2018 (3) TMI 1683 - HC - VAT and Sales Tax

Classification of goods - rusk/toast - whether the rusk/toast would fall under entry 7, i.e., bread, under Schedule I of the Chhattisgarh Value Added tax Act, 2005 or it would fall under the residuary entry under Part IV of Schedule II of the said Act as claimed by the respondents? Held that - A plain reading of section 15 of the VAT Act itself would show that all those products which are specified in Schedule I, tax shall not be payable on the sale and purchase of said products. Entry 7 of the said Schedule clearly refers to products both Bread or otherwise. Likewise, Schedule II of the said Act also envisages a list of products. What is also relevant is that the products which have been specified in Part II of Schedule II, the rate of tax levied is prescribed. Likewise, Part IV of the said Schedule II envisages that all those goods which are not included in Schedule I, Part II and III of the said Schedule have fixed the rate of tax at 14 per cent. The said entry in the Schedule, i.e., Part IV is normally referred to as residuary entry. Whether the toast or rusk would fall under the residuary entry under Part IV, the burden of proof is on the State Government and the onus also lies on them to first establish conclusively that by no conceivable process of reasoning can the said product be brought under any of the tariff items and hence the product was being brought under the residuary item. Bringing an item under the residuary entry - Held that - It is the primary and paramount responsibility of the State to first convincingly prove and establish that the item under no circumstances can be brought under any of the tariff items under the Schedule of the VAT Act. Only then could the Government claim a particular product to be one which would come under the residuary entry - It is settled law that the onus or burden to show that a product falls within a particular tariff item is always on the Revenue. There is substantially no change in the basic physical properties used for manufacturing of bread as well as toast and rusk. It is only the manufacturing process and that too restricted to the time required for baking of the two products everything else is the same. The term bread under Schedule I, entry 7 has to be construed as a generic entry made and it has to be given the widest interpretation that could be given, subject to the condition that the ingredients being substantially the same - this court holds that rusk and toast also would fall within entry 7 of Schedule I of the VAT Act and it cannot be considered to be one which would come under the residuary entry. Petition allowed.

Issues Involved:
1. Classification of rusk/toast under the Chhattisgarh Value Added Tax Act, 2005.
2. Determination of whether rusk/toast falls under entry 7 (bread) of Schedule I or the residuary entry of Part IV of Schedule II.
3. Burden of proof regarding classification under the VAT Act.
4. Interpretation of tax-free goods under Section 15 of the VAT Act.
5. Applicability of common parlance and commercial use tests.
6. Precedent and judicial interpretation of similar cases.

Issue-wise Detailed Analysis:

1. Classification of Rusk/Toast:
The primary issue in the writ petitions was whether rusk/toast should be classified under entry 7 (bread) of Schedule I of the Chhattisgarh Value Added Tax Act, 2005, making it tax-free, or under the residuary entry of Part IV of Schedule II, subjecting it to a higher tax rate.

2. Determination of Classification:
The petitioners, manufacturers of bakery items, argued that rusk/toast is a variety of bread and should fall under entry 7 of Schedule I. They contended that both bread and rusk/toast are made from the same ingredients and through similar manufacturing processes, with the primary difference being the moisture content and baking duration. The State, however, argued that rusk/toast and bread are distinct products, both in common parlance and commercial use, and should be taxed differently.

3. Burden of Proof:
The petitioners claimed that the burden of proof was on the State to show that rusk/toast does not fall under the generic term "bread" in entry 7 of Schedule I. The court referred to several precedents, emphasizing that the onus is on the Revenue to prove that a product falls under a particular tariff item, especially when attempting to classify it under a residuary entry.

4. Interpretation of Tax-Free Goods:
Section 15 of the VAT Act states that no tax shall be payable on goods specified in Schedule I. The court highlighted that entry 7 of Schedule I includes "bread (branded or otherwise)." The court examined whether rusk/toast could be included in this entry, considering their ingredients and manufacturing process.

5. Common Parlance and Commercial Use Tests:
The State argued that under common parlance and commercial use tests, bread and rusk/toast are distinct. The court, however, found that the basic ingredients and manufacturing process of both products are substantially the same, differing mainly in baking time and moisture content.

6. Precedent and Judicial Interpretation:
The court referred to several judicial precedents, including decisions by the Supreme Court and various High Courts, which supported a broad interpretation of tax entries. The court cited cases where similar products were classified under broader entries rather than residuary ones, emphasizing that when two views are possible, the one favoring the assessee should be adopted.

Conclusion:
The court concluded that rusk and toast should be classified under entry 7 of Schedule I of the VAT Act as they share the same basic ingredients and manufacturing process as bread. Consequently, the impugned assessment orders and appellate decisions were quashed, and the writ petitions were allowed. The court held that rusk and toast fall within the generic term "bread" and are thus tax-free under Schedule I.

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