2007 (10) TMI 580 - HC - VAT and Sales Tax

Levying tax and penalty - whether aluminium hydroxide paste, and magnesium hydroxide paste, manufactured by petitioner and certified by the Director, Drugs Control Administration, are bulk drugs and are taxable for the assessment year 2005-06 only at four per cent under entry 16 of Schedule IV of the APVAT Act? Held that - Since entry 16 of Schedule IV of the Act, prior to its amendment by Act 34 of 2006, did not classify bulk drugs on the basis of its coverage by HSN codes, no reliance can be placed by the assessing authority on G.O. Ms. No. 1615 dated August 31, 2005 to treat the bulk drugs manufactured by the petitioner, i.e., aluminium hydroxide paste and magnesium hydroxide paste as other goods taxable under Schedule V of the Act, at 12.5 per cent. It is not even the case of the assessing authority, nor has it been contended before us by the learned Special Government Pleader for Taxes that the aforesaid goods manufactured by the petitioner are not bulk drugs. Since these goods fall under the category of bulk drugs they can be charged to tax only at four per cent under section 4(3) read with entry 16 of Schedule IV of the VAT Act. W.P. allowed.

Issues Involved:
1. Classification of aluminium hydroxide paste and magnesium hydroxide paste as "bulk drugs."
2. Applicability of tax rate under the Andhra Pradesh Value Added Tax Act, 2005 (APVAT Act).
3. Validity and scope of executive orders and Government Orders (G.O.s) in altering tax rates.
4. Binding nature of advance rulings by the Authority for Clarification and Advance Rulings.

Issue-wise Detailed Analysis:

1. Classification of Aluminium Hydroxide Paste and Magnesium Hydroxide Paste as "Bulk Drugs":
The petitioner, a manufacturer of bulk drugs, contended that aluminium hydroxide paste and magnesium hydroxide paste were certified by the Director, Drugs Control Administration, as "bulk drugs." They argued that these should be taxed at four per cent under entry 16 of Schedule IV of the APVAT Act. The court examined the classification and confirmed that these substances were indeed "bulk drugs" as per the certification and should be treated as such under the Act.

2. Applicability of Tax Rate under the APVAT Act:
The petitioner reported a net turnover and paid tax at four per cent for the bulk drugs. However, the first respondent issued a notice proposing a 12.5 per cent tax rate, treating these substances as unclassified goods under Schedule V. The court analyzed Section 4 of the APVAT Act, which specifies tax rates based on the Schedules. Since "bulk drugs" are listed under entry 16 of Schedule IV, they are taxable at four per cent. The court ruled that aluminium hydroxide paste and magnesium hydroxide paste, being bulk drugs, should be taxed at this rate.

3. Validity and Scope of Executive Orders and Government Orders (G.O.s) in Altering Tax Rates:
The court examined various Government Orders (G.O.s), including G.O. Ms. No. 398, 419, 1596, and 1615, which specified HSN codes for certain bulk drugs. The petitioner argued that these executive orders could not override the legislative provisions of the APVAT Act. The court agreed, stating that the power conferred under section 76(2) for removing difficulties cannot contradict the Act's provisions. The court emphasized that the Government could not restrict the scope of entry 16 of Schedule IV through executive orders to only eight specified items. The court invalidated the reliance on these G.O.s for altering the tax rate.

4. Binding Nature of Advance Rulings by the Authority for Clarification and Advance Rulings:
The first respondent relied on an advance ruling in the case of M/s. Elegant Chemical Enterprises Pvt. Ltd., which held that only bulk drugs covered by HSN codes notified against entry 16 of Schedule IV were taxable at four per cent. The court found this ruling erroneous, as it failed to consider that the power under section 76(2) should not be inconsistent with the Act's purposes. The court clarified that all bulk drugs listed under entry 16 of Schedule IV should be taxed at four per cent, regardless of HSN codes. The advance ruling could not override the statutory provisions.

Conclusion:
The court concluded that aluminium hydroxide paste and magnesium hydroxide paste, being classified as "bulk drugs," should be taxed at four per cent under entry 16 of Schedule IV of the APVAT Act. The impugned assessment order proposing a 12.5 per cent tax rate was set aside. The writ petition was allowed, emphasizing that executive orders and advance rulings could not contradict the legislative provisions of the APVAT Act.

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