2017 (3) TMI 1695 - HC - VAT and Sales Tax

Classification of goods - Potato Chips - processed vegetables - Whether the Tax Board is justified in holding that Potato Chips are not classifiable as Processed Vegetable under entry 107 of Schedule IV just because of the fact that branded namkeen (including dried potato chips) are kept outside the purview of entry 131 of the same Schedule a general entry dealing with sweetmeats and unbranded namkeen? Held that - It cannot be disputed that Potato is a vegetable and after going through the process of slicing frying and spicing Potato Chips does not cease to be a vegetable. It is irrelevant as to whether it becomes a snack item or not but then it does not take a snack item outside the entry of Processed Vegetables . The characteristics of Potato does not change and merely because by processing Potato Potato Chips are produced/manufactured it will certainly remain as Potato and would be a Processed Vegetable . Material is available on record that the Ministry of Food Processing Industry has understood processing of Potato Wafers or Chips as Vegetable Processing Industry and even the Govt. of India has understood Potato Chips to be a Vegetable Product for the purposes of classification under the Central Excise Tariff Act - Potato Chips can certainly be taken within the definition of entry 107 taking within its compass all other species including Potato Chips belonging to the common genus of the Processed Vegetables and if any particular item is classifiable under a specific entry in a Schedule such item or commodity must not be relegated to the Residuary entry. Even if common parlance test is applied it can always be noticed that it would certainly fall within the category of Processed Vegetables . The claim of the petitioner is justified - Potato Chips would fall in the category of entry 107 to be charged with tax @ 4% and once rate of 4% has been held to be well reasoned and justified which was claimed by the petitioner then question of levy of interest and penalty does not arise. Petition allowed - decided in favor of assessee.

Summary

Issues Involved:
1. Classification of 'Potato Chips' under the relevant VAT schedule.
2. Consideration of evidence by the Tax Board.
3. Levy of differential tax, interest, and penalty.

Detailed Analysis:

1. Classification of 'Potato Chips' under the relevant VAT schedule:
The primary issue was whether 'Potato Chips' should be classified as 'Processed Vegetables' under entry 107 of Schedule IV, attracting a 4% VAT rate, or under the Residuary Schedule V, attracting a 12.5% VAT rate. The petitioner argued that 'Potato Chips' are made from potatoes, which are vegetables, and thus should be classified as 'Processed Vegetables'. The Tax Board, however, classified 'Potato Chips' under the Residuary Schedule V.

The court analyzed similar entries and judicial precedents from other states. It referred to the Gauhati High Court, Madras High Court, and Punjab & Haryana High Court judgments, which held that 'Potato Chips' fall under 'Processed Vegetables'. The court emphasized that 'Potato Chips' retain the characteristics of potatoes and should be classified under entry 107. The court also noted that the Ministry of Food Processing Industries and the Central Excise Tariff Act classify 'Potato Chips' as vegetable products.

2. Consideration of evidence by the Tax Board:
The petitioner contended that the Tax Board ignored substantial evidence from various government bodies and institutions in the fruits and vegetable processing sector. The court agreed, stating that the Tax Board should have considered the evidence presented by the petitioner, including the classification of 'Potato Chips' by the Ministry of Food Processing Industries and the Central Excise Tariff Act.

3. Levy of differential tax, interest, and penalty:
The Assessing Officer (AO) levied a 12.5% tax rate on 'Potato Chips', resulting in a differential tax, along with interest and penalty. The court held that since 'Potato Chips' should be classified under entry 107 with a 4% tax rate, the differential tax, interest, and penalty were not justified. The court emphasized that the petitioner had reasonably paid the 4% tax rate, and there was no intention of tax evasion.

Conclusion:
The court concluded that 'Potato Chips' fall under entry 107 of Schedule IV as 'Processed Vegetables' and should be taxed at 4%. The court also held that the Tax Board erred in ignoring relevant evidence and that the levy of differential tax, interest, and penalty was unjustified. The petitions were allowed, and the questions were answered in favor of the petitioner, with no order as to costs.