2018 (5) TMI 81 - HC - VAT and Sales Tax

Rate of tax - All-in-one Diapers, Under-pads and Sanitary Napkins - whether these commodities are taxable at the concessional rate of 4.5% under Schedule III of the Act or would be taxable in the residuary entry at the rate of 14.5% of the Act? - Vires of Section 60(8) of KVAT Act - retrospective effect of order passed by the Commissioner . Held that - the petitioner cannot successfully challenge the constitutional validity and vires of Section 60(8) of the Act and this Court does not find any lack of legislative competence of the State Government in enacting and amending Section 60(8) of the Act - such orders of Advance Ruling Authority can be undone or modified by overriding power vested in the Commissioner himself under Sub Section (8) inserted by Act No.54 of 2013 with effect from 01.08.2013, and that cannot be said to be inconsistent, conflicting or ultra vires the provisions nor the said provisions can be said to be lacking the legislative competence on the part of the State Legislature. Whether Clarification issued by Commissioner cannot be given retrospective effect? - Held that - Sub Section (8) of Section 59 does not give any such power to the learned Commissioner to issue any such Clarification or Ruling with a retrospective effect. In the absence of any such specific power, the respondent-Commissioner could not have issued the impugned clarification by the impugned order at Annexure-A dated 11.09.2014 to be effective from 01.04.2005 onwards - the retrospectivity of the said order does not fit into the parameters of Sub Section (8) of Section 59 of the Act and to that extent, it deserves to be quashed. Rate of tax - All-in-one Diapers, Underpads and Sanitary Napkins - Held that - It is well settled that if a commodity can by some rational understanding or analysis be brought or related to specific entry in the tax laws, the same cannot be taxed under the residuary entry and what is important is to apply the Trade Parlance Test or Common Parlance Test and not to apply the hair splitting exercise to apply the technical terms. The heading of the said Entry 60 namely, Medical and Pharmaceutical preparations enumerating several items also inter alia including therein, Wadding Gauze, Bandages and similar articles for medical, surgical etc., purposes has to be read ejusdem generis and the items manufactured and sold by the assessee are not the items which are alien to the said Entry 60 - They may not be exactly Wadding Gauze or Bandages but they serve almost same or similar purposes - Such Underpads or Diapers definitely help them in maintaining good medical and hygienic conditions of their body and therefore, such items can certainly be said to be similar articles read with wadding gauze and bandages for medical and surgical purpose etc. Petition allowed.

Summary

Issues Involved:
1. Validity of the Clarification Order dated 11.09.2014 by the Commissioner.
2. Vires of Section 60(8) of the Karnataka Value Added Tax Act, 2003.
3. Retrospective application of the Clarification Order.
4. Classification of 'All-in-one Diapers, Under-pads, and Sanitary Napkins' under Entry 60 of Schedule III of the Act.

Detailed Analysis:

1. Validity of the Clarification Order dated 11.09.2014 by the Commissioner:
The petitioner challenged the Clarification Order issued by the Commissioner on 11.09.2014, which reversed the previous decision of the Advance Ruling Authority (ARA) that classified 'All-in-one Diapers, Under-pads, and Sanitary Napkins' under Entry 60 of Schedule III of the Act, taxable at 4.5%. The Commissioner held these items taxable under the residuary entry at 14.5%. The Court found that the Commissioner's order lacked cogent reasons and was based on previous orders in unrelated cases without detailed discussion. The Court held that the impugned order did not deserve to be upheld on merits and quashed it.

2. Vires of Section 60(8) of the Karnataka Value Added Tax Act, 2003:
The petitioner argued that Section 60(8) of the Act, which allows the Commissioner to override the ARA's decisions, was ultra vires. The Court rejected this contention, stating that the delegation of powers to the Commissioner to issue clarifications and Advance Rulings is not illegal. The Court upheld the legislative competence of the State Government in enacting and amending Section 60(8) of the Act.

3. Retrospective application of the Clarification Order:
The petitioner contended that the Clarification Order should not have retrospective effect. The Court agreed, stating that a quasi-judicial authority cannot issue clarifications with retrospective effect unless explicitly empowered by the parent legislation. The Court found that Section 59(8) does not grant such power to the Commissioner, and therefore, the retrospective application of the order from 01.04.2005 was quashed.

4. Classification of 'All-in-one Diapers, Under-pads, and Sanitary Napkins' under Entry 60 of Schedule III of the Act:
The Court found substantial force in the petitioner's argument that these items fall under Entry 60 of Schedule III. The Court applied the principle of 'ejusdem generis' and concluded that these items, though not exactly "Wadding Gauze or Bandages," serve similar medical and hygienic purposes and should be classified under Entry 60. The Court emphasized the importance of the Trade Parlance Test or Common Parlance Test in classification matters and rejected the Commissioner's technical differentiation.

Additional Considerations:
The Court noted that the State Government later issued a Notification on 31.03.2016, specifying a concessional tax rate of 5.5% for Adult Diapers, indicating legislative intent to tax these items at a lower rate. The Court also highlighted that the Department had accepted the ARA's decision for seven years, and there was no justification for the Commissioner to reverse it after such a long period.

Conclusion:
The Court allowed the petition, quashing the impugned order dated 11.09.2014 by the Commissioner. The Court found no substance in the Revenue's arguments and upheld the ARA's original classification of the items under Entry 60 of Schedule III, taxable at the concessional rate. No order as to costs was made.