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Karnataka High Court · body

2016 DIGILAW 46 (KAR)

A. P. S. Industries v. State of Karnataka

2016-01-13

ANAND BYRAREDDY

body2016
ORDER : Heard the learned counsel for the petitioner and the learned Government Advocate. 2. The petitioner has challenged the notification No.FD 197 CSL 2005(6), Bangalore, dated 30.04.2005, as amended by notification No.FD 316 CSL 2005(II), Bangalore, dated 05.08.2005, which is issued by respondent No.1, as discriminatory and violative of Article 14 of the Constitution and Clarification No.KSA.CR.25/12-13 dated 31.05.2012 issued by the 2respondent, as it contravenes the provisions of Entry No.67 of the third Schedule to the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as the ‘KVAT Act’) and also consequential reassessment orders dated 12.01.2015 passed by respondent No.4 under Section 39(2) read with Sections 36(1) and 72(2) of the KVAT Act along with the demand notices dated 12.01.2015 for the period 2010-11 and 2011-12. 3. The petitioner is engaged in the manufacture and sale of Lead Sub Oxide (also known as Lead Oxide Grey). The Lead Sub Oxide manufactured by the petitioner is claimed to be not a final product sold to the ultimate consumer, but is an ‘industrial input’ used in the manufacture of battery plates. According to the petitioner, Lead Sub Oxide is formed in the process of converting solid lead into lead powder in a ball mill furnace. The conversion happens due to surface friction. When surfaces in contact move relative to each other, the friction between the two surfaces converts solid lead into powdered lead. The powdered lead is used in the battery manufacturing industry to manufacture electrodes such as anode and cathode for new Batteries to store and generate energy. Any metal, when it is exposed to atmosphere, will react to oxygen and forms oxides. Similarly, the lead powder when exposed to atmosphere will react to oxygen and form oxides. There is no oxygen specially supplied to the ball mill furnace to convert solid lead into lead powder to form Lead Sub Oxides. Therefore, the petitioner by undertaking the above process has converted the solid lead into lead powder and when the same exposed to atmosphere, has reacted to oxygen and form oxides. There is no oxygen specifically supplied to the ball mill furnace to convert solid lead into lead powder to form Lead Sub Oxides. 4. Therefore, the petitioner by undertaking the above process has converted the solid lead into lead powder and when the same exposed to atmosphere, has reacted to oxygen and form oxides. There is no oxygen specifically supplied to the ball mill furnace to convert solid lead into lead powder to form Lead Sub Oxides. 4. According to the petitioner, before the commencement of the KVAT Act, 2003, the levy of tax on sale and purchase of goods within the State of Karnataka was governed by the Karnataka Sales Tax Act, 1957, (hereinafter referred to as the ‘KST Act’, for brevity) and under Section 5-A of the KST Act, the tax payable by a registered dealer in respect of sale of any industrial input to another dealer for use by the latter as component part or raw material or packing material of any other goods, which he intends to manufacture inside the State was at the rate of 4% or the rate specified in Section 5 of the KST Act, whichever is lower. With the introduction of the KVAT Act, sub-section (1) of Section 3 levied the tax on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of the KVAT Act. Further, Section 4 of the KVAT Act prescribes the rate of tax applicable to the goods classified under different schedules. As per the said Section, the goods classified under the Third Schedule to the KVAT Act was liable to tax at the rate of 5% up to 31.07.2012 and at the rate of 5.5% thereafter. Further, the unscheduled goods were liable to tax at the rate of 14% up to 31.07.2012 and at the rate of 14.5% thereafter. 5. The Lead Sub Oxide manufactured and sold by the petitioner was classifiable under the said Third Schedule to the KVAT Act at Entry No.67 and accordingly, the petitioner charged, collected and paid tax at the rate of 5% / 5.5% (as applicable during the relevant period). 5. The Lead Sub Oxide manufactured and sold by the petitioner was classifiable under the said Third Schedule to the KVAT Act at Entry No.67 and accordingly, the petitioner charged, collected and paid tax at the rate of 5% / 5.5% (as applicable during the relevant period). Entry No.67 in the Third Schedule to the KVAT Act reads as follows: “Non-ferrous metals and alloys; Ingots, slabs, blocks, billets, sheets, circles, hoops, strips, bars, rods, rounds, squares, flats and other extrusions of aluminium, brass, bronze, copper, cadmium, lead and zinc, metal powders, metal pastes of all types and grades, metal scraps and waste.” The above Entry is of a very wide import and the Lead Sub Oxide manufactured and sold by the petitioner was covered within the ambit of the said Entry more precisely under the expression ‘metal powders’. The petitioner claims that it charged, collected and paid tax at the rate of 5% / 5.5% on sale of the said commodity. 6. The Third Schedule to the KVAT Act also contained one more Entry at Sl. No.51, which levied tax at the rate of 5% / 5.5% (as applicable during the relevant period) on industrial inputs and packing materials as may be notified. Accordingly, the Government had issued notification dated 23.03.2005 notifying the goods which were industrial inputs, which has been superseded by a further notification dated 30.04.2005, as amended by notification dated 05.08.2005 respectively, which are annexed to the petition as Annexures ‘A’ and ‘B’ and by virtue of these notifications, the Third Schedule to the KVAT Act has notified the oxides of all major metals, namely, tin oxide, zinc oxide, manganese oxide, iron oxide, cobalt oxide, titanium oxide, chromium oxide etc. as industrial inputs. 7. However, Lead Sub Oxide manufactured and sold by the petitioner though was classified as an ‘industrial input’ during the KST Act regime was not notified as an ‘industrial input’ for the purpose of Entry No.51 of the Third Schedule to the KVAT Act. Since both Entry Nos.51 and 67 are under the Third Schedule of the KVAT Act, the petitioner is liable to tax at 5% / 5.5% even though the same is not notified under Entry No.51 because the same qualifies under the Third Schedule within the expression ‘metal powders’ under Entry No.67. 8. Since both Entry Nos.51 and 67 are under the Third Schedule of the KVAT Act, the petitioner is liable to tax at 5% / 5.5% even though the same is not notified under Entry No.51 because the same qualifies under the Third Schedule within the expression ‘metal powders’ under Entry No.67. 8. During the month of May 2012, the office of the Commissioner of Commercial Taxes issued clarification dated 31.05.2012 stating therein that Lead Sub Oxide is not notified as an industrial input vide notification No.FD 197 CSL 2005 (6) dated 30.04.2005 and that it does not find place in any of the Schedules to the KVAT Act and therefore liable to tax under Section 4(1)(b) of the KVAT Act at 12.5% up to 31.03.2010, at 13.5% from 01.04.2010 to 31.03.2011 and at 14% from 01.04.2011 onwards. 9. Pursuant to the issuance of the clarification, petitioner was in receipt of two notices under Section 39(1) read with Sections 36(1) and 72(2) of the KVAT Act issued by respondent No.4 for the period from April 2010 to March 2011 and April 2011 to March 2012. It was alleged by respondent No.4 that on scrutiny of the books of accounts and the returns filed by the petitioner, it was found that the petitioner had effected local sales of Lead Sub Oxide and had collected tax at the rate of 5% instead of 13.5%. It was further alleged by respondent No.4 that the commodity Lead Sub Oxide is not covered under any of the entries in the Third Schedule to the KVAT Act nor covered under any of the notifications and therefore, it is an unscheduled commodity liable for tax at 13.5% under Section 4(1)(b) of the KVAT Act. Therefore, the petitioner is liable for payment of differential tax. Accordingly, notice dated 26.12.2013, Annexure ‘H’, was issued for the period from April 2011 to March 2012 and proposed a total demand of tax including interest and penalty of Rs.16,29,829/-and the notice for the period from April 2010 to March 2011 dated 09.01.2014 at Annexure ‘J’ proposed a total demand of Rs.12,91,377/-. However, before confirming the proposals, an opportunity was granted to the petitioner to file objections. The petitioner did file his objections. However, before confirming the proposals, an opportunity was granted to the petitioner to file objections. The petitioner did file his objections. However, respondent No.4 having passed reassessment order dated 22.01.2014 confirming the proposals made in the notice of reassessment and having fixed the differential tax along with interest and penalty at 12,91,378/-, made a demand on the petitioner. 10. The petitioner sought to question the reasonableness of the reassessment order dated 22.01.2014 and consequent demand notice issued by respondent No.4 in W.P. Nos.9352/2014 and 9774-9788/2014 and the same were set aside by this Court by order dated 25.02.2014 on the ground that the petitioner had not been given an opportunity. On a remand, the reassessment orders were reiterated notwithstanding objections, which were heard on behalf of the petitioner. Therefore, the petitioner is before this Court questioning the basis of the manner in which the tax is levied and the demand made. 11. Primarily, the authorities have proceeded on the basis of a clarification issued by the 2respondent Commissioner in exercise of power under Section 59 of the KVAT Act. Learned counsel for the petitioner while elaborating on the arguments as briefly stated herein above namely that the commodity manufactured by the petitioner i.e., Lead Sub Oxide would be covered under the ambit of Entry No.67, more precisely under the expression ‘metal powders’ is sought to be supported by several authorities and scientific literature. 12. According to McGraw-Hill Encyclopedia of Science and Technology, 9Edition, while expounding uses of ‘Lead’, it is referred to as follows: “Uses: As implied in the discussion of scrap lead above, the largest single use of lead is for the manufacture of storage batteries. Other important applications are for the manufacture of tetraethyl lead, cable covering, construction, pigments, solder, and ammunition.” Extracts of the information concerning ‘Lead Powder Applications’ provided on the websites is made available, wherein it is stated as follows:- “Lead powder either as pure lead, lead oxide or litharge lead (Litharge is one of the natural mineral forms of lead oxide) find multiple applications in many industries including: Oil and gas exploration, Radiological Medical protective clothing, Industrial X-ray shielding, Golf club manufacturing, Anti-friction products.” Uses of Lead Oxides are also mentioned on those websites as follows: “There are several uses of the Lead Oxides. Lead Oxides are mainly used as raw material in making lead glass for electronic elements, optical glass etc. Lead Oxides are mainly used as raw material in making lead glass for electronic elements, optical glass etc. Lead Oxides are also used in industries such as antirust paint, and ceramics store battery. There are individual use of Lead Oxides also. Lead Sub-Oxide, also commercially known as Grey Oxide / LSO is used extensive for preparation of plates in lead acid batteries. ” The description of ‘Lead Sub Oxide’, which is also gathered from the website is as follows:- “The Greyish color Lead oxide is also known lead sub oxide, grey oxide, battery oxide. The Grey Oxide is produced in ball mill plant & the process is an enothermic reaction. The chemical formulae of Lead sub oxide is (2PbO.Pb). The Lead sub oxide is used extensively in preparation of plates in Lead Acid Batteries.” The uses of lead Sub-oxide / Grey Oxide are mentioned in the website as follows:- “Lead Acid Batteries Electroplating Anode Sulphuric Acid Tank Liners.” Therefore, it is emphasized that Entry No.67 under the Third Schedule to the KVAT Act, which covers all kinds of ‘metal powders’, is an inclusive Entry and it does not mention any particular metal, but Entry No.51 mentions ‘industrial inputs’ as notified. To restrict the consideration of a ‘metal powder’ to those ‘industrial inputs’, which are specified by notification, would be to ignore the Entry at 67, which covers all ‘metal powders’ including ferrous and non-ferrous metals. Hence, the clarification issued by the Commissioner is without reference to these glaring circumstances, whereby Lead Sub-Oxide cannot be treated anything other than as a ‘metal powder’. 13. The learned Government Advocate, who has filed statement of objections, primarily seeks to justify the clarification issued by the Commissioner and the learned Government Advocate having been called upon to furnish the basis on which the Commissioner has issued such a clarification, has secured the relevant file where the Commissioner has indicated the basis on which, he has come to such a conclusion. From the file, it is noted that after reiterating the several contentions urged by the petitioner herein, the authority has proceeded to frame a question namely, that the question that arose for his consideration was whether the Lead Sub Oxide is an alloy of Lead and thereafter, has concluded that Lead Sub Oxide is not an alloy, but it is a chemical compound of Lead and Oxygen. Lead is converted to Lead Sub Oxide by an exothermic process. In this process, heat is generated and temperature of a oxide is increased to control the temperature with in the range of 115 to 135C. The ball mill is cooled with constant flow of air and also with the water spraying system controlled through solenoid valve. Its chemical formula is Pb2O. There are similar oxides of Lead viz., Litharge (PbO) and Red Lead Oxide (Pb3O4) or Lead Orthoplumbate. Thus, Lead Sub Oxide is not an alloy of lead as argued by the petitioner, but a chemical compound consisting of Lead and Oxygen. The very question framed by the Commissioner is incorrect and it does not pertain to the points canvassed by the petitioner at all. It was not the case of the petitioner that Lead Sub Oxide was an alloy of Lead. It was his case that it was a ‘Lead powder’ and nothing more. Therefore, the manner in which the question is framed and conclusion arrived at on the basis of it is erroneous and cannot be sustained. The clarification issued by the Commissioner has wide ramifications not only insofar as the petitioner is concerned, but in respect of all the manufacturers of lead powder and therefore, if the clarification is allowed to stand, it results in gross miscarriage of justice apart from having serious implications on the dealers. Therefore, this Court is of the opinion that the manner in which the clarification has been issued is found wanting as it is not the manner in which trade has understood the product and it leads to much confusion apart from the financial implications that it results insofar as dealers such as petitioner are concerned. 14. Hence, there is no hesitation in allowing this petition and quashing the clarification issued by the 2-respondent -Commissioner at Annexure ‘C’. Consequently, Annexures ‘D’, ‘E’, ‘F’ and ‘G’ are quashed. This will not preclude the concerned authority from issuing a fresh clarification insofar as the classification under which ‘lead powder’ would fall with reference to the entries in the Third Schedule to the KVAT Act and thereafter, for the authorities to take further steps in line thereof. The petition is allowed in terms as above. The petitioner’s claim that lead powder should be considered as an ‘industrial input’ is left open for consideration.