2014 (10) TMI 1020 - HC - VAT and Sales Tax

Classification of goods - Liquid Medical Oxygen IP - Medical Grade Oxygen - Nitrous Oxide IP - whether fall under Entry 88 of the IV Schedule to the A.P. VAT Act, 2005 or are they liable to tax as unclassified goods under Schedule-V to the Act? - HELD THAT - Section 4(3) of the Act requires every VAT dealer to pay tax on every sale of goods taxable under the Act on the sale price at the rates specified in Schedules III, IV and V subject to the provisions of Section 13. Schedule IV is the list of goods taxable at 4% prior to 14.09.2011, and at 5% thereafter - Under Schedule V to the Act all goods, other than those specified in Schedules I, III, IV and VI, are taxable at the standard rate of 12.5% prior to 15.01.2010, and at 14.5% thereafter. If Medical Oxygen IP and Nitrous Oxygen IP fall under Entry 88 of Schedule IV, they are then liable to be taxed at 4% or 5%. If not, they are taxable, as unclassified goods, at 12.5% or 14.5% under Schedule V to the Act. Going by the user test and the functional test, it is evident that medical oxygen and nitrous oxide serve as medicines. As medical oxygen IP and Nitrous Oxide IP are used in the treatment and mitigation of disorders in human beings, and as they are generally understood in the trade to be surgical aids, both these substances would fall under the definition of drug under Section 3(b)(i) of the Drugs Act and, consequently, fall under Entry 88 of Schedule IV to the Act liable to tax only at 4%/5%. Entry 100 of the IV Schedule to the Act relate to goods when sold as industrial inputs. Under sub-entry (36) thereof, Hydrogen, rare gases and other non-metals, when sold as industrial inputs, fall within Entry 100 of Schedule IV and are liable to be taxed at 4%/5%. However, in view of its specific exclusion, medical grade oxygen, when it is sold as an industrial input, would not fall within the purview of Entry 100 of Schedule IV to the Act. Exclusion of medical oxygen from the ambit of Entry 100(36) does not mean that it is, automatically, excluded from all other Entries in Schedule IV for, if the Legislature had so intended, medical oxygen would then have been excluded from Entry 88 of Schedule IV also. Entry 88 specifically excludes (a) medicated goods; (b) products capable of being used as cosmetics and toilet preparations including Tooth Pastes, Tooth powders, cosmetics, Toilet articles and soaps; and (c) mosquito repellants in any form - Entry 88 not only includes drugs and medicines as defined in Section 3(b)(i), (ii), and (iii) of the Drugs Act, but also includes hypodermic syringes, hypodermic needles, perfusion sets, urine bags, catguts, sutures, surgical cotton, dressings, plasters, catheters, cannulae, bandages and similar articles. All articles, similar to the goods aforementioned, would also fall within the ambit of Entry 88. There is no reason why medical oxygen IP and Nitrous Oxide IP, which are admittedly surgical aids used for or in the treatment and mitigation of disorders in human beings, would not fall under similar articles in Entry 88 of Schedule IV to the Act. Both medical oxygen IP and Nitrous Oxide IP fall under Entry 88 of Schedule IV, and are liable to tax only at 4%/5%, and not at 12.5%/14.5% - Petition allowed.

Summary

Issues Involved:
1. Classification of Liquid Medical Oxygen IP, Medical Grade Oxygen, and Nitrous Oxide IP under the A.P. VAT Act, 2005.
2. Validity of the assessment order passed by the assessing authority.
3. Applicability of HSN Codes and their impact on classification.
4. Whether the assessment order is barred by limitation.
5. Binding nature of clarifications by the Advance Ruling Authority.

Detailed Analysis:

1. Classification of Liquid Medical Oxygen IP, Medical Grade Oxygen, and Nitrous Oxide IP under the A.P. VAT Act, 2005:
The primary issue was whether Liquid Medical Oxygen IP, Medical Grade Oxygen, and Nitrous Oxide IP fall under Entry 88 of the IV Schedule to the A.P. VAT Act, 2005, or are they liable to tax as unclassified goods under Schedule V. The court concluded that both medical oxygen IP and Nitrous Oxide IP fall under Entry 88 of Schedule IV, which pertains to drugs and medicines as defined under Section 3(b)(i) of the Drugs and Cosmetics Act, 1940. The court emphasized that these substances are used for or in the treatment, mitigation, or prevention of disorders in human beings, thus qualifying as drugs under the Act. The court also noted that these items are generally understood in the trade to be surgical aids, thereby falling under similar articles in Entry 88 of Schedule IV.

2. Validity of the assessment order passed by the assessing authority:
The assessment orders were challenged on the grounds that they were passed without jurisdiction and in violation of Section 67(3) of the Act. The court found that the assessing authority's reliance on G.O. Ms. No. 1615, dated 31.08.2005, was misplaced since it was neither a legislative exercise nor issued under Section 79 of the Act. The court held that the assessment orders were invalid as they did not consider the correct classification of the goods under Entry 88 of Schedule IV.

3. Applicability of HSN Codes and their impact on classification:
The court referred to the judgment in MGRM Medicare Limited v. Commercial Tax Officer, which held that the notification in G.O. Ms. No. 1615 could not restrict the scope of the entries in the Schedules to the Act. The court reiterated that the law declared by the court is presumed to be the law at all times and that the executive cannot override judicial decisions by issuing notifications. Consequently, the assessing authority could not rely on the HSN Codes mentioned in G.O. Ms. No. 1615 for classification purposes.

4. Whether the assessment order is barred by limitation:
The petitioner contended that the assessment order was barred by limitation for the period prior to 06.04.2010. However, the court found it unnecessary to examine this issue in detail as the assessment orders were already set aside on the grounds of incorrect classification.

5. Binding nature of clarifications by the Advance Ruling Authority:
The court noted that the petitioner had filed an appeal before the STAT against the earlier ruling of the Advance Ruling Authority and a review petition against the subsequent ruling. The court found that the assessment order should not have been passed without considering these pending proceedings. However, this issue was also rendered moot by the court's decision to set aside the assessment orders based on the classification issue.

Conclusion:
The court set aside the assessment orders, concluding that Liquid Medical Oxygen IP, Medical Grade Oxygen, and Nitrous Oxide IP should be classified under Entry 88 of Schedule IV to the A.P. VAT Act, 2005, and are liable to tax at 4%/5%. The writ petitions were allowed without costs, and all miscellaneous petitions were disposed of accordingly.