Classification under VAT - HSN Applicable? Supreme Court Classic Judgement - Assessee wins appeal, but no refund of tax paid
THE Supreme Court yesterday delivered a masterly judgement on Classification. Though the issue was classification under Kerala VAT, the judgement extensively covered Customs, Central Excise and HSN.
The issue was classification of "Ujala Supreme" and "Ujala Stiff and Shine". The Kerala High Court opined that an acid base industrial raw material cannot be used as a laundry whitener and it has to be necessarily subjected to processing or manufacture to make it fit for use as a laundry whitener which is exactly what is done by Jyothy Laboratories, the supplier of the items to the appellant and since in the process, the original item lost its identity and a new commodity with distinct composition, identity and use emerged, and accordingly rejected the appellant's contention that the item should be treated as the original commodity for classification.
The High Court repelled the contention that the common parlance or commercial parlance test cannot be applied and identification of the products should be in accord with HSN Code No., for the said two products cannot be regarded as original items from which they are made, more so, for the purpose of payment of VAT under the Kerala VAT Act. The High Court opined that even though the classification of items under VAT regime is also based on HSN numbers, it does not mean that the products made out of items with HSN numbers should be classified as the original items with same HSN number, and when the products made from industrial raw material are commercially different with distinct use and purpose, it cannot be treated as the raw material from which it is made. On the said foundation it ruled that the two items can be classified under the residuary Entry 103 of SRO 82/2006.
Thus the appeal reached the Supreme Court.
The Supreme Court elaborately dealt with the issue taking help from some decided cases.
Primacy of HSN: The Supreme Court explained, the commodities mentioned in the schedules have been allotted code numbers developed by International Customs Organisation, which is known as Harmonised System of Nomenclature (HSN). The same has been adopted in the Customs Tariff Act, 1975. Where the commodities have been given HSN numbers, the same meaning would be given for classification under the Customs Tariff Act, 1975. The rules accept that for certain entries, HSN numbers are not given. Where commodities are not ascribed any HSN number, they would be interpreted as understood in common or commercial parlance. In case of inconsistency between meaning of a commodity without HSN number and a commodity with HSN number, the commodity without HSN number should be interpreted by including the commodity in that entry, which has been given HSN number. Thus, primacy is given to HSN number classification and adoption/interpretation of HSN classification under the Customs Tariff Act, 1975 and any inconsistency or debate would be decided with the commodity being categorized against the HSN number. As is seen, general guidelines have been given on interpretation of four digit, six digit and eight digit HSN numbers. The rules also provided for resolution and conflict between the commodities with four digit, six digit and eight digit HSN number, when they overlap. It can be emphatically stated that the word "other" used in sub-entries or sub-sub-entries have to be construed by adopting the doctrine of ejusdem generis.
HSN Code and VAT: The Supreme Court had in an earlier case held that in cases where HSN code number is indicated against the tariff item mentioned in the Third Schedule, then one has to go by the provisions of the HSN as adopted by the Customs Tariff Act, 1975. If that is the case, then, one needs to interpret the entries in the Third Schedule not only in the light of the entries in the Customs Tariff Act, 1975 but also the judgments applicable to the corresponding entries in the Customs Tariff Act.
Thus the Supreme Court held that in interpreting the VAT schedule, one has to follow not only the entries in Customs Tariff Act, 1975 but also the judgments applicable to the corresponding entries in the Customs Tariff Act.
Central Excise and HSN: In the Woodcraft Products case, the Supreme Court had observed, It is significant, as expressly stated, in the Statement of Objects and Reasons, that the Central Excise Tariffs are based on the HSN and the internationally accepted nomenclature was taken into account to "reduce disputes on account of tariff classification". Accordingly, for resolving any dispute relating to tariff classification, a safe guide is the internationally accepted nomenclature emerging from the HSN. This being the expressly acknowledged basis of the structure of Central Excise Tariff in the Act and the tariff classification made therein, in case of any doubt the HSN is a safe guide for ascertaining the true meaning of any expression used in the Act. The ISI Glossary of Terms has a different purpose and, therefore, the specific purpose of tariff classification for which Central Excise Tariff Act, 1985, must be preferred, in case of any difference between the meaning of the expression given in the HSN and the meaning of that term given in the Glossary of Terms of the ISI.
In another case the Supreme Court had observed, "Further, the scheme of the Central Excise Tariff is based on Harmonised System of Nomenclature (for short "HSN") and the explanatory notes thereto. Therefore, HSN along with the explanatory notes provides a safe guide for interpretation of an entry."
Central Excise Tariff and VAT: The Supreme Court observed, "The submissions of learned counsel for the State that the decisions under the Excise Act would have no play, for they deal with the issue of the manufacture, does not commend acceptance. It is pertinent to state here that the question of manufacture is not relevant for the purposes of 2003 Act (VAT). What is really relevant is the classification based upon the HSN number. The decisions rendered by the CESTAT have decided on the classification which is founded upon the HSN number."
On the case at hand, the Supreme Court observed, It has been laid down that after devolution with water the goods continue to remain classified under the same HSN number. This means that the goods remain in list "A" of the Third Schedule. It may be noted that the position would have been totally different had the goods in question been separately and specifically itemized in SRO number 82/ 2006 dated 21st January 2006. The goods which are specifically mentioned in any of the entries of the said SRO, would be chargeable to tax @ 12.5%. But that is not the lis here, for the Revenue has included the goods in the residuary Entry 103 and the said entry, by no stretch of reasoning, can be made applicable."
Case won but NO REFUND: The Supreme Court set aside the High Court order allowing the appeals, but held that if any assessee-appellant has paid the amount of VAT to the State Government, they will not be entitled to get any refund of the said amount .
This judgement was delivered yesterday and we bring it to you today. For the next few hours, we will be the only site carrying the judgement.