IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HON'BLE THE CHIEF JUSTICE MR.J.CHELAMESWAR & THE HONOURABLE MR. JUSTICE ANTONY DOMINIC TUESDAY, THE 12TH APRIL 2011 / 22ND CHAITHRA 1933 OT.Rev.No. 13 of 2009() ----------------------- TAVAT.272/2008 of KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM .................... REVISION PETITIONER/RESPONDENT/REVENUE ------------------------------------------------------------------------- STATE OF KERALA, REPRESENTED BY JOINT COMMISSIONER (LAW), COMMERCIAL TAXES, ERNAKULAM. BY SPL..GOVERNMENT PLEADER SRI.VINOD CHANDRAN RESPONDENT(S): APPELLANT/ASSESSEE ----------------------------------------------------------- M/S.JYOTHY LABORATORIES LTD., KADANASSERY P.O., THRISSUR DISTRICT. ADV. SRI.N.NAGARESH FOR R1 SRI.SHAJI THOMAS PORKKATTIL FOR R1 SRI.BINU PAUL FOR R1 SRI.T.V.VINU FOR R1 SRI.G.SIVADAS THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 1/04/2011, ALONG WITH OTRV NO. 16 OF 2009 THE COURT ON 12/4/2011 PASSED THE FOLLOWING: J.CHELAMESWAR, C.J. & ANTONY DOMINIC, J. =============================== O.T.Rev. Nos. 13 & 16 OF 2009 ======================== Dated this the 12th day of April, 2011 O R D E R Antony Dominic, J. These revision petitions have been filed by the State of Kerala aggrieved by the orders passed by the Kerala Value Added Tax Appellate Tribunal in its order in T.A.(VAT) Nos.272/2008 and 314/2008. 2. The facts which led to the filing of these revision petitions are that the respondent herein, M/s.Jyothy Laboratories Ltd., a manufacturer and dealer of detergents, whiteners etc., are also manufacturing and dealing in products known as “Ujala Supreme” and “Ujala Stiff and Shine”. In respect of Ujala Supreme, in the returns filed for the year 2005-06, the assessee collected and paid tax on the sales turn over for the month April and May 2005 @12.5% and for the subsequent period @4% only. In so far as Ujala Stiff and Shine is concerned, the product was launched in June 2005 and 4% tax was collected and paid. 3. The Assessing Officer issued Annexure A notice under Section 22(3) of the KVAT Act, on the basis that the aforesaid O.T.(Rev) Nos.13 & 16/2009 : 2 : products of the assessee were laundry brighteners and proposing to classify the products under Entry 27 of SRO 82/2006 tax and levy tax @12.5%. On receipt of the notice, the assessee filed its objections contending that Ujala Supreme is the brand name under which it is marketing “Acid Violet” a Synthetic Organic dye, classified under HSN Code 3204.12.94, and that the same was used as a fabric whitener. Similarly, with respect to Ujala Stiff and Shine also, it was contended to be a brand name, under which Vinyl Acetate diluted in water which is used as a fabric stiffner and classified under HSN Code 3905, was marketed. According to the respondent, applying the Rules of Interpretation of Schedules to the Act, the products are liable to be assessed only @4%, these being covered by Entry Nos.155(8)(d) and 118(5) of the list A to the 3rd Schedule. 4. The Assessing Officer rejected the contentions of the assessee and issued Annexure B proceedings holding that Ujala Supreme is liable to be classified as a laundry brightener under Entry 27 of SRO 82/2006. It was also held that Ujala Stiff and Shine is to be included under the residual Entry No.103 of SRO 82/2006. On this reasoning, Assessing Officer held that the O.T.(Rev) Nos.13 & 16/2009 : 3 : products are liable for tax @12.5% and completed the assessment for the year 2005-06 to the best of his judgment, levying interest under Section 31 and double the amount as penalty under Section 22 of the KVAT Act. First appeal filed by the assessee was disposed of by Annexure C order, confirming the classification of the products as held by the Assessing Officer. However, the appellate authority held that there was no finding that there was any willful suppression of turn over, and in the absence of mens rea, the penalty levied was unjustified and ordered deletion of the penalty levied. Against the first appellate order, the assessee filed STA 272/2008 and to the extent penalty was deleted by the First Appellate Authority, State also filed STA 314/2008 before the Appellate Tribunal. 5. Both the appeals were disposed of by the Appellate Tribunal by Annexure D common order. In so far as Appeal No.272/2008 filed by the assessee is concerned, the Tribunal by majority held, that the products are liable to be classified under the headings related to Acid Violet Dye and Polymer of Vinyl Acetate included in list to the 3rd Schedule and assessable to tax @4%. In so far as Appeal No.314/2008 filed by the State is O.T.(Rev) Nos.13 & 16/2009 : 4 : concerned, the Appeal was dismissed. 6. Aggrieved by the aforesaid common order passed by the Tribunal, the State of Kerala have filed these revision petitions and the questions of law framed are the following:- O.T.Rev.No.13/2009(against TA (VAT No.272/2008) “A) Ought not the Tribunal have held that Ujala Supreme and Ujala Stiff and Shine, manufactured by the assessee, cannot be levied tax as a industrial input under List A of the KVAT Act since the same is a finished product and cannot be used as a raw material or industrial input? B) Ought not the Tribunal have held that Ujala Supreme is a laundry brightener assessable to tax under Entry 27 of SRO 82/2006 and Ujala Stiff and Shine is assessable to tax under Entry 103 of SRO 82/2006? C) Has not the Tribunal grievously erred in deciding the issue without reference to the definition of manufacture under the KVAT Act and is not the finding of the Tribunal perverse in the facts and circumstances of the case?” O.T.(Rev) No.16/2009(against TA (VAT No.314/2008) “Is not the order of the tribunal confirming the order of the first appellate authority deleting the penalty levied by the assessing officer against the provisions of section 22 of the Kerala Value Added Tax Act and is not the same perverse in the facts and circumstances of the case?” 7. We heard the learned Government Pleader and the O.T.(Rev) Nos.13 & 16/2009 : 5 : learned Counsel for the respondent assessee. The learned Government Pleader relied on the Division Bench judgment of this Court in M.P.Agencies v. State of Kerala {(2010) 18 KTR 82 (Ker)} and contended that the issues raised in O.T.Rev.No.13/2009 have been already held in favour of the State. On the other hand, the learned counsel for the respondent contended that many relevant questions were not considered by the Bench while deciding the case of M.P.Agencies (supra). He also explained the process of manufacture, relied on the Rules of Interpretation the HSN Codes, Annexures 9, 10 and 13 Test Reports and also the judgment of the Gauhati High Court, which accepted the plea of the assessee. In substance what he contended was that the products are covered by the entires 155 (8)(d) and 118(5) in List A to 3rd Schedule to the Act and liable for tax only @4%. 8. We have carefully considered the contentions raised by both sides and have gone through the records produced by both sides. Since according to the learned Government Pleader the issues raised in O.T. Rev. 13/2009 are fully covered by the judgment in M.P.Agencies case (supra), we shall first refer to O.T.(Rev) Nos.13 & 16/2009 : 6 : the said judgment. 9. The judgment in M.P.Agencies case (supra) shows that the appellant therein are the wholesale distributor of the respondent assessee. They made an application to the Commissioner of Commercial Taxes for certification on the rate of tax applicable to the products of the respondent viz., Ujala Supreme and Ujala Stiff and Shine. Commissioner held that the products fell under Entry 27 of Notification SRO 82/2006 issued under Section 6(1)(d) of the Act. Against this order, M.P.Agencies filed an appeal to this Court contending that Ujala Supreme is an item falling under Entry 155 (8)(d) of the 3rd Schedule to the Act and that Ujala Stiff and Shine falls under Entry 118(5) of the 3rd Schedule. This Court set aside the order of the Commission and remanded the matter for fresh consideration. 10. The matter was reconsidered and in the judgment, the Division Bench has stated about the fresh order passed by the Commissioner thus; The Commissioner after considering all the materials furnished by the appellant and after hearing them issued Annexure 5 order again clarifying that both the items do not fall under the above stated entries in the Third Schedule O.T.(Rev) Nos.13 & 16/2009 : 7 : and instead the items would fall under residuary Entry 103 of SRO 82/2006 taxable at the rate of 12.5 per cent. The only deviation made in Annexure 5 order from the earlier order of the Commissioner is that though he found that laundry brighteners are among the items covered by the heading of Entry 27 in Notification SRO 82/2006, no such item is provided in any of the sub-headings with HSN Code No. The Commissioner therefore held that both the items fall under the residuary Entry 103 of SRO 82/2006 which provides for rate of tax on items not covered by any of the entries in the list provided in the notification or by any Entry of any of the Schedules to the Act. Accordingly appellant's claim that the items fall under the two entries of Third Schedule referred above was turned down by the Commissioner. It is against this order the appellant has filed this appeal. 11. It was against the above order of the Commissioner that M/s.M.P.Agencies filed the appeal. 12. As far as Ujala Supreme is concerned, the Division Bench dealt with the contentions in the following manner:- 3.Ujala Supreme: The appellant's claim is that the item falls under Entry 155(8) (d) of the Third Schedule with HSN Code No.3204.12.94, which covers “Acid Violets”. We have to therefore consider whether Ujala Supreme sold by the appellant is an 'Acid Violet” falling under the said Entry and if so, it cannot be treated as covered by notification issued under Section 6 (1)(d) of the Act. Appellant's case is that Ujala Supreme is made by the manufacturer, namely, Jyothy Laboratories by just diluting Acid Violet Paste with water. They have produced test O.T.(Rev) Nos.13 & 16/2009 : 8 : reports. Annexure 7 and 8, issued by SGS India Private Ltd, which show that on analysis of the product, namely, Ujala Supreme, the presence of AV49, that is Acid Violet Paste, is only less than one per cent and balance 99% (exactly 99.01) is water. Annexure 9 is the test report of Acid Violet Paste and Ujala Supreme obtained by the appellant from the Institute of Chemical Technology, Matunga, Mumbai, wherein they have stated as follows: The acid violet paste (referred as “AVP” hereafter) supplied to us confirms to Acid Violet 49, a synthetic dye classified into acid dye class which is used for the colouration of silk/wool at elevated temperatures in the presence of acid. “AVP” is uniform and having standard strength which is formulated and prepared as ready fur use. The “AVP” as well as “Ujala” purchased from the market are subjected to instrumental analysis HPTLC (High Performance Think Layer Chromatography) and the results are observed as below: 1. Acid Violet 49 is a synthetic organic Dye which can be used by fabric Dyeing industry for dyeing silk/wool and other protein fibres. The dyeing of these fabrics takes place under an elevated temperature in presence of acid only. 2. The diluted acid blue/violet dyes are being used in the fabric finishing industries for imparting brightness (bluish/purple tint) to white fabrics. 3. As such “Ujala” cannot be used as a dye or a colouring matter as it is because, the fundamental principle of Acid class of dyes is that they do not show any substantivity to cotton and at the most they tint the fabric. Entry 155 falls under List A of Third Schedule to O.T.(Rev) Nos.13 & 16/2009 : 9 : the Act covering “Industrial Inputs and Packing Materials”. It is obvious from the Group Heading of the Schedule that all items given thereunder including Acid Violet falling under Entry 155(8) (d) are essentially industrial inputs. The finding of the Commissioner of Commercial Taxes in the impugned order is that Acid Violet Paste is purchased by the Jyothy Laboratories, a SSI unit, engaged in the manufacture of various products, including Ujala Supreme and the same is used to produce Ujala Supreme. In our view, the finding of the Commissioner is consistent with the appellant's own case that industrial inputs, namely, acid Violet Paste, is purchased by the Jyothy Laboratories and is converted into final product, namely, “Ujala Supreme” for use as a fabric whitener. Appellant has produced several orders of the Central Excise Tribunal and Commissioners of Central Excise in support of their contention that there is no manufacture involved for payment of excise duty in the conversion of AVP into Ujala Supreme, which according to the appellant, is extremely diluted form of AVP. However, from the test report, namely, Annexure 9, extracted above, it is clear that AVP is a synthetic organic dye for fabric dyeing and is used for dyeing silk/wool and dyeing of these fabrics can take place at elevated temperature in the presence of acid only. However, the further finding of the Institute is that product sold by the appellant, namely, Ujala Supreme, cannot be used as a dye or a colouring matter. Even though appellant contend that there is no manufacture in the conversion of Acid Violet Paste to Ujala Supreme, we find from the opinion expressed by the Institute of Chemical Technology in their above report that by virtue of the extreme dilution to below one per cent, AVP lost its identity and therefore Ujala Supreme can no longer be regarded as AVP from which it is made. In fact the test result produced by the O.T.(Rev) Nos.13 & 16/2009 : 10 : appellant itself shows that the product has lost it's property as a dyeing agent, once it is subject to conversion process by Jyothy Laboratories to Ujala Supreme. In the impugned order, the Commissioner of Commercial Taxes, has also come to the conclusion that irrespective of whether there is manufacture or not for the purpose of deciding on the liability for excise duty, the product sold by the appellant, namely, Ujala Supreme can no longer be identified with the raw material, namely AVP, from which it is made. Appellant has relied on several court decisions including that of the Supreme Court in Deputy Commissioner Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Pio Food Packers, (1980) 6 ELT 343(SC), Commissioner vs. Titanium Equipment & Anode Mfg. Co.Ltd., (2003) 153 E.L.T.A298 (SC) and Sterling Foods v. The State of Karnataka and another, (1986) 63 STC 239 (SC). It is worthwhile to mention the observation of the Supreme Court in the last above referred decision, wherein the Supreme Court has stated as follows: “...It is necessary to point out that it is not every processing that brings about change in the character and identity of a commodity. The nature and extent of processing may vary from one case to another and indeed there may be several stages of processing and perhaps different kinds of processing at each stage. With each process suffered, the original commodity experiences change. But it is only when the change or a series of changes take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct commodity that it can be said that a new commodity, distinct from the original, has come into being.” Applying the above test laid down by the O.T.(Rev) Nos.13 & 16/2009 : 11 : Supreme Court, we are of the view that Ujala Supreme, which is admittedly used as laundry whitener for clothes, cannot be treated as AVP falling under Entry 155 (8) (d) under List “A” of Third Schedule covering “Industrial inputs and Packing materials” because Ujala Supreme, the product made can no longer be identified with AVP in any manner and in the conversion process it has lost it's property as an industrial input used for dyeing silk and woolen material. Moreover in the process of conversion, there is 99% erosion in the concentration of AVP leaving only, an insignificant percentage of the item in water with different properties and different use. In other words, what is done is that an industrial raw material which is used as a dyeing agent for silk and woolen clothes at high temperature is converted into a laundry whitener. Obviously 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. Since in the process,the original item lost it's identity and a new commodity with distinct composition, identity and use emerged, the appellant's contention that the item should be treated as the original commodity for classification cannot be accepted. We therefore confirm the order of the Commissioner rejecting the appellant's claim that the item falls under Entry 155(8)(d) of List A of Third Schedule to the Act with HSN Code No.3204.12.94. 4. The next question to be considered is whether the Commissioner is justified in classifying the item under Entry 103 of the Notification, SRO 82/2006. Appellant has no case that the item falls under any of the entries of second or Third Schedule other than Entry 155(8)(d) of the Third Schedule which we have O.T.(Rev) Nos.13 & 16/2009 : 12 : found against. Since the item falls outside second or third Schedule, rate of tax can be prescribed by the Government in items of Section 6(1)(d) of the Act. The only notification issued in this regard is SRO 82/2006 which in Entry 27 provides for rate of tax for “fabric whiteners”. We have found that appellant did not deny that the only purpose of the item, namely, Ujala Supreme, is for use as fabric whitener. However, even though Commissioner initially held that the item is a fabric whitener coming under Entry 27, after remand by this Court, he found that even though the Group Heading contains Fabric Whitener, none of the sub-entries covers fabric whitener. Therefore the Commissioner held that the item falls under residuary entry, namely, Entry 103 of SRO 82/2006. We are in complete agreement with this finding of the Commissioner because Entry 103 is a residuary entry covering items which are not covered by any of the entries in Second or Third Schedule or any of the specific entries in the said notification. We therefore uphold Annexure 5 order of the Commissioner of Commercial Taxes on this issue. 13. Similarly, the contentions of M/s.M.P.Agencies regarding Ujala Stiff and Shine have been dealt with by the Division Bench as follows:- 5. Ujala Stiff and Shine: The next issue pertains to rate of tax on Ujala Stiff and Shine. According to the appellant, the item falls under Entry 118(5) of List A of Third Schedule to the Act providing for “Industrial inputs and Packing materials”. Admittedly Ujala Stiff and Shine is a laundry item used to impart crispness and shining of clothes. In common parlance it is an agent which is a substitute for starch used for O.T.(Rev) Nos.13 & 16/2009 : 13 : giving stiffness to clothes and is applied after washing the clothes. Appellant's contention is that the item falls under Entry 118(5) of Third Schedule. Group heading of Entry 118 provides for Plastic granules, plastic powder and master batches”. Sub-entry(5) provides for rate of tax for polymers of vinyl acetate or of other vinyl esters, in primary forms; other vinyl polymers in primary forms Annexure 17 and 18 are test reports obtained by the appellant from Shriram Institute for Industrial Research. In Annexure 18 the test result of Ujala Stiff and Shine is given as follows: Sl. No. Tests Results 01. 02. 03. 04. Polymerized vinyl acetate content, % w/w Water content, % w/w Solid content, %w/w Fragrance (Rose) 42.98 55.80 43.80 Present According to the appellant, the processing done by Jyothy Laboratories which purchases raw materials and converts the same to Ujala Stiff and Shine, does not involve any manufacturing activity. However, appellant does not deny the contents of the product certified by the Laboratory which shows that product is different from raw materials and it has a rose fragrance. We do not know on what basis appellant can contend that an industrial raw material, namely, polymerized vinyl acetate retains it's character even after subjecting it to the process, whether it be manufacture or not, leading to production of a different item with different use and purpose. The contention raised by the appellant that common parlance or commercial parlance test cannot be applied and identification of the products should be with HSN O.T.(Rev) Nos.13 & 16/2009 : 14 : Code No., does not apply to these two products because these two products as such cannot be regarded as original item from which these are made. In fact all the orders produced by the appellant are of the Central Excise Tribunal, and Commissioners of Central excise, to show that the supplier namely, Jyothy Laboratories is not engaged in any manufacture, and so much so they have no liability for excise duty. We do not think we should consider this argument for the purpose of deciding classification done by the Commissioner of Commercial Taxes for the purpose of payment of sales tax under the Act.; Even though classification of items under VAT regime is also based on HSN numbers the same does not mean that the products made out of items with HSN numbers should be classified as the original items with same HSN number. 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. Our findings above rendered with regard to Ujala Supreme squarely apply to Ujala Stiff and Shine also. We are therefore of the view that the Commissioner of Commercial Taxes is perfectly justified in classifying the two items under residuary Entry 103 of SRO 82/2006. 14. We have extracted the relevant paragraphs of the judgment only to indicate that all the contentions which were urged before us and the materials relied on by the respondent/assessee were considered by the Division Bench and the only subsequent development relied on by the assessee is the judgment of the Gauhati High Court in WP(C) No.5428/2010, a O.T.(Rev) Nos.13 & 16/2009 : 15 : copy of which has been produced as Annexure 14 to the counter affidavit. Having considered the judgment of this Court in M.P.Agencies Case (supra), we fully agree with the principles laid down by this Court and therefore we hold that the conclusions of the Tribunal in its order in TA (VAT) No.272/2008 are erroneous and illegal and is set aside. On this basis, we answer the questions of law in O.T.Rev.No.13/2009 in favour of the revision petitioner, the State of Kerala and against the assessee and restore the order of the first Appellate Authority. 15. Coming to O.T.Rev.No.16/2009, the revision is filed against the Tribunal's order in T.A(VAT) No.314/08 confirming the First Appellate Authority's order, deleting the penalty imposed on the respondent. The reason stated by both the appellate authorities for such an order, is their concurrent finding that, if there were reasons for levying penalty, the Assessing Authority should have passed a separate order of penalty. It was also held that in the absence of a finding that there was a willful and purposeful suppression of facts or turn over and that the assessee had acted with malafide intention to evade tax, the Assessing Authority was not justified in penalizing the respondent. The O.T.(Rev) Nos.13 & 16/2009 : 16 : revision petitioner has not placed any materials or urged any substantial contention persuading us to conclude that these findings of the authorities are illegal for any reason. In fact, the judgment