2013 (5) TMI 29 - HC - VAT and Sales Tax

Bone meal - whether lies under Entry 17 of the Third Schedule to the KGST Act or under Entry 57 to the first Schedule among fertilizers - exemption from tax disallowed - Held that - The judgement of Arya Vaidya Pharmacy and Another Versus State of Tamil Nadu 1989 (3) TMI 355 - SUPREME COURT OF INDIA as relied by assessee have had application to the facts of this case, if Court had accepted that bone meal had qualified to be an organic manure and which case alone its exclusion would be discriminatory. Since it has been held that bone meal did not qualify to be an organic manure for the reason that it is not produced by a natural process, the principle laid down by the Apex Court has no relevance. Going by the words of the statute only those items which are produced or derived naturally are eligible for inclusion in Item 17. Even if the case of the petitioners is accepted that would only mean that certain items which are ineligible to be included are also included in the Third Schedule. In view, even if what is contended is factual, petitioners cannot say that yet another ineligible items should also be included through the intervention of this court. Therefore, this argument raised by the learned counsel for the petitioners also cannot be accepted and the relief sought for cannot be granted on that basis. Bone meal cannot qualify as an organic manure for the purpose of Entry 17 of the Third Schedule to the KGST Act. These writ petitions were entertained by this Court and on the prima facie case made out, this Court also granted stay. Therefore, it will not be fair to penalise the petitioners by making them liable for interest on the tax amount. Thus direct that if the petitioners pay the tax due under the assessment orders, which are stayed by this Court within four weeks from today, they will be relieved of the liability for the payment of the interest.

Summary

Issues:
1. Exemption from tax on 'bone meal' under KGST Act.
2. Classification of 'bone meal' under Entry 17 and Entry 57 of the KGST Act.
3. Discriminatory exclusion of 'bone meal' from organic manures.
4. Interpretation of 'organic manure' under Entry 17 of the Third Schedule.
5. Legal precedent regarding discriminatory taxation.

Analysis:
The judgment by the Kerala High Court addressed several issues related to the taxation of 'bone meal' under the Kerala General Sales Tax (KGST) Act. The petitioners, manufacturers of 'bone meal,' claimed exemption from tax for the assessment years 2003-2004 and 2004-2005 under Entry 17 of the Third Schedule to the KGST Act. However, tax was levied on them at 4% based on the classification of 'bone meal' under item No.57(V) of the first Schedule to the KGST Act. The petitioners challenged this classification as arbitrary and discriminatory, seeking to set aside the assessment orders (Exts.P1 and P2).

The court analyzed the relevant Entries of the KGST Act, specifically Entry 17 of the Third Schedule and Entry 57 of the First Schedule. Entry 17 included organic manure derived naturally from plants or animals, excluding those specifically mentioned in the First Schedule. The explanation clarified that organic manure must be produced or derived naturally without any mechanical or unnatural process. The court determined that 'bone meal' did not qualify as organic manure as it was produced through a mechanical process, not naturally from plants or animals, as per the counter affidavit filed by the respondents.

The judgment referred to legal precedents, including the Apex Court's decision in Arya Vaidya Pharmacy case, emphasizing the need for a rational basis for discriminatory taxation within the same category of commodities. However, the court held that the principle did not apply in this case since 'bone meal' did not meet the criteria for organic manure. The court also cited cases like Marico Industries Ltd. v. State of Karnataka and State of U.P. v. Deepak Fertilizers & Petrochemical Corporation Ltd. to support its decision on discriminatory taxation.

Furthermore, the court rejected the argument that other mechanically produced items were included in Entry 17 of the Third Schedule, emphasizing that only items produced or derived naturally could qualify. The judgment concluded by directing the petitioners to pay the tax due under the assessment orders within four weeks to avoid liability for interest, dismissing the writ petitions on the grounds that 'bone meal' did not meet the criteria for organic manure under the KGST Act.