1997 (1) TMI 489 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Classification of insecticide mats for tax purposes.
2. Right to be heard before issuing tax-related clarifications.
3. Requirement for a speaking order with reasons.
4. Entitlement to tax exemption for retreading materials under the Karnataka Sales Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Insecticide Mats for Tax Purposes:
The petitioner challenged the clarifications issued by the respondent which classified insecticide mats under entry No. 11 of Part M of the Second Schedule to the Karnataka Sales Tax Act, 1957, making them liable for tax at 10% at the first sale point. The petitioner contended that these mats should fall under entry No. 5 of Part I of the Second Schedule, which would subject them to a lower tax rate of 3%. The argument was based on the definition of "insecticide" as a combination of "insect" and "cide," meaning "killer," asserting that insecticide mats are not merely mosquito repellents.

2. Right to be Heard Before Issuing Tax-Related Clarifications:
The petitioner argued that the clarifications were issued without providing an opportunity to be heard, which violated principles of natural justice. The court agreed, stating that since the clarification significantly affected the petitioner's rights and imposed a higher tax liability, the petitioner should have been given a chance to present their case. The court emphasized that the principle of natural justice must be read into the provision, implying that the petitioner must be heard before any adverse order is passed.

3. Requirement for a Speaking Order with Reasons:
The petitioner also contended that the clarifications lacked reasons and thus were not speaking orders. The court concurred, noting that no material was presented to justify the classification of insecticide mats under entry No. 11 of Part M of the Second Schedule. The court held that any order affecting the rights of parties must provide reasons for its conclusions. Since the clarifications did not meet this requirement, they were deemed liable to be quashed.

4. Entitlement to Tax Exemption for Retreading Materials:
In a separate judgment, the petitioner sought exemption from tax on retreading materials used in the execution of retreading contracts, based on notifications issued under section 8A of the Karnataka Sales Tax Act. The court referred to the Supreme Court's decision in P.C. Cheriyan v. Mst. Barfi Devi, which held that retreading old tyres does not constitute manufacturing. The court noted that the exempting notifications clearly applied only to goods manufactured and sold by tiny sectors and SSI units. Since the petitioner did not manufacture the retreading materials but used them in works contracts, they were not entitled to the exemption. The court also referenced the constitutional validity of taxing deemed sales in works contracts, as upheld by the Supreme Court in Builders' Association of India v. State of Karnataka.

Conclusion:
The court quashed the clarifications dated 12th October 1989 and 9th January 1990, allowing the respondent to issue fresh orders if desired, while reserving the petitioner's right to pursue remedies before the assessing or appellate authority. The writ petition was allowed, and the rule issued was made absolute.