High Court · 2012

5. Respondent was issued an audit assessment notice dated 21-05-200 7 u/s 36 of the Act asking it to produce documentary evidence in support of the returns filed by it for the period 01-05-2005 to 31-03-2006. It complied with th e notice and submitted the necessary documents and details. Thereafter, a show c ause notice dated 25-06-2007 was issued by the concerned Superintendent of Taxes alleging that the respondent had paid VAT @ 4% instead of 12.5% for the sale of the product. In response to the notice, respondent appeared before the concerne d departmental authority and explained as to why the product is exigible to VAT @4%. However, the departmental authority did not accept such explanation and pas sed order dated 02-08-2007 rejecting the claim of the respondent, who thereafter filed appeal before the appellate authority contending that the product is exig ible to VAT @ 4%. The appellate authority by order dated 27-11-2007 upheld the c ontention and held that the product is taxable @ 4% and not 12.5%. Revenue filed revision petition against the appellate order before the Commissioner. The revi sional authority i.e. the Commissioner passed order dated 27-06-2008 affirming t he findings of the appellate authority holding that the product by addition of w ater with AVP does not amount to manufacture and that the product retains the or iginal characteristics of AVP. Subsequent thereto, the Additional Commissioner of Taxes, Assam 6. by his letter dated 26-05-2010 required the respondent to appear before the Comm issioner for clarification regarding rate of tax on the product, which was sough t for by a departmental Superintendent. Respondent appeared before the Commissio ner and the matter was heard. Thereafter, the Commissioner passed order dated 11 -08-2010 under section 105 of the Act. Detail reference to the order dated 11-08 -2010 would be made in the subsequent part of the judgment. At this stage, suffi ce it to say, the Commissioner held that the product cannot be treated as AVP as by dilution it loses the characteristics of AVP and that the product does not f all under any Entry in the 1st, 2nd, 3rd and 4th schedule to the Act, thus it wi ll be covered under the Entry at Serial No.(1) of the 5th schedule to the Act an d therefore taxable @ 12.5%.

7. The appellants who were the respondents in the writ proceeding r esisted the writ petition by filing counter affidavit. The stand taken in the co unter affidavit was that the respondent was taking contradictory position. To av ail concessions under the concession scheme framed in terms of the industrial po licy it had contended that it had been manufacturing the product by using AVP as raw material. Now, it has made a somersault by asserting that the said product does not involve any manufacturing process and is only a dilution of AVP alone. According to the department, the product marketed by the respondent is understoo d as a fabric whitener which is distinctly different from AVP, which is known in the market as synthetic organic dye used for dyeing of fabrics of silk wool at elevated temperature in the presence of acid. The department placed reliance on a judgment of the Kerala High Court in the case of M.P. Agencies -vs- State of K erala reported in (2010) 28 VST 44 (Ker) and contended that the product is comme rcially different from AVP and even assuming that it is diluted AVP, as the prod uct contains 99.02@ of water, it is completely transformed in identity, use and marketability, thus it ceases to be a dye. Therefore, the rate of tax applicable on synthetic organic dye used for dyeing fabrics of silk wool was not applicabl e to the product. Respondent’s classification of the product at Entry No.114 of part-C of the 2nd schedule to the Act was disputed as erroneous.

8. Learned Single Judge after due consideration held that the produ ct is nothing but a diluted form of AVP and is entitled to be catalogued in Entr y No.114 of schedule II C to the Act with corresponding rate of duty at 4%. In v iew of the above finding, the order of the Commissioner dated 11-08-2010 was set aside and quashed.

9. Heard Mr. K.N. Choudhury, learned Senior Additional Advocate Gen eral, Assam for the appellant State. Also heard Mr. M.P. Devnath, learned Couns el for the respondent.

10. Counsel for the appellant state submits that the product of the respondent is not identifiable with AVP and there is distinction between the two . According to him, the product is commercially different from AVP with distinct characteristics and utility and therefore a manufacturing process is undertaken in the conversion of AVP into the product, which infact was the initial stand o f the respondent itself while claiming exemption under the concession scheme. He therefore contends that the commodity having ceased to be a dye, which is lodge d in Entry 114 of Schedule II C to the Act, the Commissioner was justified in ta xing the product as a residuary item under the 5th schedule to the Act. He also places reliance on the decision of the Kerala High Court in M.P. Agencies (supra ). He therefore submits that the appellate Court should intervene in the matter and restore the order of the Commissioner.

11. Learned Counsel for the respondent on the other hand submits tha t the learned Single Judge had elaborately examined all aspects of the matter an d thereafter had arrived at a reasonable conclusion. Asserting that there is no error or infirmity in the view taken by the learned Single Judge, learned Counse l for the respondent supports the judgment of the learned Single Judge and praye d for dismissal of the appeal.

12. Court. The submissions made have received the due consideration of the

13. The issue involved in this case is as to whether the product of the respondent is substantially the same as its original material AVP or has it undergone a manufacturing process to transform itself into a commercially distin ct identifiable end product. Corollary to that issue is the question of inclusio n of the product in Entry 114 of the schedule-II C to the Act attracting a lower rate of tax at 4%.

14. Before proceeding further, reference may be made to Entry 114 of schedule II C to the Act. The 2nd schedule to the Act contains a list of goods which are taxable at 4%. Part-C of 2nd schedule furnishes the list of industrial inputs and packing materials. The description of Entry 114 of schedule-II C wit h corresponding heading No. of 32.04 in the Central Excise Tariff Act, 1985 is a s under :- (cid:28)Synthetic organic colouring matter, whether or not chemically defined; preparat ions based on synthetic organic colouring matter as specified in Note 3 of Chapt er 32 of the First Schedule of the Central Excise Tariff Act, 1985; synthetic or ganic products of a kind used as fluorescent brightening agents or as luminophor es, whether or not chemically defined excluding catechu or gambiar. (cid:29)

15. te of tax at 12.5%. All residuary items are placed in the 5th schedule attracting ra

16. lly based on the decision of the Kerala High Court in M.P. Agencies (supra). The order of the Commissioner dated 11-08-2010 appears to be who

17. In the Kerala case it was held that in the product (cid:28)Ujala Suprem e (cid:29), acid violet was present in less than 1% and that the balance 99% was water. The Kerala High Court upheld the finding of the jurisdictional Commissioner that (cid:28)Ujala Supreme (cid:29) is a finished product used as a fabric whitener, emerging from the application of the industrial input i.e. AVP and that (cid:28)Ujala Supreme (cid:29) as a p roduct was completely distinct from AVP.

18. We may now refer to the order of the Commissioner dated 11-08-20 10, which was based entirely on the decision of the Kerala High Court referred t o above. As has already been noticed earlier, the Commissioner passed the order dated 11-08-2010 under Section 105 of the Act on an application filed by the Sup erintendent of Taxes, Guwahati Unit-B seeking clarification on the rate of tax o n the respondent’s product referring to an earlier decision of the Commissioner wherein he had held that preparation of (cid:28)Ujala Supreme (cid:29) by addition of water wit h AVP did not amount to manufacture as the product retained the original charact eristics. Relying on the decision in M.P. Agencies, the Commissioner held that (cid:28) Ujala Supreme (cid:29) cannot be treated as AVP and in view of such a finding, clarified that since the product did not fall under any Entry in the 1st, 2nd, 3rd and 4t h schedule to the Act, it would be covered under the Entry at Serial No.1 of the 5th schedule to the Act attracting the prescribed higher rate of tax.

19. ld as follows :- Learned Single Judge after an in-depth analysis of the matter he (cid:28)18. Before adverting to the merit of the contentious projections, the responden ts’ cavil on the petitioner’s bonafide demands attention. The petitioner does no t deny to have availed the benefit of tax/fiscal incentives under the Assam Indu strial Policy, 2003 at the relevant point of time. The policy was formulated amo ngst others to ensure industrial development in the industrially backward region s of the State and to generate more employment opportunities. It offered a packa ge of incentives for promotion and setting up of industrial units and revitaliza tion of sick industrial units and to promote investment in the State. The eligib ility criteria for availing the incentives offered thereunder visibly envisaged a date of commencement of commercial production of the unit concerned whether ex isting or new and a finished product was contemplated to mean and include the it em manufactured by the eligible units. Raw materials similarly were envisaged to mean and include all industrial components, intermediate goods, substances, con sumable stores including furnace oil and light diesel oil used for captive gener ating sets required in the process of manufacture and packing materials utilized for packing of finished products by an eligible unit. The applications for gran t of Eligibility Certificate and the Certificate of Entitlement with the particu lars furnished therein thus have to be judged in these perspectives. The facts pertaining to the commencement of commercial production and the manufa cture of finished products were pre-dominantly for the purpose of determining th e eligibility of the units engaged therein to avail the benefits under the polic y. The focus invariably was not on the actual process of manufacture of the good s. Though the petitioner’s present plea that Ujala Supreme is intrinsically only a diluted AVP is irreconcilable with the amalgam of the raw materials applied f or the manufacture thereof as enumerated in its application for obtaining the af orementioned certificates, in the estimate of this Court this incompatibility ip so facto, does not render the issue raised herein non examinable on the ground o f lack of its bonafide. Such a contradiction though may expose the petitioner to steps contemplated in law by the appropriate authorities, the consequence of if being non-suited therefore vis a vis the present challenge does not ensue. If i n fact, the product Ujala Supreme is only singularly diluted AVP to its extreme with no other constituent and thus ought to be included in Entry No.114 of the A ct to be assigned the corresponding HSN Code No.3204 12 94, its prospect wou ld stand jeopardized if the aforesaid anomally simpliciter is awarded a decisive primacy. There being no estoppel against law, the plea of the respondents again st the maintainability of the instant proceeding for want of bonafide of the pet itioner does not commend for acceptance. (cid:29) (cid:28) 22. That Ujala Supreme has been determined to be comprised of the following c onstituents is borne out by the relevant reports referred to in M.P.Agencies (su pra) as well laid before this Court as follows :- AV/49 Water & & & & &..99.02% & & & & &...08% The petitioner’s product is an extremely diluted form of AVP in the compositiona l context is also a finding of the Kerala High Court in M/S M.P. Agencies (Supra ). 23. The following excerpt of the certificate dated 30-08-2006 of Prof. V.R. Kan etkar, Professor and Head, Dyestuff Technology Department, University of Mumbai, Institute of Chemical Technology (Autonomous), University of Mumbai deserves to be extracted. (cid:28) The acid violate paste (referred as (cid:28)AVP (cid:29) hereafter) supplied to us co nfirms to Acid Violate 49 a synthetic organic classified into acid dye class whi ch is used for the colouration of silk wool at elevated temperatures in the pres ence of acid. (cid:28)AVP (cid:29) is uniform and having standard strength which is formulated and prepared as ready for use. The (cid:28)AVP (cid:29) as well as (cid:28)Ujala (cid:29) purchased from the m arket are subject to instrumental analysis (High Performance Thin Layer Chromato graphy) that the result are observed as below.

1. e dilution in (cid:28)Ujala (cid:29). The chemical composition of (cid:28)AVP (cid:29) and (cid:28)Ujala (cid:29) are the same except for th

2. ed form of AVP with water. It can be observed from the chromatogram that (cid:28)Ujala (cid:29) is a heavily dilut

3. As such (cid:28)Ujala (cid:29) cannot be used as a dye or a colouring matter as it is.

4. From the technical literature it can be understood that diluted acid vio late 49 is used in the fabric finishing industries for imparting brightness to w hile fabrics ( The mechanism being the fabric absorbs all the colours in the visible light and transmits the bluish / purplish tint). & &.. & &.. & &.. & &.. As per the technical report and the HPTLC report, it can be conclusively said th at Ujala is nothing but a diluted form of Acid Violet Dye. The observations of the HPTLC analysis are as follows. All the components present in diluted sample of AVP are also present in a. Ujala sample. b. No additional components are present in Ujala Sample. c. The diluted AVP samples and the Ujala sample’s spectral scans are super imposable and match exactly, which confirms that Ujala is a diluted form of AVP and chemically they both are identical. From the above analytical and technical data, it can be concluded that (cid:28)Ujala (cid:29) is only a diluted form of Acid Violate 49 with water, which has the inherent characteristics of brightening clothes and d oes not contain any other additives or optical brightening agents. The brightnes s of the fabric is increased because it absorbs all the colours in the visible l ight and transmits the bluish / purplish tint, thus hiding the yellowing of the fabrics (cid:29).

24. product - (1) (2) (3) The above extract recites the following features of the analysis of the The chemical compositions of AVP and Ujala are the same. Ujala is heavily diluted form of AVP with water. All the components present in diluted sample of AVP also exist in Ujala. No additional component is present in Ujala Ujala is a ciluted form of AVP and both are chemically identical Ujala is a diluted form of Acid Violate Paste 49 with water and has the (4) (5) (6) inherent characteristics of brightening clothes. (7) Ujala cannot used as a dye or colouring matter as it is.

25. The petitioner in paragraph D.45 has referred to a report dated 22-10-2007 (stated to be Annexure-13 in the appeal before the High Court) of Prof. V.R. Ka netkar as above providing the following clarification: (cid:28)4) Para 2, point 3 of the report dated 30th August, 2006 state that as such ’Ujala’ cannot be used as a dye or a colouring matter as it is. Ujala will impart permanent colour (dye) in the presence of acid at elevated temperature. (cid:29) On a conjoint reading of this clarification (existence and authenticity of the r eport dated 22-10-2007 not having been denied by the respondents), the absence o f dyeing efficacy of the petitioner’s product in absolute terms cannot be inferr ed. Ujala Supreme assuredly thus is a commodity which is AVP being highly dilute d with water possessing dyeing quality in the presence of acid at elevated tempe rature.

26. Axiomatically, therefore, if Ujala is identifiable with AVP though in a dil uted form and is not construed to be a commercially different product therefrom, it is classifiable under Entry 114 of the Act and relatable to HSN Number 3204 12 94 for the purpose of excise duty under the Tariff Act. If, however, it i s regarded as a new product independent of its constituent AVP irrespective of i ts end use, in absence of any other entry available to accommodate it, it is lia ble to be assessed as a residuary item contemplated under Schedule V of the Act. Admittedly, Ujala Supreme is a mixture or combination of AVP and water. Entry 1 14 of the Schedule II-C of the Act is assigned inter alia to synthetic organic c olouring matter whether or not chemically defined as well as preparation based o n synthetic organic colouring matter as specified in Note 3 of Chapter 32 of the First Schedule of the Central Excise Tariff Act, 1985. It is relatable to headi ng No.3204 in Chapter 32 of the Tariff Act dealing with (cid:28)Tannig or Dyeing Extrac ts (cid:29) Tannins and their Derivatives; Dyes, Pigments and other colouring matter; pa ints and varnishes; putty and other mastics; inks (cid:29) Note-3 of Chapter 32 as above, extends amongst other the application of heading 3204 to preparations based on colouring matter of a kind used for colouring any material or used as ingredients in the manufacture of colouring preparations. Th is head Note, however, does not apply to pigments dispersed in non-aqueous media , in liquid or paste form, of a kind used in the manufacture of paints, includin g enamels or to other preparations of heading 3212 etc. (cid:29) (cid:28) 30. Noticeably, the argument on behalf of the respondents that Ujala Supreme even if a dye, being offered for sale in form or packing for retain sale, is cov ered by heading 3212 is not based on pleadings. Such a plea is instead opposed t o the stance of the respondents that the product is shorn of any dyeing attribut e. Be that as it may, as the product is a composition of two constituents as dem onstrated by its composition, Rule 3(b) of the General Rules for Interpretation of the Harmonized System seems apposite to diagnose with certitude, its classifi cation to ascertain the rate of its exigibility to duty under the Tariff Act. Ju dged by the percentage of existence of the ingredients of the product, it cannot be gainsaid that the essential characteristics thereof would be decided by Acid Violate Paste (AVP). As it is Rule 3(b) stipulates that classification of mixtu res and composite goods consisting of different materials or made up of differen t components as well as goods put up in sets for retail sale and which cannot be classified by referring to Rule 3(a) shall be classified as if they constitute the materials or component which gave them their essential character. As Ujala S upreme is a highly diluted form of AVP in its essential character, on the applic ation of Rule 3(b) it appropriately is entitled to be catalogued in Entry 114 of Schedule II-C of the Act and qualified for HSN 3204 12 94 for determining the rate of taxability.

31. The ultimate conclusion of their Lordships in M/s M.P. Agencies contrary to the above is based on the findings of the report dated 30-08-2006 that Ujala Su preme is in capable of being used as a dye or a colouring matter and it having t hus lost that quality due to extreme dilution, can no longer be identified with AVP. The petitioner’s contention against manufacture of the product to yield a c ommodity novel in kind and distinguishable for AVP was not considered in this pr emise. On the same reasoning, the benefit of classification based on Harmonized System of Nomenclature was refused to its product. This determination with utmos t respect for the aforementioned deductions in the present adjudication cannot b e subscribed to. Not only the clarification provided in the report dated 22-10-2 007 by Prof. V.R. Karnetker neutralizing the earlier observations in the report dated 30-08-2006 that Ujala cannot be sued as a dye or a colouring matter, is of definite significance for the ultimate classification of the product, its struc tural composition as well enjoins its inclusion under Entry 114 of Schedule II-C of the Act earning for it HSN Code Number 3204 12 94 to determine its tax liability. (cid:29) (cid:28)37. On a totality of the above considerations, this Court is of the unhesitant view that the petitioner’s product (cid:28)Ujala Supreme (cid:29) is entitled to be included i n Entry 114 of Schedule II-C of the Act with corresponding rate of duty prescrib ed by HSN Code No. 3204 12 94. This Court, for the reasons recorded hereinab ove, is thus in respectful disagreement with the observations and the conclusion s recorded in M/s M.P. Agencies (Supra). The impugned order dated 11-08-2010 whe n judged by the above touchtone is thus unsustainable in law and on facts. It is thus, quashed. (cid:29)

20. We are in agreement with the line of reasoning adopted by the le arned Single Judge. The product (cid:28)Ujala Supreme (cid:29) though is a highly diluted form of AVP, as has been rightly held by the learned Single Judge, it retains the ess ential characteristics of AVP. Therefore, it cannot be said to be commercially distinct and different from the user product AVP, which is covered by Entry 114 of schedule II-C to the Act. In this respect, we may refer to the views expresse d by the Hon’ble Supreme Court in the well known case of Union of India -vs- Del hi Cloth and General Mills reported in (1963) Supp 1 SCR 586 that manufacture s ignifies bringing into existence a new substance and not merely to effect a chan ge in one. Therefore, we find no justifiable reason to accept the submission of the appellant State that the product emerges out of a manufacturing process and to place the product in the residuary category in the fifth schedule to the Act.

21. In view of the discussions made above, we are not inclined to ta ke a view different from the one taken by the learned Single Judge. Accordingly, we find no merit in the appeal. Consequently, the same stands dismissed.

22. No cost.