2021 (3) TMI 596 - HC - VAT and Sales Tax

Classification of goods - Chandrika Soap - whether assessee is entitled to be treated as Handmade soap and consequently obligated to pay tax at concessional rate of 4% or Chandrika Soap falls under the category i.e. soaps other than hand made? - interest on the differential tax - tax paid based on the return. HELD THAT - It must be predominantly made by hand. It does not matter if some machinery is also used in the process. (2) It must be graced with visual appeal in the nature of ornamentation or inlay work or some similar work lending it an element of artistic improvement. Such ornamentation must be of a substantial nature and not a mere pretence. These principles would apply to all pending matters and to all matters arising thereunder - The report deals in sufficient detail on the purpose and utility of drum in the sequence of manufacturing process and used for mixing the raw material. This stand alone item ought not to be understood as Chandrika Soap made otherwise than Handmade. The Chandrika Soap is treated as 'hand made' by the assessing authorities in the State of Karnataka. The dominant tests on what constitutes 'handmade' are satisfied in the case on hand and the findings of the Tribunal are set aside and accordingly the first question is answered in favour of the assessee and against the Department. Whether the direction of the Tribunal for calculating interest on the differential tax and tax paid based on the return is legal? - HELD THAT - The re-assessment does not arise and question is answered in favour of assessee and against the Revenue. Revision dismissed.

Issues Involved:
1. Classification of Chandrika Soap as handmade or machine-made.
2. Legality of the Tribunal's direction on calculating interest on differential tax.

Issue-wise Detailed Analysis:

1. Classification of Chandrika Soap as Handmade or Machine-made:

The primary issue revolves around whether the Chandrika Soap manufactured by the assessee should be classified as handmade or machine-made, which determines the applicable tax rate under the Kerala General Sales Tax Act (KGST Act). The assessee claims that Chandrika Soap is handmade, attracting a concessional tax rate of 4%, while the Revenue argues that it is machine-made, subject to a higher tax rate of 12%.

The Tribunal initially ruled against the assessee, stating, "On a clear reading of the Enquiry Report as well as the documents, it is seen that various machineries were used by the appellant/assessee for the manufacturing of 'Chandrika Soap' by the Surya Laboratories sold by the assessee, cannot be considered to be a handmade Soap. So we found that the appellant assessee is not entitled to the concessional rate of tax as it is handmade."

The High Court examined the Enquiry Report dated 14.12.2010, which detailed the manufacturing process and the contrivances used. The report concluded that except for the mixing drum, the contrivances used did not qualify as machinery. The mixing drum, although having mechanical parts, was operated manually, thus not fitting the definition of machinery as per the Privy Council's criteria in Corporation of Calcutta v Chitpore Municipality (AIR 1922 PC 27).

The Court emphasized the need for consistency in classification, referencing the Supreme Court's decision in Collector of Central Excise, New Delhi v Louis Shoppe (1996(3) SCC 445), which stated that the test is the predominance of handmade activity. The Court found that the predominant use of labor in the manufacturing process, including the manual operation of the mixing drum, supported the classification of Chandrika Soap as handmade.

The Court concluded, "After appreciating the flow of manufacturing process and predominant use of labor for manufacturing the soap including while mixing the materials, we are convinced that the claim of assessee that Chandrika Soap is 'handmade' is tenable."

2. Legality of the Tribunal's Direction on Calculating Interest on Differential Tax:

The second issue concerns the Tribunal's direction to levy interest on the differential tax between the assessed tax and the tax paid based on the return. This issue is contingent on the classification of Chandrika Soap.

Given the Court's finding that Chandrika Soap is handmade and thus eligible for the concessional tax rate of 4%, the reassessment of tax liability does not arise. Consequently, the Tribunal's direction on calculating interest on differential tax is rendered moot.

The Court stated, "In view of the findings recorded on substantial question No.1, the re-assessment does not arise and question is answered in favor of assessee and against the Revenue."

Conclusion:

The High Court allowed S.T. Revision Nos. 52, 54, and 56 of 2013 filed by the assessee, setting aside the Tribunal's findings and ruling that Chandrika Soap is handmade, thus eligible for the concessional tax rate of 4%. Consequently, S.T. Revision Nos. 41, 42, and 43 of 2013 filed by the Revenue were dismissed.

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