SKP Tax Alert
8 June 2015 | Volume 8 Issue 8
Eligibility of input credit on purchase of DFIA licence in Maharashtra
We would like to share a recent judgment delivered by the Maharashtra Sales Tax Tribunal on claiming set-off on the purchase of a Duty Free Import Authorisation (DFIA) licence in Maharashtra.
Facts in brief
In Maharashtra, set-off/credit of VAT paid is available on all purchases within the state, except for a few restricted items. One such restriction is on availing credit on the purchase of intangible goods as per Rule 54(f) of the Maharashtra Value Added Tax Rules (MVAT Rules), 2005. However, this restriction would not apply to purchases of the following:
  • Import licence, export permit or licence or quota, credit of duty entitlement pass book, Duty-free Replenishment Certificate (DFRC), SIM cards
  • Software in the hands of a dealer who is trading in software
  • Copyright that is resold within 12 months of the date of purchase
Asian Paints Ltd (the assessee) had purchased a DFIA licence from their supplier in March 2008 to enable duty-free imports of raw materials for their manufacturing operations and had claimed set-off of the VAT paid on purchase. The assessee was denied credit on the purchase of the DFIA licence by the Commissioner of Sales Tax, Mumbai, on grounds that the DFIA licence is not covered by the exclusion list prescribed by Rule 54(f) and therefore, the claim for set-off is not admissible.
The assessee made submissions that the DFIA licence should be covered under the term 'import licence' based on commercial parlance, because the term is not defined under the Maharashtra Value Added Tax Act (MVAT Act), 2002 or Rules; and accordingly, they should be allowed to claim credit. Alternatively, the assessee highlighted that the DFIA scheme was introduced as a replacement for the DFRC scheme in 2006 and since DFRC is covered under the exclusion to Rule 54(f), the benefit should be extended to the DFIA licence as well. Furthermore, the assessee pleaded that in case the argument is not accepted, the claim of credit for past periods should not be rejected due to lack of clarity on the term 'import licence'.
The adjudication authority did not accept the submissions made by the assessee. The authority stated that the meaning of import licence should not be given a wide interpretation to include the DFIA licence. With respect to the assessee's contention to treat DFRC and DFIA as one, the authority referred to the taxing entry for intangible goods i.e. entry no. 39 of Schedule C (C-39) under the MVAT Act, which notifies intangible goods. The authority stated that in this notification, entries 13 and 14 covering DFRC and DFIA were notified and recognised separately. It was argued that if the intention of the legislature would have been to treat them as the same, DFIA would have been notified as a substitute to the term DFRC and not as a separate entry. Accordingly, the authority concluded that the assessee's contention to claim credit on the DFIA licence was misplaced and should not be allowed.
The Maharashtra Sales Tax Tribunal held that DFRC and DFIA cannot be considered identical since separate notifications were issued to insert the two entries in the notification, thereby conceding a different status to each licence. Furthermore, the Tribunal observed that the DFRC licence was separately excluded from the provision of Rule 54(f); however, DFIA was covered under the Rule, making it clear that the intention was to restrict claim of credit on DFIA. Accordingly, the claim of set-off on the DFIA licence purchased was rejected and a plea for the prospective effect of disallowance was not considered.
SKP's Comments
The term 'import licence' is not defined under the MVAT Act. However, the term 'licence' is defined as per section 2(g) of the Foreign Trade (Development and Regulation) Act (FTDR Act), 1992, which states that 'licence means a licence to import or export and includes a customs clearance permit and any other permission issued or granted under this Act'. However, there is no clarity on whether such licences include DFRC/DFIA (which are governed by the Foreign Trade Policy issued under the FTDR Act).
This recent judgment has emphasised that in case of any ambiguity with regard to claiming exemptions, literal interpretation should be assigned to the wording of the statute. When a term is not defined under the statute, the meaning should not be expanded to avail benefits under this provision.
Considering the above Ruling, it is imperative that businesses evaluate/review their position on credit with regard to licences currently held by them and whether the licence can be construed as an import licence or is specifically covered for claiming credit.

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