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Azam Laminators (P) Ltd. Vs. The Secretary to Govt. and Anr.

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  • Decided on : Jun-10-2008

LegalCrystal Citation : legalcrystal.com/722678

Court : Kerala

Reported in : 2008(2)KLJ572

Judge : J.B. Koshy and; P.N. Ravindran, JJ.

Subject : Sales Tax/VAT

Decided On : Jun-10-2008

Acts : Kerala Value Added Tax Act, 2003 - Sections 6, 6(1), 59(4), 94 and 94(2); Central Excise Tariff Act; Customs Tariff Act, 1975; Kerala Finance Act, 2006

Case Number : Other Tax Appeal No. 7 of 2008 and W.P. (C) No. 25214 of 2007-B

Appellant : Azam Laminators (P) Ltd.

Respondent : The Secretary to Govt. and Anr.

Advocate for Appellant : Nalini Chidambaram, Sr. Adv.,; Raju Joseph,; Joseph Kodi

Advocate for Respondent : Mohammed Rafiq, GP

Cases Referred :
Reckitt Benckiser (Indian) Ltd. v. Commissioner

Excerpt:
The appellants cut the betel nut into small pieces and thereafter essential/non-essential oils like menthol and sweetening agents are added to make the commodity in question. Addition of essential oils like menthol, sweetening agents etc. 2007ECR418(SC) held that process of cutting betel nut into small pieces and addition of essential and non-essential oils like menthol, sweetening agents etc. In our view, the Commissioner of Customs and Central Excise (Appeals) has correctly analysed the factual as well as the legal situation in arriving at the conclusion that the process of cutting betel nuts into small pieces and addition of essential/non-essential oils, menthol, sweetening agent etc. It is further contended that under the Rules of Interpretation of Schedules, classification under the Customs Tariff Act, 1975 and HSN numbers should be taken as the guideline and the Commissioner failed to consider the Rules of Interpretation of the Schedules to the KVAT Act, 2003 while passing the impugned order. It is well settled law that excise duty is applicable only on the manufacture of goods and mere processing cannot be equated to manufacture. The Commissioner has not considered the arguments based on the HSN code as well as the Rules of Interpretation. The important point which we need to stress is that neither the Commissioner nor the High Court has considered the Rules of Interpretation of the Schedules to the Kerala VAT Act, 2003. The High Court has failed to consider the effect of the omission of the figure '3808' by Kerala Finance Act, 2006. In our view, a vital aspect is lost sight of. So, the clarification under Section 94 of the KVAT Act has got far reaching consequences and it cannot be issued like in the impugned order without even considering the nature of the commodity sold.

Judgment:

J.B. Koshy, J.

1. The question to be decided in these cases is whether scented betel/arecanut sold by the appellants is taxable at 4% under Entry No. 2 of the Third schedule to the Kerala Value Added Tax Act, 2003 (in short 'KVAT Act') or under entry 75(2) of S.R.O. No. 82 of 2006 attracting tax at 12.5%. The Betel Nut Manufacturers' Association preferred an application under Section 94 of the KVAT Act before the Commissioner of Commercial Taxes seeking clarification on the rate of tax applicable to the above product. By impugned order No. C3/25772/07/CT dated 14-1-2008, the Commissioner clarified that the commodity is classified under entry 75(2) of S.R.O. No. 82 of 2006 and will attract tax at the rate of 12.5%. That is questioned by the appellants herein. The matter was argued on behalf of the appellant by Smt. Nalini Chidambaram, Senior Advocate and Shri Raju Joseph, Advocate. Special Standing Counsel for Taxes, Shri Mohammed Rafiz presented the arguments for the Revenue. The process of manufacturing of the commodity in question, namely, scented arecnut, is not in dispute. The appellants cut the betel nut into small pieces and thereafter essential/non-essential oils like menthol and sweetening agents are added to make the commodity in question. Addition of essential oils like menthol, sweetening agents etc. is for preservation and for improvement of appearance. They sell it as betel nut or scented betel nut and not as supari as the cover indicates. Ext. P2 (W.P.(C) No. 25214 of 2007) certificate of analysis shows that 'Nizam Betel nut' marketed by the petitioner in W.P.(C) No. 25214 of 2007 contains more than 85% betel nut apart from 5.12% Edible Oil and 8.24% Sugar/Glucose and very minimal quantities of Saccharin, Menthol, Flavour and Cardamom. Port Health Officer also certified in Ext. P2 as follows:

Even the addition of ingredients at above ratio to the Betel nut for additional preservation and to improve the appearance, the essential character is not changed and it retains its original character.



It is also contended that the commodity known in the market as 'supari' is entirely different from the commodity in question. It is also contended by the appellants that the Apex Court in Crane Beter Nut Powder Works v. Commissioner of Customs & Central Excise, Tirupathi and Anr. : 2007ECR418(SC) held that process of cutting betel nut into small pieces and addition of essential and non-essential oils like menthol, sweetening agents etc. does not result in manufacture and betel nut remains as betel nut and, therefore, it will fall squarely under Chapter 8 in sub-heading 0801.00 of the Central Excise Tariff Act. The Apex Court held as follows:

Despite the elaborate submissions made on behalf of the respective parties, the issue involved in this appeal boils down to the question as to whether by crushing betel nuts and processing them with spices and oils, a new product could be said to have come into being which attracted duty separately under the Schedule to the Tariff Act.

In our view, the process of manufacture employed by the appellant-company did not change the nature of the end product, which in the words of the Tribunal, was that in the end product the 'betel nut remains a betel nut'. The said observation of the Tribunal depicts the status of the product prior to manufacture and thereafter. In those circumstances, the views expressed in the D.C.M. General Mills Ltd. (supra) and the passage from the American Judgment (supra) become meaningful. The observation that manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation is apposite to the situation at hand. The process involved in the manufacture of sweetened betel nut pieces does not result in the manufacture of a new product as the end product continues to retain its original character though in a modified form.

In our view, the Commissioner of Customs and Central Excise (Appeals) has correctly analysed the factual as well as the legal situation in arriving at the conclusion that the process of cutting betel nuts into small pieces and addition of essential/non-essential oils, menthol, sweetening agent etc. did not result in a new and distinct product having a different character and use.



Notwithstanding the fact that in Chapter 21 betel nut product supari is classified separately, the commodity is classified as betel nut only, it is contended. According to the appellant, the commodity will come squarely under Entry No. 2 of the Third Schedule to the KVAT Act as arecanut powder and arecanut. Since it is covered under the Third Schedule, one need not look into the notification for classifying the goods. Only if the goods are not coming under the First, Second or the Third schedule, goods can be classified by notification. It is further contended that under the Rules of Interpretation of Schedules, classification under the Customs Tariff Act, 1975 and HSN numbers should be taken as the guideline and the Commissioner failed to consider the Rules of Interpretation of the Schedules to the KVAT Act, 2003 while passing the impugned order. Finally, it was pointed out that in neighbouring States, the same commodity is taxed at 4%. They also produced the clarification issued under Section 59(4) of the Karnataka Value Added Tax Act, 2003 that the product is taxable at 4% as per Entry 7 of the Third Schedule to the Karnataka Value Added Tax Act, 2003.

2. Before meeting the arguments, we will consider the relevant entries in the Act. Sl. No. 2 of the Third Schedule to the KVAT Act reads as follows:

---------------------------------------------Sl. No. Description of goods HSN Code---------------------------------------------2. Arecanut powder and arecanut(1) Arecanut powder 0802.90.13(2) Arecanut 0802.90.11-----------------------------------------------

Section 6 of the KVAT Act provides that goods specified in the First Schedule are not taxable and goods specified in the Second and Third Schedules are taxable at the rates specified therein and at all points of sale, Clause (d) of Section 6(1) says that in case of goods not falling under Schedules I to m, the rate of tax is 12.5% at all points of sale and that the State Government may notify a list of goods taxable at the rate of 12.5%. So, the goods notified at 12.5% and included in the Schedule to the notification are goods not classifiable under Schedules I to HI. So, the main point to be considered is whether the commodity in question can be classified under Entry No. 2 of the Third Schedule. In that case, the rate of (ax is only 4%. To consider that question one has to look into the statutory Rules of Interpretation. Rules of Interpretation of Schedules to the KVAT Act read as follows:



The commodities in the schedules are allotted with Code Numbers, which are developed by the International Customs Organisation as Harmonised System of Nomenclature (HSN) and adopted by the Customs Tariff Act, 1975.However, there are certain entries in the schedules for which HSN numbers should be given the same meaning as given in the Customs Tariff Act, 1975. Those commodities, which are not given with HSN Number, should be interpreted, as the case may be, in common parlance or commercial parlance. While interpreting a commodity, if any inconsistency is observed between the meaning of a commodity without HSN Number and the meaning of a commodity with HSN Number, the commodity should be interpreted by including it in that entry which is having the HSN Number.

HSN Numbers are allotted in the Schedules either in four digits or in six digits or in eight digits. The four digit numbers indicate the heading in the HSN classification, six digit numbers indicate the sub-heading and the eight digit numbers indicate the specific commodity number. While interpreting the commodities in the Schedule, the following guidelines may be followed:

i) The Commodities which are given four digit HSN Number shall include all those commodities coming under that heading of the HSN.

ii) The commodities which arc given six digit HSN Number shall include all those commodities coming under mat sub-heading of the HSN.

iii) The commodities which are given eight digit HSN Number shall mean that commodity which bears that HSN Number.

iv) As an exception to the above rules, there are certain entries in the Schedules, which bear the eight digit numbers but the four digit heading numbers of such commodities arc given for some other commodities mentioned elsewhere. In such cases, the four digit heading shall include only those commodities under that heading excluding mat commodity for which the eight digit numbers are given. Similar cases are available in the case of six digit numbers also. In such cases the above principle shall apply mutatis mutandis....

In the Third Schedule to the KVAT Act in Sl. No. 2 against item Nos. 1 and 2, eight digit numbers are used. Therefore, HSN numbers and Customs clarification are relevant here. Note 3 in Chapter 8 of the Central Excise Tariff Act reads as follows:

3. Dried fruit or dried nuts of this Chapter may be partially rehydrated, or treated for the following purposes.:

(a) for additional preservation or stabilisation (forexample, by moderate heat teatment, sulphuring, the addition of sorbic acid or potassium sorbate);

(b) to improve or maintain their appearance (for example, by the addition of vegetable oil or small quantities of glucose syrup), provided that they retain the character of dried fruit or dried nuts.

'Betel nut' classified as follows:

------------------------------------------------------------------------Tariff item Description of goods Unit Rate of dutyStandard Preferential Areas------------------------------------------------------------------------Betel Nuts:08029011 Whole Kg. 100% 90%08029012 Split Kg. 100% 90%08029013 Ground Kg. 100% 90% 08029019 Other Kg. 100% 90%08019090 Other Kg. 100% 90%------------------------------------------------------------------------

The contention of the appellant is that their product will come under 0802 9013 ground betel nut or betel nut powder and their product will not come under Chapter 21. In Chapter 21 'Pan masala' and 'betel nut product known as 'supari'' are classified as follows:

-----------------------------------------------------------------------Tariff item Description of goods Unit Rate of dutyStandard Referential Areas-----------------------------------------------------------------------21069020 Pan masala Kg. 150% --21069030 Betel nut productknown as 'supari; Kg. 150% ------------------------------------------------------------------------

It is submitted that in the notification issued under Section 6(1)(d) of the KVAT Act, item 75 reads as follows:

-------------------------------------------------------------Sl. No. Description of goods HSN Code-------------------------------------------------------------75 Pan masala, pan chutney, scented supari and the lile(1) Pan masala 2106.90.20(2) Supari including scented supari 2106.90.30 (3) Chuma for pan 2106.90.70 (4) Pan chutney NA------------------------------------------------------------

It is contended that what is manufactured by the appellant will squarely come under the HSN Code 08029013 and, therefore, will not come under HSN Code 2106.90.30. But, 'pan masala' and 'betel nut product known as supari' are defined in the Supplementary Notes in Chapter 21 of the Central Excise Tariff Act as follows:

1. In this Chapter, 'Pan masala' means any preparation containing betel nuts and any one or more of the following ingredients, namely; lime, katha (catechu) but not tobacco whether or not containing any other ingredient, such as cardamom, copra or menthol.

2. In this Chapter, 'betel nut product known as supari' means any preparation. containing betel nuts, but not containing any one or more of the following ingredients, namely: lime, katha (catechu) and tobacco whether or not containing any other ingredients, such as cardamom, copra or menthol.

It is the appellants's case that what is sold is betel nut as such or, at the maximum, a betel nut product and the product manufactured by the appellant is not a preparation containing betel nut It is a preparation of betel nut and the prominent ingredient (more than 85%) is betel nut alone and it is contended that grinding of the betel nut into small pieces (ground betel nut) and addition of small quantity of ingredients for preservation and sending it for marketing will not make it a mere preparation containing betel nut and what they manufacture is not supari under Sl. No. 75 of the schedule to the notification issued under Section 6(1)(d) of KVAT Act or item No. 2106.90.30 in Chapter 21 of the Central Excise Tariff Act, but, only betel nut powder or ground betel nut. According to the learned Government Pleader, it was correctly found in the impugned order that merely because it was held in Crane Betel Nut Powder case (supra) that no manufacturing process is involved in marketing the product and it is not excisable as a separate commodity, sales-tax liability cannot be waived. Even though arguments were placed based on the HSN Code, in that case, the Hon'ble Supreme Court only held that the process of cutting the betel nuts into small pieces and addition of essential oils etc. does not amount to manufacture and, therefore, it is not a new product other than betel nut. It is well settled law that excise duty is applicable only on the manufacture of goods and mere processing cannot be equated to manufacture. A new and distinct product should emerge by way of manufacturing process to attract excise duty as held by the Supreme Court in Union of India and Anr. v. Delhi Cloth and General Mills Co. Ltd. : 1973ECR56(SC) . The Supreme Court in the above decision only stated that by the process of converting arecanut into scented arecanut there is no change in the end product and the end product remains betel nut itself. But, the real contention of the appellant is that their product is coming under item No. 2 of Third Schedule (HSN Code 0802.90.13) as arecanut powder or ground arecanut and no new product is manufactured so as to take it out of the Third Schedule. Only if it cannot be classified under Third Schedule, one need look into the notification, it is contended. It is was pointed out by the appellant that whether a new marketable product was manufactured or not, the ratio of the decision in Crane Betel Nut Powder case (supra) is an answer and they also relied on the decision of the Hon'ble Supreme Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Pio Food Packers 1980 KLT 624.

3. We have gone through the impugned order. The Commissioner has not considered the arguments based on the HSN code as well as the Rules of Interpretation. In a recent case. Reckitt Benckiser (Indian) Ltd. v. Commissioner, Commercial Taxes 2008 (2) KLT 604 SC arising from the KVAT Act while considering the question of clarification of mosquito repellants, the Supreme Court held as follows:

The important point which we need to stress is that neither the Commissioner nor the High Court has considered the Rules of Interpretation of the Schedules to the Kerala VAT Act, 2003. The High Court has failed to consider the effect of the omission of the figure '3808' by Kerala Finance Act, 2006. In our view, a vital aspect is lost sight of. In the present case, the High Court has held that looking to me HSN Code 3808.10.91 repellant for insects such as filed, mosquito, has a direct relation to Heading 3808. At the same time, the High Court has held that HSN Code 8516.79.20 of the Customs Tariff Act which deals with electrical or electronic devices for repelling insects fall under HSN Code 8516 and, looking at that HSN Code, the High Court has held that Code 3808.10.91 has to be read along with Heading 3808. The basic controversy, therefore, which arose before the High Court was whether the above items fell within the sub-Heading 3808.10.91. In this connection, we find that Kerala VAT Act is aligned with Customs Tariff which in turn is aligned with HSN and consequently each product in question was required to be seen in the context of HSN Code and judgments based thereon.

4. We are of the view that the contention of the appellants was not properly considered by the Commissioner while issuing the impugned order. It is true that what is sold is not whole arecanut or betel nut coming under 0802.90.11, but whether it will come under Arecanut Powder (Sl. No. 2, item No. 1 of the Third Schedule to the KVAT Act) coming under Code 0802.90.13 was not considered by the Commissioner. This has to be considered in the background of the Statutory rales of Intepretaion. HSN Code, nature of ingredients of the commodity in question etc. If the commodity in question can be classified under the Third Schedule, it cannot be notified again. There is no application of mind on that aspect by the Commissioner. There is no mention of the ingredients of the commodity in the impugned order. A clarification under Section 94 of the KVAT Act can be issued by the Commissioner only after due consideration of all aspects of the matter. Section 94(2) of the KVAT Act provides that it can be issued only after hearing and consideration of the evidence and Sub-section (5) states that the clarification is binding on all assessing officers subordinate to the Commissioner including Deputy Commissioner Appeals. So, the clarification under Section 94 of the KVAT Act has got far reaching consequences and it cannot be issued like in the impugned order without even considering the nature of the commodity sold. Therefore, in our opinion, the matter has to be re-examined and that process shall be done by the Commissioner as expeditiously as possible, complying with the requirements of Section 94 of the KVAT Act. We are not expressing any opinion in the matter as it is for the Commissioner to decide the matter afresh after considering and examining the product and all aspects of the matter and the relevant tariff entry read with the Rules of Interpretation. Till a decision is taken, penalty proceedings and assessment proceedings shall be kept in abeyance. The Commissioner shall decide the matter as expeditiously as possible.

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