind s.7(c) notifications to facilitate exports and relieve manufacturer-exporters of tax burden sits uneasily with the seller’s claim that refusal of input credit undermines the same policy by leaving the seller with an effective tax cost; the seller urged a purposive reading of s.13 to preserve credit.

The Court, however, scrutinised the statutory scheme and admonished that while policy and intention matter, clear and express textual limitations, especially in a fiscal statute where levy and credit are conceptually discrete, should control the outcome. In consequence, the Court focused on the express embargo in section 13(7) which, on its plain words, prohibits input credit where the sale is exempt under s.7(c), a statutory limit that overrides a purposive balancing in favour of the dealer.

D) FACTS OF THE CASE

The material facts are succinct and admitted between the parties: the appellant is a registered dealer under the State VAT Act who filed returns for assessment year 2010-11 recording sales to a manufacturer-exporter amounting to Rs. 1,89,35,100/ effected through the prescribed declaration Form-E, and concurrently claimed input tax credit aggregating Rs. 6,42,260/.

The tax authorities initially allowed the claimed credit; however, in a subsequent assessment order passed under section 28 the assessing authority reversed that allowance and disallowed the input tax credit.

The department’s action was premised on the view that the subject sales were covered by the State notification issued under section 7(c) dated 24.02.2010, together with the operational directions of 25.03.2010 relating to Form-E, and that section 13(7) of the Act contains an explicit bar on allowing input tax credit where the sale by the dealer is exempt under section 7(c).

The dealer appealed: the first appellate authority dismissed the appeal on 22.07.2013, the Tribunal affirmed the order on 10.09.2013 and the High Court, in revision, dismissed the petition on 24.11.2014 — all courts accepting that the combined effect of s.7(c) exemption and the express prohibition in s.13(7) disentitled the selling dealer to the claimed input credit.

The appellant contended before the Supreme Court that the notifications were intended to encourage manufacturer-exporters and that denial of input credit to sellers was contrary to that policy; alternately the appellant urged a purposive reading of s.13(1) so as to preserve credit despite s.7(c) exemption.

The revenue resisted, submitting that the statutory text was unambiguous and that s.13(7) circumscribes credit when the sale is exempt under s.7(c)  a position consistently accepted by the lower authorities. The Supreme Court analysed the statutory scheme, the notifications and the interplay between levy/exemption and the input credit regime, culminating in dismissal of the appeal.

E) LEGAL ISSUES RAISED

1. Whether a dealer who effects direct sale to a manufacturer-exporter under notification issued under section 7(c) and records such sale on the basis of Form-E can claim input tax credit under section 13(1) of the Uttar Pradesh Value Added Tax Act, 2008, notwithstanding the express bar contained in section 13(7)?

2. Whether the policy objective underlying the State’s notification to promote manufacturer-exporters can be read into section 13 to permit input tax credit to the selling dealer despite the textual prohibition in section 13(7)?

3. What is the correct statutory approach to harmonise the separate concepts of exemption from levy (s.7(c)) and input tax credit entitlement (s.13) where both apply to the same commercial transaction?

F) PETITIONER / APPELLANT’S ARGUMENTS

The appellant advanced two principal lines of contention.

First, it argued that the State’s notifications under s.7(c) were designed to encourage manufacturer-exporters and reduce tax impediments to export activity; accordingly, denying input tax credit to the selling dealer runs counter to that policy as it leaves the seller bearing the purchase tax cost, which in turn diminishes the economic effect of the export facilitation and creates friction in trade. The counsel urged that a purposive construction of section 13 would permit the dealer to claim input tax credit where the purchased goods are ultimately sold to a manufacturer-exporter under Form-E, so as to give effect to the export-promotion objective embedded in the notification scheme.

Second, the appellant contended that section 13(1) contemplates allowance of credit where conditions are met and that the facts of this case satisfy the said conditions; relying on the chronological and practical operation of the notifications and the assessing officer’s initial allowance, the appellant urged that the reversal was unsustainable because the dealer had acted within the administrative mechanism provided by the department (i.e., filing Form-E) and thus ought to be accorded the credit available under section 13(1). The appellant pressed for an interpretative approach that reads the provisions together to avoid a result that would render the export-facilitation notification hollow in commercial effect for the seller.

G) RESPONDENT’S ARGUMENTS

The revenue’s response was grounded in textual fidelity and statutory architecture. It maintained that the notification under section 7(c) operates to exempt the subject turnover from levy and collection of tax and that section 13(7) in express terms prevents a dealer from claiming input tax credit where the sale by the dealer is exempt under clause (c) of section 7.

The respondent emphasised that credit and exemption are distinct legal concepts in a value-added tax regime and that the legislature has deliberately framed s.13(7) as an embargo applicable to precisely the class of sales covered by s.7(c) notifications. The Department further submitted that tax statutes must be interpreted by reference to their plain language and that where the language is clear and unambiguous the Court should not rewrite or dilute the legislative mandate to accommodate broader policy arguments.

It was argued that administrative instructions (notifications and circulars guiding Form-E compliance) cannot eclipse or override the statutory prohibition embodied in s.13(7). Consequently, the reversal of the initially allowed credit was justified and the concurrent findings of the lower authorities merited affirmation.

H) JUDGEMENT

The Supreme Court framed the controversy as one of statutory construction and the interplay between exemption and credit. The Court noted the undisputed factual matrix: sales effected by the dealer under Form-E to a manufacturer-exporter and the claimed input credit. It methodically reproduced the operative text of section 7 (power to exempt particular sales/purchases by notification) and section 13 (input tax credit framework), including the explicit sub-section 13(7) that forbids input tax credit where the dealer’s sale is exempt under clause (c) of section 7.

The Court observed that the notifications of 24.02.2010 and 25.03.2010 implemented the legislative power under s.7(c) for direct sale to or direct purchase by manufacturer-exporters and prescribed Form-E procedures. Turning to statutory architecture, the Court emphasised that the scheme of VAT contemplates distinct legal constructs  taxable event, taxable person, levy, exemption and credit  and that each must be respected in their statutory boundaries.

The judgment rejected the appellant’s appeal to policy and purposive interpretation to bridge the textual gap; it held that policy cannot be used to contravene an express statutory prohibition where the legislature has chosen to circumscribe the credit by s.13(7). The Court reasoned that if the legislature had meant to allow input credit for sales exempted under s.7(c) it could have stated so; that omission is indicative of legislative choice.

The Court therefore found no error in the assessing officer’s reversal and affirmed the concurrent orders of the lower authorities. The appeal was dismissed with no order as to costs. The Court’s analysis is careful to treat s.7(c) exemption and s.13(7) prohibition as complementary facets of a single statutory design in which certain exemptions are trade-promoting but do not translate automatically into credit entitlements for the seller.

a. RATIO DECIDENDI

The decisive legal principle in the case is that where the sale of goods by a dealer is exempt from tax under clause (c) of section 7 of the Uttar Pradesh Value Added Tax Act, 2008, the dealer is barred from claiming input tax credit in respect of the purchase of those goods by virtue of section 13(7). The Court anchored its conclusion on textual interpretation: s.7(c) creates a statutory exemption by notification; s.13(1) sets out the general mechanism for allowance of input credit; and s.13(7) contains a specific exception to the input credit regime that applies when s.7(c) exemption has been invoked.

The ratio therefore rests on the primacy of the specific statutory prohibition in s.13(7) over any general grant of credit, and on the separation of the concepts of exemption from levy and availability of input credit. The Court held that because the legislature expressly denied input credit in certain circumstances, administrative policy or purposive readings cannot be permitted to nullify the statutory bar. The ratio is thus textual and hierarchical: specific statutory prohibition controls over general entitlement.

b. OBITER DICTA 

While the Court’s disposition is anchored in text, it made several observations of persuasive significance that amount to obiter guidance. The Court noted the legitimacy of governmental policy to encourage exporters through tax exemptions but clarified that such policy must operate within legislative parameters.

It further observed that administrative mechanisms like Form-E and departmental circulars can facilitate compliance and identify beneficiaries, but cannot be read to expand statutory entitlements beyond what the statute permits. The Court also reflected on tax jurisprudence principles that distinct elements taxable person, taxable event and credit are deliberately demarcated to prevent cross-subsidies and to preserve fiscal neutrality, implying that permitting credit in the instant scenario could create unintended fiscal consequences.

These comments are cautionary: they encourage the Executive and Legislature to calibrate export facilitation measures if the economic policy requires sellers to be relieved of purchase tax burdens, but they do not alter the statutory position. Such observations guide future legislative or administrative action but do not form part of the binding ratio.

c. GUIDELINES 

The Court’s decision contains practical legal guidelines which, while founded on the statutory text, are useful for authorities and dealers:

(i) When a sale is exempt under s.7(c) by notification, assessing officers must treat the exemption and the question of input credit as separate inquiries and determine credit availability in light of s.13(7).

(ii) Administrative notifications and operational forms like Form-E identify beneficiaries and procedure for claiming exemption but do not, by themselves, create or expand input credit rights beyond statutory allowance.

(iii) Dealers claiming input credit must satisfy the precise conditions of s.13(1) and ensure the transaction is not within any statutory embargo such as s.13(7); documentary compliance under departmental circulars does not substitute for statutory entitlement.

(iv) Where policy considerations suggest relief for sellers in the export supply chain, recourse is to the legislature or to explicit administrative concessions consistent with the statute, not to judicial rewriting of clear statutory exclusions. These guidelines clarify enforcement practice and the limits of purposive interpretation in fiscal statutes.

I) CONCLUSION & COMMENTS

The judgment is a clear affirmation of textual statutory interpretation in the indirect tax domain: an express statutory prohibition on input credit cannot be overridden by administrative policy or by purposive readings that would expand credit entitlement.

The Court balanced the economic policy aims of promoting exports against the statutes’ carefully drawn fiscal architecture and rightly (within the bounds of judicial function) deferred to the legislature for any corrective measure if the policy objectives require sellers to be relieved of purchase tax burdens. Practically, the decision signals to dealers and tax administrators that Form-E based exemptions under s.7(c) will not, absent explicit legislative provision, generate input tax credit rights for the selling dealer; thus commercial parties must factor the statutory incidence when negotiating commercial prices and when structuring supply chains.

The judgment also suggests administrative clarity: if the State wishes exporters’ suppliers to be able to claim credit, it must either refrain from exempting sales at the seller’s end or expressly permit credit while exempting the purchaser. From a jurisprudential viewpoint, the Court’s approach reinforces the rule that fiscal statutes with clear language will be applied as written and that policy cannot be used to rewrite statutory exclusions; any perceived harshness in result remains a matter for policy and legislative amendment rather than judicial intervention. The appeal is therefore dismissed in consonance with the statutory scheme and the consistent findings of the lower authorities.

J) REFERENCES

a. Important Cases Referred

i. Neha Enterprises v. Commissioner, Commercial Tax, Lucknow, Uttar Pradesh, Civil Appeal No. 6553 of 2016 (S.C. Apr. 9, 2025) 5 S.C.R. 475.

b. Important Statutes Referred

i. Uttar Pradesh Value Added Tax Act, 2008 (U.P. Act No. 5 of 2008), particularly s.7(c), s.13(1) and s.13(7); Notifications dated 24.02.2010 and 25.03.2010 relating to Form-E.