2009 (12) TMI 891 - HC - VAT and Sales Tax

Rate of tax applicable on cut chillies, spent chillies and chilly seeds - whether attracts 12.5 per cent tax under section 4(1)(b) of the Act for the period April 1, 2005 to March 31, 2006 and with effect from April 1, 2006, the above goods are eligible to be taxed at the rate of four per cent in view of entry 89 of the Act? Held that - The crushed chilly, spent chilly is a spice by itself which can be sold and traded in common parlance and accordingly, tax leviable would be at the rate of four per cent and it comes within entry 61 under the definition of dry chillies and accordingly, we answer the questions of law formulated hereinabove in favour of the assessee and against the Revenue by holding that the Advance Ruling Authority was in error.

Summary

Issues Involved:
1. Tax rate applicability on cut chillies, spent chillies, and chilly seeds for the period April 1, 2005, to March 31, 2006.
2. Interpretation of the amendment effective from April 1, 2006, regarding the inclusion of cut chillies, spent chillies, and chilly seeds.
3. Common parlance understanding of cut chillies, spent chillies, and chilly seeds as dry chillies.

Detailed Analysis:

Issue 1: Tax Rate Applicability (April 1, 2005, to March 31, 2006)
The appellant argued that the remnants from the extraction of oleoresin, such as cut chillies, spent chillies, and chilly seeds, should be taxed at 4% under Section 4(1)(a)(ii) of the Karnataka Value Added Tax Act, 2003, as they fall under the category of "dry chillies" listed in the Third Schedule. The Authority for Clarifications and Advance Ruling, however, held that these items attract a 12.5% tax under Section 4(1)(b) for the specified period since they were not explicitly included in the old Schedule entry 61.

Issue 2: Interpretation of Amendment Effective from April 1, 2006
The appellant contended that the amendment effective from April 1, 2006, which explicitly included cut chillies, spent chillies, and chilly seeds in entry 89 of the Third Schedule, should be considered clarificatory and hence applicable retrospectively. The Authority for Clarifications and Advance Ruling disagreed, asserting that the amendment was prospective, and thus, the higher tax rate of 12.5% applied for the period before April 1, 2006.

Issue 3: Common Parlance Understanding
The appellant maintained that in common parlance and trade circles, cut chillies, spent chillies, and chilly seeds are regarded as forms of dry chillies. Therefore, they should fall under the "dry chillies" category in the old Schedule entry 61, attracting a 4% tax rate. The Revenue argued that these items should be taxed at 12.5% as they were not explicitly listed in entry 61 for the relevant period.

Court's Analysis and Judgment:
The court examined whether the remnants of dry chillies post-extraction could be sold as independent commodities and if they were accepted as such in common parlance. It was noted that the remnants such as cut chillies, crushed chillies, and spent chillies are recognized and sold in the market. The court referenced the judgment in Habeeb Proteins & Fats Extracts, which established that commodities retaining their identity post-processing should not attract the residuary tax clause.

The court found that the Legislature's amendment to entry 89, which explicitly included cut chillies, spent chillies, and chilly seeds, was an enlargement of the scope of "dry chillies." This indicated that these items were always intended to be part of the "dry chillies" category. Consequently, the court held that the Advance Ruling Authority erred in applying the 12.5% tax rate for the period before April 1, 2006.

Conclusion:
The court concluded that cut chillies, spent chillies, and chilly seeds are forms of dry chillies and should be taxed at 4% under entry 61 of the old Schedule for the period April 1, 2005, to March 31, 2006. The appeal by the assessee was allowed, and the Advance Ruling Authority's decision was overturned.