2015 (7) TMI 387 - HC - VAT and Sales Tax

Principle of res judicata in taxation - Rate of VAT on Noodles - 4% or 12.5% - Classification - Covered by Entry 9(3) of Schedule I or Entry No.87 of Schedule II to the Gujarat Valued Added Tax Act - whether sale of Maggi, Noodles equating it to Farsan sold as branded product - Validity of order passed beyond the scope of show cause notice (SCN) - Held that - there cannot be any dispute that generally, the principle of res judicata would not be applicable to Tax Laws as every year is a separate unit. However, it is required to be noted that the same would not be applicable in a case where the issue with respect to classification and/or Entry is interpreted by higher forum and the same had attained finality, inasmuch as the same is not challenged and the decision of the higher forum has been followed consistently for number of years, unless there are change circumstances in the subsequent assessment years. Even in case, where the officer and/or authority is of the opinion that the earlier decision though not challenged and/or even implemented for years is not a good decision and/or not in the interest of the revenue, the revenue is not remediless. However, as observed hereinabove, the Assessing Officer being lower in rank cannot be permitted to ignore and/or cannot be permitted to take a contrary view than the view taken by the higher forum, more particularly, when in the subsequent years, there are no change circumstances and the decision of the higher forum (in the present case, learned Tribunal), has been acted upon and implemented for the years. The impugned order passed by the Assessing Officer cannot be sustained, as the same is beyond the scope and ambit of the show cause notice dated 30.8.2012. It is required to be noted that by show cause notice dated 30.8.2012, the petitioner was called upon to show cause why Maggi Noodles shall not be treated as Farsan and Eatables (except sold in sealed container under a brand) falling under Entry 22 and liable to be taxed at 4%. However, by impugned order, the adjudicating authority has passed the impugned order holding that product Maggi Noodles would fall within Entry 87 (Residuary Entry) and liable to be taxed at 12.5% plus additional duty. Under the circumstances also, the impugned order cannot be sustained. Decided in favor of assessee on technical grounds.

Summary

Issues Involved:
1. Classification of "Maggi Noodles" under the Gujarat VAT Act.
2. Applicability of earlier tribunal decisions.
3. Principle of res judicata in tax matters.
4. Scope and ambit of the show cause notice.
5. Judicial discipline and adherence to higher authority decisions.

Detailed Analysis:

1. Classification of "Maggi Noodles" under the Gujarat VAT Act:
The petitioner, registered under the VAT Act, contested the classification of "Maggi Noodles" under Entry No.87 of Schedule II, which imposed a 12.5% tax plus 2.5% additional tax. The petitioner argued that "Maggi Noodles" should be classified under Entry 9(3) of Schedule I, which exempts "Sev made out of wheat flour or maida" from tax. This classification was previously upheld by the Gujarat Sales Tax Tribunal in 1986, and the petitioner sought adherence to this precedent.

2. Applicability of earlier tribunal decisions:
The petitioner emphasized that the classification of "Maggi Noodles" as "Sev" had been consistently followed for over two decades based on the 1986 Tribunal decision. The petitioner argued that this decision should be binding on the assessing authorities unless there were material changes in the facts or law. The court noted that the relevant entries in the Gujarat Sales Tax Act and the VAT Act remained unchanged, thus supporting the petitioner's contention.

3. Principle of res judicata in tax matters:
The respondent contended that the principle of res judicata does not apply to tax laws, as each assessment year is a separate unit. However, the court distinguished this case by emphasizing the importance of judicial discipline and the binding nature of higher tribunal decisions. The court cited several Supreme Court judgments, including Kamlakshi Finance Corporation Ltd., which stressed that lower authorities must follow the decisions of higher appellate authorities to maintain judicial discipline and avoid undue harassment to assessees.

4. Scope and ambit of the show cause notice:
The petitioner argued that the impugned order went beyond the scope of the show cause notice, which proposed to levy tax on "Maggi Noodles" as "Farsan" sold as a branded product at 4%. Instead, the order classified "Maggi Noodles" under the Residuary Entry 87, imposing a higher tax rate of 12.5% plus 2.5% additional tax. The court found merit in this argument, noting that the impugned order was beyond the scope and ambit of the show cause notice.

5. Judicial discipline and adherence to higher authority decisions:
The court reiterated the importance of judicial discipline, emphasizing that lower authorities must follow the binding decisions of higher appellate authorities. The court cited the Kamlakshi Finance Corporation Ltd. case, which underscored the need for revenue officers to adhere to appellate orders to avoid chaos in tax administration and undue harassment to assessees. The court also referred to the Excel Industries Limited case, highlighting that the revenue cannot flip-flop on issues already settled by higher authorities.

Conclusion:
The court quashed the impugned orders dated 12.10.2012, 28.3.2014, and 31.3.2014, setting aside the assessment that classified "Maggi Noodles" under Entry 87 of Schedule II. The court allowed the petitions, emphasizing the need for judicial discipline and adherence to higher appellate authority decisions. The court granted liberty to the State/revenue to take appropriate remedial measures, without expressing any opinion on the merits of the Tribunal's 1986 decision or the classification of "Maggi Noodles" under Entry 9(3) of Schedule I to the VAT Act.