2015 (3) TMI 1315 - HC - VAT and Sales Tax

Payment of tax at compounded rates - whether the petitioners who are admittedly dealers engaged in the production of granite metal with the aid of mechanized crushing machines, are entitled to claim exemption from separate assessment, in respect of the M-sand produced by them using VSI/HIS machines, that have not been reckoned for the purposes of compounding under Section 8(b) of the KVAT Act? Held that - Section 8(b) of the KVAT has been amended by the Finance Act, 2014 and, specific provisions, providing for payment of compounded tax on VSI/HIS machines of various sizes, have been introduced. The newly introduced amendments are substantive in nature and hence, in the absence of any express indication to the contrary, necessarily prospective in their operation. The said amendment, introduced with prospective effect, also suggests that, for the prior period, the legislature never intended to include VSI/HSI machines in the reckoning of compounded tax under Section 8(b) of the KVAT Act. Petition allowed by declaring the impugned notices and orders issued/passed by the respondents as illegal and legally unsustainable - decided in favor of petitioner.

Issues Involved:
1. Entitlement to exemption from separate assessment for M-sand produced using VSI/HSI machines under Section 8(b) of the Kerala Value Added Tax Act (KVAT Act).

Detailed Analysis:

Common Issue:
The writ petitions were consolidated as they involved a common issue regarding the entitlement of dealers in granite metal to claim exemption from separate assessment for M-sand produced using VSI/HSI machines under Section 8(b) of the KVAT Act.

Section 8(b) of the KVAT Act:
Section 8(b) allows dealers producing granite metals with mechanized crushing machines to opt for a compounded tax rate instead of the regular tax under Section 6. The compounded tax rates are specified based on the size and type of crushing machines used. The provision also includes an exemption from separate assessment for M-sand produced during the granite metal production process.

Petitioners' Contentions:
1. Compounded Tax Scheme: The petitioners argued that under Section 8(b), once they paid the compounded tax for specified crushing machines, they were entitled to an exemption from separate assessment for M-sand produced during the granite metal production process.
2. Non-relevance of Additional Machines: The installation of additional machines like VSI/HSI for shaping granite metal should not affect the exemption, as the tax obligation was only for the specified machines.
3. Precedent Cases: The petitioners cited previous judgments (State of Kerala v. Poabs Granites Pvt Ltd and M/s. Poabs Granite Products Pvt. Ltd v. State of Kerala) where it was held that no separate assessment could be made for by-products like M-sand if the tax on specified machines was paid.
4. Binding Clarifications: Clarifications by the Authority under the KVAT Act stated that no separate assessment could be done for M-sand produced using VSI machines, which should bind the revenue authorities.
5. Legislative Amendments: The 2014 amendment to Section 8(b), which introduced specific rates for VSI/HSI machines, was prospective, indicating that no differential tax could be demanded for periods before the amendment.

Respondent State's Contentions:
1. Exclusion of VSI/HSI Machines: The State contended that VSI/HSI machines were not considered crushing machines under Section 8(b), and hence M-sand produced using these machines did not qualify for the exemption.
2. Separate Product Classification: M-sand produced through VSI/HSI was argued to be a separate main product, not a by-product of granite metal production, and thus separately taxable.
3. Legislative Intent: The 2014 amendment was cited to argue that the legislature never intended to exempt M-sand produced using VSI/HSI machines from separate assessment.

Court's Findings:
1. Legislative Scheme: The court found that the legislative scheme under Section 8(b) intended for dealers to pay compounded tax based on specified machines used in granite metal production. VSI/HSI machines were not among the specified machines.
2. Definition of M-sand: The court acknowledged the lack of clarity in defining M-sand but noted that all products, including granite metal, crusher sand, and M-sand, were obtained during the granite metal production process using mechanized crushing machines.
3. Exemption Validity: The court held that the installation of VSI/HSI machines for shaping granite metal or obtaining finer sizes did not negate the exemption. The compounded tax scheme did not intend to include VSI/HSI machines for tax computation.
4. Prospective Amendment: The 2014 amendment was deemed substantive and prospective, suggesting no differential tax demand for periods before the amendment.

Judgment:
The court quashed the notices and orders demanding differential tax from the petitioners for M-sand produced using VSI/HSI machines, declaring them illegal and legally unsustainable. The writ petitions were allowed with no order as to costs.

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