2012 (12) TMI 908 - HC - VAT and Sales Tax

Revision petition under Section 72 - Tripura Value Added Tax Act,2004 Tripura VAT Rules 2005 - Search & seizure Classification - Twin test for determining the classification - Mis-declaration of goods as Entry No.183 under Schedule II(b) - Section 3 of Drugs and Cosmetics Act 1940 - Entry No. 67(i) of Schedule 11(a) H.L. medicine attracting tax @ 5% but on physical verification during the search was found by the seizing authority that the item is Appetite Tonic which is taxable @ 13.5% Held that - The petitioner declared the product as H.L. medicine in the statutory declaration as was required to be furnished at the time of crossing the barrier. Unless contrary to that is established by the revenue in accordance with the decisions of the Apex Court as referred, it has to be treated as properly declared. Therefore, the order dated 25.03.2011 as passed in Seizure Case No.1549/CRB/2010-11 cannot be sustained in law. The revisional authority, the Commissioner of Taxes, without any test, affirmed the order of the Officer In-charge. The Revenue thus failed to discharge their burden to properly classify the product. As such, the order dated 21.10.2011 is liable to be set aside and accordingly it is set aside. Since there is a controversy as regards the classification of the product or as regards the decision arrived at on the basis of the common parlance test, the Revenue is under obligation to adopt the twin test if the assessee approached for re-determination of the classification. But such approach was the basis of the revision as filed under Section 70 of the TVAT Act, 2004. The Revenue has utterly failed to discharge the said obligation. In view of this, the Commissioner of Taxes is directed to adopt the twin test for determining the classification, meaning thereby the common parlance test such as the functional utility and pre-dominance of the primary uses of the commodity apart from taking into account other understanding in common parlance such as to consider the product literature and label etc. and thereafter to determine the composition and character of the product on resorting to the scientific test. The Commissioner of Taxes shall also be at liberty to take aid from the Deputy Drug Controller, Govt. of Tripura for determining the composition of the product to classify the product in controversy having the brand name of Betonin AST Tonic manufactured by M/s Sangfroid Industries Ltd., IDA, Kothur, Andhra Pradesh. The said exercise of determining the classification of the said product shall be completed within a period of 6(six) weeks from the day of receipt of this judgment and order. Prior to determination of classification of the said product, VAT more than 5% shall not be charged on the petitioner against the said import of the product. Order of Seizure set aside and case remand back to Commissioner for classification

Summary

Issues Involved:
1. Legality of the seizure of goods under the Tripura Value Added Tax Act, 2004.
2. Classification of 'Betonin AST Tonic' for tax purposes under the TVAT Act.
3. Interpretation of tax entries and their precedence over definitions from other statutes.
4. Application of the common parlance test for product classification.
5. Burden of proof in tax classification disputes.

Issue-wise Detailed Analysis:

1. Legality of the Seizure of Goods:
The petitioner challenged the seizure of 'Betonin AST Tonic' by the Officer-in-charge, Churaibari Check Post, under Seizure Case No.1549/CRB/2010-11, dated 25.03.2011. The seizure was based on the allegation that the petitioner mis-declared the goods as 'H.L. medicine' (taxable at 5%) instead of 'Appetite Tonic' (taxable at 13.5%). The petitioner argued that the product was correctly declared as a drug under the Drugs & Cosmetics Act, 1940, and should be taxed at 5%.

2. Classification of 'Betonin AST Tonic' for Tax Purposes:
The core issue was whether 'Betonin AST Tonic' should be classified under Entry No. 67(i) of Schedule II(a) (taxable at 5%) or Entry No. 183 of Schedule II(b) (taxable at 13.5%) of the TVAT Act. The Revisional Authority held that the tonic falls under Entry No. 183, taxable at 13.5%, despite the product being a drug as per the Drugs & Cosmetics Act, 1940.

3. Interpretation of Tax Entries and Their Precedence:
The Revisional Authority emphasized that when two interpretations are possible, the one explicitly mentioned in the tax statute takes precedence over interpretations derived from other statutes. The authority argued that the classification under Entry No. 183 of Schedule II(b) was clear and unambiguous, and thus, it should prevail over Entry No. 67(i) of Schedule II(a).

4. Application of the Common Parlance Test:
The court referred to multiple Supreme Court judgments emphasizing the common parlance test for product classification. This test considers how the product is understood by those in the trade and by consumers. The court noted that the common parlance test is not the sole determinant and that a scientific test to determine the product's composition and character is also essential.

5. Burden of Proof in Tax Classification Disputes:
The court highlighted that the burden of proof lies with the Revenue to establish the correct classification of the product. The Revenue failed to provide sufficient evidence to support the classification of 'Betonin AST Tonic' under Entry No. 183. The court criticized the Revisional Authority for not examining the product label and ingredients properly and for not discharging their burden to classify the product accurately.

Conclusion:
The court concluded that the order of seizure dated 25.03.2011 could not be sustained in law due to the failure of the Revenue to properly classify the product. The Revisional Authority's order dated 21.10.2011 was set aside. The court directed the Commissioner of Taxes to adopt the twin test (common parlance and scientific test) for determining the classification of 'Betonin AST Tonic' and to complete this exercise within six weeks. Until the classification is determined, VAT on the product should not exceed 5%. The revision petition was allowed to this extent, with no costs awarded.