2020 (3) TMI 367 - HC - VAT and Sales Tax

Classification of goods - Polyurethane Footwear - It is the case of the writ applicant that Polyurethane is a plastic - Gujarat Value Added Tax Act, 2003 - pre-condition for stay of demand of dispute - issue raised is to the effect that as the footwear manufactured by the writ applicant contains certain accessories not made of plastic, the footwear, as a whole, will fall within the ambit of residuary entry. HELD THAT - The issue of granting stay pending appeal is governed principally by the two circulars issued by the CBDT. The first circular was issued way back on 2nd February 1993 being instructions no.1914. The circular contained guidelines for staying the demand pending appeal. It was stated that the demand would be stayed if there are valid reasons for doing so and mere filing of appeal against the order of assessment would not be sufficient reason to stay the recovery of demand. The instructions issued under the office memorandum dated 29th February 2016 are not in super-session of the instructions no.1914 dated 2nd February 1993 but are in partial modification thereof. This circular thus lays down 15% of the disputed demand to be deposited for stay, by way of a general condition. The circular does not prohibit or envisage that there can be no deviation from this standard formula. In other words, it is inbuilt in the circular itself to either decrease or even increase the percentage of the disputed tax demand to be deposited for an assessee to enjoy stay pending appeal. The circular provides the guidelines to enable the Assessing Officers and Commissioners to exercise such discretionary powers more uniformly - Ordinarily, the writ Court would be slow in interfering with such discretionary exercise of powers by the authority concerned. However, in the present case, the total tax demand is quite on higher side. The issues are at the first appeal stage. Even 15% of the disputed tax dues comes to around ₹ 60 Lakh. It is deemed fit to reduce the requirement of depositing the disputed tax dues to enable the writ applicant to avail the benefit of the stay pending the appeal before the Appellate Authority to 5% - application disposed off.

Summary

Issues Involved:
1. Classification of Polyurethane (PU) Footwear under the VAT Act.
2. Requirement of pre-deposit for hearing appeals on merits.
3. Imposition of penalty and interest on reassessed tax dues.
4. Stay on coercive recovery pending appeal.

Detailed Analysis:

1. Classification of Polyurethane (PU) Footwear under the VAT Act:
The primary issue concerns the classification of PU Footwear. The petitioner, a manufacturer of PU Footwear, classified their product under Entry 59 of Schedule II to the VAT Act, which pertains to "Plastic Footwear" taxed at 4% plus 1% additional tax. However, the Commercial Tax Department contended that the footwear, containing non-plastic accessories, should fall under the Residuary Entry No.87, leading to a higher tax rate. This classification dispute led to reassessment and additional tax demands.

2. Requirement of Pre-deposit for Hearing Appeals on Merits:
The petitioner’s first appeals were summarily dismissed due to non-payment of the required pre-deposit. The Tribunal, while hearing the second appeals, directed a pre-deposit of 15% of the disputed tax amount. The petitioner argued financial incapacity to meet this requirement, citing market conditions and business impact. The Tribunal's decision emphasized that the merits of the classification issue could not be delved into at this stage, as it would contravene the spirit of the judgment in Tudor India Ltd.

3. Imposition of Penalty and Interest on Reassessed Tax Dues:
The reassessment for the years 2013-14 and 2014-15 resulted in significant tax dues, including penalties and interest. The authorities imposed a penalty at the maximum rate of 150% under Section 34(2) of the VAT Act, asserting that the dues were illegally raised by the petitioner. The total dues for the years in question amounted to over ?12 crore, including tax, interest, and penalties.

4. Stay on Coercive Recovery Pending Appeal:
The petitioner sought a stay on the coercive recovery of the reassessed dues pending the final hearing of the appeals. The Tribunal granted a conditional stay, subject to the petitioner depositing 15% of the tax amount. The petitioner’s counsel argued that the financial burden of such a deposit would prevent the appeals from being heard on merits, causing undue prejudice.

Court's Judgment:
The High Court considered the guidelines issued by the CBDT, which generally require a 15% deposit of the disputed demand for granting a stay. However, recognizing the financial constraints and the substantial tax demand, the Court deemed it appropriate to reduce the pre-deposit requirement to 5% of the disputed tax dues. The Court directed the petitioner to deposit this amount within 15 days and produce the Challan before the Tribunal. Upon compliance, the Tribunal was instructed to proceed with the appeals and grant a stay on the recovery of the tax.

Conclusion:
The High Court modified the Tribunal's order to reduce the pre-deposit requirement to 5%, facilitating the petitioner’s ability to contest the classification issue on merits. The stay on recovery would commence upon the petitioner’s compliance with the modified pre-deposit directive. This judgment balances the need for revenue protection with the petitioner’s financial incapacity, ensuring access to justice.