Dilip B. Bhosale, J.@mdashHeard learned counsel for the parties. Admit. By consent, heard forthwith for final disposal.
1.1. This group of Sales Tax Revision Petitions, u/s 65(1) of the Karnataka Value Added Tax Act, 2003 (for short the ''KVAT Act''), is preferred against a common order dated 11.07.2012 rendered by Karnataka Appellate Tribunal, Bangalore (for short the ''Tribunal''), in STA Nos. 392/2011 to 438/2011 and STA Nos. 801/2011 to 848/2011, whereby the appeals filed by the respondent-Company were allowed. The respondent in these Revision Petitions-M/s. Asian Paints Limited, shall be hereinafter referred to as "assessee" only.
1.2. In the appeals before the Tribunal, the assessee had called in question the order dated 18.12.2010 passed by the Joint Commissioner of Commercial Taxes (Admn.) (for short the ''revisional authority'') in exercise of the powers u/s 63-A of the KVAT Act. The revisional authority reversed the assessment orders dated 11.12.2006 passed u/s 38(1) of the KVAT Act, for the tax period commencing from April 2005 upto March 2006, by the Assistant Commissioner of Commercial Taxes (Audit-9), LDU Division, Bangalore (for short the ''assessing authority'').
Briefly stated the facts leading to these revision petitions are as under:
2.1 The assessee in these revision petitions is a Company incorporated under the provisions of the Companies Act, 1956 and also a registered dealer under the provisions of the KVAT Act. The assessee is engaged in the manufacture and sale of various kinds of paints, varnishes, thinners etc., including road marking paints/material. The road marking paints/material, hereinafter shall be referred to as ''RMP''. The assessing authority, had passed the assessment orders, dated 11.12.2006, accepting the return of turnover filed by the assessee in Form VAT 100. The assessee had accordingly paid output tax @ 4% on the sale of ''RMP'' by classifying it as plastic granules.
2.2 The revisional authority, in exercise of the powers u/s 63-A of the KVAT Act called for the records pertaining to the assessee and after perusing and examining the same found the assessment orders to be erroneous, improper and prejudicial to the interest of the revenue. After verification of the record it was noticed that the assessee had wrongly discharged the output tax liability @ 4% on the sale of RMP by wrongly classifying the same as ''plastic granules'' even though the RMP dealt in by the assessee is a finished product. Thus, the revisional authority revised and modified the assessment orders by leaving tax @ 12.5% on the RMP dealt in by the assessee as against the rate of tax at 4% claimed by the respondent. The revisional authority also held that the sale of Colour World Machine comprising of tinting machine, computer and UPS sold by the assessee should be treated as sale of single unit, liable for tax at 12.5% in terms of the provisions of Section 4(1)(b) of the KVAT Act. The revisional authority further held that the expenses incurred by the assessee on account of freight towards transportation of goods to its warehouse depot as well as the premises of its customers before sale and such expenditure being in the nature of pre-sale expenditure is exigible to tax as a part of taxable turnover, as applicable to the goods sold by the assessee to its customers. Accordingly, the assessment orders for the period between April 2005 and March 2006, were revised by the revisional authority.
2.3. The assessee, being aggrieved by the order of the revisional authority dated 18.12.2010 preferred appeals before the Tribunal. The Tribunal framed the following questions for consideration:
1. Whether the Appellant proves that the Assessing Authority, Revisional Authority and First Appellate Authority erred in levying tax at 12.5% on Apcomark & Thermolin?
2. Whether the appellant proves that the Assessing Authority as well as First Appellate Authority and SMR Authority erred in treating Colour World Machines'' and computer and UPS as a single unit and levying tax @ 12.5%?
3. Whether the appellant proves that Assessing Authority as well as First Appellate Authority erred in treating freight charges paid and reflected in profit and loss account of appellant as part of taxable turnover and further erred in levying tax on the same?
4. Whether the appellant proves that AA as well as FAA erred in disallowing the exemption on sales returns?
5. Whether the appellant proves that AA and FAA erred in levying full tax on inter-state sales without giving sufficient opportunity to the appellant to submit - ''C'' forms?
2.4. All the questions were answered by the Tribunal in favour of the assessee and against the department. Insofar as the first question is concerned the Tribunal held that though RMP is a composite mixture of Aliphatic petroleum Hydrocarbon resin, Titanium dioxide, glass beads. Calcium carbonate and Additives, since dominant ingredient contained is petroleum resin it (RMP) will have to be classified as petroleum resin. Having so observed, the Tribunal held that the RMP sold by the assessee is entitled to be considered as industrial input in terms of the notification so as to be liable for taxation at the rate of 4%. In short, the Tribunal held that RMP manufactured by the assessee is covered by the notification and hence liable to be taxed at the rate of 4%.
2. In the backdrop of the facts mentioned above, the department filed these revision petitions u/s 65(1) of the Act raising the following questions of law for our consideration:
(a) Whether, on the facts of the case, the appellate tribunal is correct in law in holding that ''Apcomark'' and Thermoline'' products which are road marking paints (RMP) dealt in by the assessee - company are to be considered as industrial input liable to be taxed at 4% in terms of the Notification bearing No. FD 197 CSL 2005(6) Bangalore, dated 30.04.2005?
(b) Whether on the facts of the case, the appellate tribunal is correct in law in holding that in the case of colour world machines dealt in by the assessee-company, namely, tinting machine, computer and UPS are independent and that the said three items are to be taxed separately as independent units?
(c) Whether the appellate tribunal is correct in law in holding that the expenditure incurred by the assessee - company towards freight charges cannot be included and does not form part of the turnover and as such freight charges are included in consideration - amount of the goods itself?
(d) Whether on the facts of the case, the appellate tribunal is correct in law in setting aside the disallowance of respondent-assessee''s claim towards ''sales returns'', while the disallowance is sustained by the assessing authority and first appellate authority?
The first two questions of law are common in all revision petitions. The third question arises only in STRP Nos. 199/2013 & 415-425/2013, STRP Nos. 200/2013 & 308-318/2013, STRP Nos. 204/2013 & 533-543/2013 and STRP Nos. 205/2013 & 46-55/2014. The last question of law is raised in STRP Nos. 202/2013 & 319-329/2013, STRP Nos. 203/13 & 57-67/2014, and STRP Nos. 206/13 & 330-340/2013.
3. We have heard learned counsel appearing for the parties at considerable length and with their assistance gone through the impugned orders as well as the other materials placed on record and so also the judgments relied upon by them in support of their contentions.
4. At the outset, we would like to deal with the first question which was addressed by both the learned counsel at length. Mrs. S. Sujatha, learned AGA appearing for the Department submitted that RMP, which is known in the trade as ''Apcomark'' and ''Thermoline'', is an unclassified item exigible to tax at 12.5% in terms of Section 4(1)(b) of the KVAT Act and not at 4% as declared by the assessee in its monthly returns filed in Form VAT 100. She submitted that RMP being a finished product cannot be categorized as petroleum resin. After inviting our attention to Entry No. 51 of the 3rd Schedule of the KVAT Act, which deals with ''industrial inputs and taking materials as may be notified'', she submitted that - RMP cannot be classified as petroleum resin as specified at Sl. No. 133 or 139 of the Notification No. FD 197 CSL 2005(6) Bangalore dated 30.04.2005 (Sl. No. 22) (for short ''the Notification'')- In short, she submitted that road marking material is not covered by the Notification and hence exigible to tax at the rate of 12.5% as contemplated by Section 4(1)(b)(iii) of the KVAT Act.
5. She further submitted that the test to be applied for classification for the purpose of excise duty is the common parlance test, i.e., the sense in which the product is understood in the trade parlance or commercial usage and understanding. She submitted that the RMP do not find place in the notification and merely because one of the ingredient/chemicals used for manufacturing RMP is petroleum resin it cannot be classified as petroleum resin. She submitted that even if it is assumed that the RMP can be classified as petroleum resin still the petroleum resin used in the product does not find place in the notification. The notification has two entries - Sl. No. 133 and 139 having heading and sub-headings 3911, 3911.10.10 and 3911.10.90. It does not make specific reference to subheading 3911.90.90 assigned to the resin, admittedly used in the mixture of RMP by the assessee. From bare perusal of these entries, it is clear that Entry at Sl. No. 133 is general in nature whereas, Entry at Sl. No. 139 is specific entry which covers only two petroleum resins viz., ''coumarone indene'' having HSN Code No. 3911.10.10 and other petroleum resins having HSN Code No. 3911.10.90. Insofar as entry at Sl. No. 133 in the notification is concerned, she submitted that it is general in nature apart from the fact that it only gives heading (HSN) 3911. The product with which we are concerned in this case, she submitted, is assigned HSN Code No. 3911.90.90 by the assessee which in any case is not covered by this notification and therefore, the benefit of notification cannot be extended to the assessee. In rejoinder, she submitted that even if the Rules for Interpretation are applied still they would not help the assessee to claim that their product-RMP can be identified as petroleum resin. In other words, she submitted that petroleum resin being one of the ingredients for manufacturing RMP that would not give its essential character to the product.
5.1. In support of her submission, she placed reliance upon the following judgments: Asian Paints India Limited vs. Collector of Central Excise, 1998 (17) STC 39 (SC),
5.2. On the other hand, Mr. Shivadass, learned counsel appearing for the assessee submitted that the RMP is classified under Chapter 39 and assigned HSN code 3911.90.90 of the Central Excise Tariff Act, 1985 (for short ''CET Act'') by virtue of the application of the General Rules for interpretation of the First Schedule to the CET Act (for short ''Rules for Interpretation''). He submitted that the Rules for interpretation, in particular Rule 3(b) thereof, would give the RMP, being a mixture of different components/chemicals, (petroleum resin being a dominant component), its essential character to the RMP-mixture. After inviting our attention to HSN code 3911 and entries at Sl. No. 139 of the Notification namely subheadings 3911.10.10 and 3911.10.90, he submitted that once the road marking material is classified under chapter heading 3911 as petroleum resins it gets covered under Sl. No. 133 and/or Sl. No. 139 of the Notification.
6. He then submitted that Sl. No. 51 of the third Schedule refers to the industrial inputs and packing materials that should be notified. The notification notifies industrial inputs and packing materials which are liable to be taxed at the rate of 4%. He submitted that the adoption of HSN code for the purposes of classification, the Rules for Interpretation contained in the Central Excise Tariff Act need to be applied whenever specifically indicated than the common parlance test. In support of his contention, he placed reliance upon the judgment of the Supreme Court in
6.1. He submitted that various classifications issued by the Commissioner of Commercial Tax, Bangalore, from time to time on the rate of duties for industrial input also indicate that the notification is by reference to the CET Act and not by determination of classification independently.
6.2. He invited our attention to Rules 2(b) and 3(b) of the Rules for Interpretation to submit that composite goods, such as, RMP, consisting of different chemicals needs to be classified as if they consisted of material or components/chemical which give their essential character. The RMP, he submitted, has been rightly classified as petroleum resins under heading 3911.90.90 and the CET Act by virtue of the application of the General Rules for Interpretation as petroleum resins provides the essential character to the mixture/product.
6.3. Apcomark and Thermoline, he submitted, are typical RMP intended for application on roads for better visibility, road safety and traffic management. For their application, they undergo further processing by the applicators before being applied on the road and therefore differ from paint. He submitted that though the mixture is a physical blend of Aliphatic Petroleum Hydrocarbon Resin, Titanium Di Oxide, Calcium Carbonate, Glass Beads and Additives, the petroleum resin present in the mixture provide essential character to the product-RMP.
6.4. In support of his contentions, he placed reliance upon the judgment of the Supreme Court in
6.5. For dealing with the first question of law, we need to examine whether the product-RMP of the assessee-company, which is known as ''Apcomark'' and ''Thermoline'' can be classified as petroleum resin and that it is covered by the entries at Sl. Nos. 133 or 139 of the Notification. In other words, it will have to be examined whether the existence of petroleum resin namely Aliphatic Petroleum Hydrocarbon Resin in the RMP would provide essential character to the product (RMP) as contemplated by Rule 3(b) of the Rules for Interpretation.
7. Section 4 of the KVAT Act provides for liability to tax and rates thereof. Under sub-section (1) of Section 4 - every dealer who is or is required to be registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover in respect of goods mentioned in 2nd, 3rd and 4th schedule appended to the Act at the rates specified therein. Clause (b) of sub-section (1) of Section 4 provides that every dealer shall be liable to pay tax, on his taxable turnover in respect of the goods specified in sub-clause (i) and (ii) of clause (b) of sub-section (1) at the rate provided therein. Insofar as, sub-clause (iii) of clause (b) of sub-section (1) of Section 4 is concerned, it is a residuary entry which provided the rate of tax at 12.5%, (at the relevant time) if the goods were not covered under sub-section (1)(a) and sub-section (1)(b)(i)(ii) of Section 4 of the KVAT Act. Sub-section (3) of Section 4 empowers the State Government to reduce the tax payable under sub-section (1) in respect of any goods by issuing notification.
8. According to the assessee, their product being industrial inputs fall under Entry at Sl. No. 51 of the Third schedule, which reads as follows: "Industrial inputs and packing materials as may be notified". The Government of Karnataka issued the Notification dated 30.04.2005, in exercise of the powers conferred by clause (a) of subsection (1) of Section 4 read with Entry Sl. No. 51 of the Third Schedule of the KVAT Act, in supersession of Notification No. FD 55 CSL 2005 (8), dated 23.03.2005, specifying with effect from the first day of May, 2005, the goods in Column (3) of the table, with heading and subheading numbers under the CET Act, specified in Column (2) as "industrial inputs and packing materials". The relevant serial numbers in the Notification are 133 and 139 and the relevant heading and sub-heading are 3911, 3911.10.10 and 3911.10.90. It would be relevant to reproduce those entries, which read thus:
9. It would be relevant to reproduce the tariff item No. 3911 along with description of goods, unit, and rate of duty in Chapter 39 of the CET Act, which reads thus:
10. To understand and interpret the relevant entries/serial numbers, headings and sub-headings, description of goods in the Notification better it would be relevant to look into the explanations appended to the Notification, which reads thus:
Explanations- (1) the Rules for Interpretation of the Central Excise Tariff Act, 1985 read with Explanatory notes as updated from time to time published by the Customs Co-operation Council, Brussels apply for interpretation of this Notification.
(2) where any commodities are described against any heading or, as the case may be, sub-heading, and the aforesaid description is different in any manner from the corresponding description in the Central Excise Tariff Act, 1985, then only those commodities described will be covered by the scope of Notification and other commodities though covered by the corresponding description in the Central Excise Tariff will not be covered by the scope of this Notification.
(3) Subject to Explanation 2, for the purpose of any entry contained in this notification, where the description against any heading or, as the case may be, sub-heading, matches fully with the corresponding description in the Central Excise Tariff, then all the commodities covered for the purposes of the said tariff under that heading or sub-heading will be covered by the scope of this notification.
(4) Where he description against any heading or sub-heading is shown as "other" then the interpretation as provided in Explanation 2 shall apply.
11. From bare perusal of Explanation-1, it is clear that the Rules for Interpretation of the CET Act, read with Explanatory notes as updated from time to time published by the Customs Co-operation Council, Brussels apply for interpretation of this Notification. In view thereof, our attention was invited by learned counsel appearing for the assessee to the Rules for Interpretation of this Schedule to make his submission good that the existence of petroleum resin in the mixture-RMP gives its essential character so as to classify it as petroleum resin. We would go to Rule 3(b) of the Rules for Interpretation little later.
12. Learned AGA appearing for the Department, invited our attention to Explanation-2 and submitted that RMP does not find place in the Notification nor the components/ingredients, thereof find place in the Notification so as to cover it by the Notification. Explanation 2 states that where any commodities are described against any heading or, as the case may be, sub-heading, and the aforesaid description i.e., description given in Column 3 of the Notification, is different in any manner from the corresponding description in the CET Act then only those commodities described in Column 3 of the Notification will be covered by the scope of Notification and other commodities though covered by the corresponding description in the Central Excise Tariff will not be covered by the scope of this Notification.
13. There doesn''t appear to be any dispute that the assessee described their product by assigning HSN code 3911.90.90. This HSN Code, however, does not find place in the entries at Sl. No. 133 and 139 in the Notification. Sl. No. 133 in the Notification provides HSN Code with heading and sub-headings bearing 3911, 3911.10.10 and 3911.10.90. The sub-heading 3911.90.90 does not find place in the Notification. It was, therefore, submitted, that petroleum resin, used in the RMP is not covered by Sl. No. 133 heading 3911 or Sl. No. 139 subheading 3911.10.10 or 3911.10.90. It was further submitted that if the legislature intended to cover all subheadings under tariff 3911 in Chapter 39 of the CST Act, it would not have given specific sub-headings at Sl. No. 139 in the Notification. In other words, the legislature would have incorporated only Entry at Sl. No. 133 with heading 3911 in the Notification.
14. In order to secure a uniform classification of commodities among various taxing enactments be it parliamentary or legislative enjoining prescription and realization of duty/levy, the world/International Customs Organisation developed a system of code numbers for commodities catalogued in schedules of such legislations based on Harmonised System of Nomenclature (for short "HSN") since adopted by the Customs Tariff Act, 1975. The organization also formulated rules for interpretation of the harmonized system. The norms for classification of goods in the nomenclature have also been fulfilled. Insofar as the instant revision petitions are concerned, the rules for interpretation of the notification, as appended to the notification by way of explanations enjoining that commodities allotted HSN code numbers and to be extended the same meaning as recorded in the Customs Tariff Act and that while interpreting such a commodity if any inconsistency is observed between meaning of a commodity without HSN number and the meaning of a commodity with HSN number, the commodity should be interpreted by including it in that entry which has assigned the HSN number. From bare perusal of the explanations appended to the notification, it is clear that rules for interpretation will have to be looked into to appreciate the contentions urged on behalf of the parties.
15. We would now like to consider whether RMP consists of five components/chemicals including aliphatic petroleum hydrocarbon resin, being a petroleum resins can be classified as petroleum resins in the light of the test of essentiality as contemplated by Rule 3(b) of the General Rules for Interpretation. If our answer to this question is in the negative, we need not either enter into any other controversy or to apply common parlance test and in that event the first question of law will have to be answered against the assessee and in favour of the Department. This is not in dispute.
16. It would be relevant to reproduce relevant portion of Rule 1, 2 and 3 of the General Rules for Interpretation, which read thus:
1. The titles of Sections, Chapters and Sub-Chapters are provided for case of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions.
2. (a) ...............
(b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of rule 3.
3. When by application of rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows:
(a) the heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.
(b) mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.
(c) when goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.
17. A glance at the aforesaid Rules, would show that these Rules will have to be applied in view of the fact that RMP is a mixture of five components/chemicals. As a matter of fact, the assessee has placed on the record a report of the National Test House, Government of India dated 11-11-2009, procured by them seeking clarification in respect of their product RMP which is a mixture of five components/chemicals. We would like to reproduce the report to appreciate whether RMP stand to the ''test of essential character''. The report reads thus:
GOVERNMENT OF INDIA
NATIONAL TEST HOUSE
MINISTRY OF CONSUMER AFFAIRS,
FOOD AND PUBLIC DISTRIBUTION,
DEPARTMENT OF CONSUMER AFFAIRS,
NATIONAL TEST HOUSE, ALIPORE,
KOLKATA-27
All communication should be addressed to the Director, National Test House by title and not by name
Date: 11.11.2009
No. NTH. KH, CH(P) 2008/00148
To:
M/s. Asian Paints Ltd.,
53-A "Arianth building",
1st Floor, Mirza Galib Street,
Kolkatta-700016
Attn: Dr. B.P. Mallick
Sub: APCOMARK & THERMOLINE Brand Hot Melt Road Marking Material
Ref: your letter dated: 23.10.2008.
With the above reference this is to clarify that:
Apcomark and Thermoline samples are typically road marking material intended for application on roads for better visibility, road safety and traffic management
Based on the analysis carried out in our lab of NTH, Kolkatta, it was found that these samples are physical blends of following Chemicals and not dispersed product like that of liquid paint.
a) Aliphatic Petroleum Hydrocarbon resin Chemical provides bonding to concrete or tar road surface when applied as a hot melt using a special machine.
b) Titanium dioxide (TI02) white Pigment Chemical-used to improve brightness of the marking which in turn improve safety on road due or better visibility,
c) Calcium Carbonate (CAC03) Chemical-used as filler to give thickness file reinforcement and control flow.
d) Glass Beads retro reflective properties to improve night visibility on the road.
e) Additivies to ensure properties such as flaw index, hardness etc.
The % constituents of the above stated raw materials of APCOMARK/THERMOLINE samples are shown in the T.C. No. NTH(ER)/CH(P)/2008-148A, B & C respectively.
The road marking material tested above is a simple physical blend of above chemicals since all the chemicals are possible to be isolated individually and there is an observable chemical change in the identity or composition.
Being the Physical blend of several chemicals, road marking materials cannot be applied as such like paint using conventional paint application tools like brush, spray etc. These materials require melting at high temperature (180 - 200 deg C) in a separate pot for proper homogenization then applied on road using a special equipment. Molten material forms a strong bond with the asphalt surface of road due to melt fusion.
At the time of application HMRM powder mixture is heated gradually upto 180 - 200 deg C under continuous agitation in a pre-melting equipment. The hydrocarbon resin melts. In the molten resin mass, TI02, CaC03, Additives and Glass beads are homogenized by stirring to form fluid paste. This then transferred to an application equipment where the material is maintained in a molten state under continuous agitation. The homogenized molten mass is passed through the narrow slit in the application equipment opening to cast marking on the road.
Based on the analysis of APCOMARK/THERMOLINE samples we can conclude that these materials are dry solid blend (physical mixture) of several chemicals which are heated, melted and homogenized and then cast on the road with specialized equipment.
Thanking you
Yours faithfully,
(RATNA S. DE)
Scientist-SC(Chemical)
18. There cannot be any dispute that the Rules for Interpretation require that in cases where HSN code number is indicated against the tariff item mentioned in the notification, then one has to go by the provisions of the HSN as adopted by the CET Act. If that is the case, then, one needs to interpret the entries in the notification in the light of the entries in the CET Act read with the explanations appended to the Notification applicable to the corresponding entries in the CET Act (See Reckitt Benckiser India Ltd. (supra))
19. Rule (1) of the Rules for Interpretation would not help to classify RMP in the present case. The other relevant rule is Rule 2(b) and Rule 3(b) which provide that classification of goods consisting of more than one material or substance shall be according to the principles contained in Rule 3. Rule 3(b) provides for mixtures or composite goods consisting of different materials, which cannot be classified with reference to Rule 3(a) as in the present case, are to be classified as if they consisted of the material or component which gives them essential character. It is not in dispute that the RMP is a composite item. Since the product-RMP in question is a composite goods, the test of essentiality will have to be applied to find out whether petroleum resin being one of the ingredients/component gives its essential character to the product (RMP).
20. Chapter 39 of CET Act deals with ''plastic and articles thereof''. As stated above, under heading 3911 petroleum resins, Coumarone-indene resins, polyterpenes, polysulphides, polysulphones and other products specified in Note 3 to this Chapter, not elsewhere specified or included, in primary forms stand covered as plastics and other articles thereof. It is not in dispute that the product in question (RMP) is a composite item. Since the product in question is a composite goods, the test of essentiality shall apply. The test of essentiality refers to "essential character". The test states that, if the manufactured goods has the essential character of petroleum resins, then one has to treat the product as petroleum resins.
21. Rule 3(b) of the Rules for interpretation requires that composite goods, mixtures and goods put up in sets have to be classified on the classification of that material or component which gives to the product their essential character. In other words. Rule 3(b) requires classification based on the material which gives its the essential characteristics. This is the test of essentiality (See Kemrock Industries & Exports Ltd. (supra). The effect of the tariff schedule is to classify the products under different heads according to the character of the product. In interpreting a tariff entry, Rules for interpretation, as observed earlier, are helpful, particularly in cases of composite goods. (See Collector of Central Excise, Hyderabad vs. Bakelite Hylam Ltd., and CCE vs. Wood Polymers Ltd.) We may also mention, at this stage, that Rule 3 of the Rules for interpretation contains the principles to be applied for classification of the goods which are prima facie classifiable under two or more headings. Since RMP is composite goods made from different chemicals/components, viz., (i) Aliphatic Petroleum Hydorcarbon Resin chemical (ii) Titanium Dioxide white pigment chemical (iii) Calcium carbonate chemical and (iv) glass beads having retro reflective properties and (v) Additives with which it is impregnated, its classification has to be determined in the light of Rule 3(b) of the Rules. According to the said Rule, composite goods consisting of different materials are made up of different components and which cannot be classified by reference to sub-Rule(a), shall be classified as if they consists of raw material components which gives them their essential character insofar as this criteria/test is applicable.
22. In the present case, as is seen from the report of National Test House, Government of India, dated 11.11.2009, RMP is impregnated with four different chemicals and glass beads where, it will have to be seen whether petroleum resin i.e., Aliphatic Petroleum Hydrocarbon resin can be identified to say that it gives its essential character to the product.
23. The product-RMP of the assessee is a physical blend of four chemicals including glass beads. It is not a dispersed product like that of a liquid paint. It being the physical blend of several chemicals, it cannot be applied as such like paint using conventional paint application tools like brush, spray etc. After all the five ingrediants/components are mixed, the mixture (powder) is required to be melted at high temperature i.e., 180-200 C in a separate pot for proper homogenization then applied on road using a special equipment. Every chemical used for making the mixture has independent properties/characteristics, which plays its role to call it R.MP. Insofar as Aliphatic Petroleum Hydrocarbon resin, which is a petroleum resins, is concerned it provides bonding to concrete or tar road surface when applied as hot melt using a special machine. At the time of application of hot melt road marking powder is heated gradually up to 180-200 C under continuous agitation in a pre-melting equipment. The Aliphatic Petroleum Hydorcarbon Resin melts and thereby Titanium Dioxide white Pigment chemical. Calcium Carbonate chemical, Additives and glass beads are homogenized by stirring to form fluid paste. The paste then is transferred to an application equipment where the material is maintained in a molten state under continuous agitation. The homogenized molten material is passed through the narrow slit in the application equipment opening to cast marking on the road. It is thus clear that these materials/components are dry solid blend (physical mixture) of several chemicals which are heated, melted and homogenized and then cast on the road with specialized equipment. When we look at the properties/characteristics of each of the chemical we find that Aliphatic Petroleum Hydrocarbon Resin chemical is used for providing bonding to concrete or tar road surface when applied as a hot melt using a special machine and for converting the remaining four components into fluid paste. All other chemicals used also have their own properties/characteristics, which play equally important role in making the RMP. Altogether make the mixture (powder) which ultimately is used as RMP. It would be difficult to accept that Aliphatic Petroleum Hydrocarbon only gives/provides essential characteristic to RMP. It is not in dispute that Aliphatic Petroleum Hydorcarbon Resin chemical occupies 20% of the RMP and the other four components/chemicals including glass beads occupy major portion of the fluid paste. The test report shows what are the characteristics of each of the chemicals and for what purpose they are used in making the final product RMP. The report also shows that RMP cannot be made or given desired effect in the absence of any of the chemicals. It is, in this backdrop, if we apply Rule 3(b) of the Rules and go by the test of essentiality, the RMP, in our opinion, cannot be classified as petroleum resins and it cannot be stated that the said petroleum resin gives its essential character to RMP.
24. In the case of assessee-Asian Paints India Ltd., (supra), the Supreme Court was considering the question whether ''decoplast'' would be considered as plastic emulsion paint in view of its composition, its characteristics, its usage and its reputation in trade parlance. The Supreme Court, after referring to its judgment in
25. In
The mere fact that the substance or raw material out of which it is made has also been taxed in some other form, when it was sold as a separate commercial commodity, would make no difference for purposes of the law of sales tax. The object appears to us to be to tax sales of goods of each variety and not the sale of the substance out of which they are made.......... As soon as separate commercial commodities emerge or come into existence, they become separately taxable goods or entities for purposes of sales tax.......... The law of sales tax is also concerned with ''goods'' of various descriptions. It, therefore, becomes necessary to determine when they cease to be goods of one taxable description and become those of a commercially different category and description.
25.1. In
25.2. In view of the judgments of the Supreme Court referred to above and the Rules for Interpretation, to us it is clear that RMP cannot be classified as petroleum resins having HSN code 3911.90.90 so as to cover it by the Notification. That apart, the Notification does not make a reference to the petroleum resins assigned with HSN code 3911.90,90. In the result, we answer the first question in favour of the Department and against the assessee.
26. Next, we would like to consider whether Colour world machine dealt in by the assessee, comprising of tinting machine, computer and UPS are liable to tax as one single unit or three independent units to be taxed separately. Colur World machines (tinting machine, computer and UPS) are used for intermixing of colours as per the desired requirement of the customers. According to learned counsel for the assessee, all the three units are independent and cannot be treated as one single machine. Tinting machine, according to the assessee, is operated with the help of computer and UPS. UPS in common parlance is known as inverter. According to the assessee, all the three units have independent identity and therefore, each of them should be levied separately and cannot be taxed as a single machine @ 12.5%. There doesn''t appear to be any dispute that according to the Department all the three units were levied tax @ 12.5% only when they are sold as a single machine/unit.
27. There is no dispute that the computer (CPU) is a part of tinting machine and fixed in the machine itself and cannot be separated or used for any other purpose though it can be operated with the help of monitor and key board which can be detached from the machine. In other words, the computer (CPU) is an inseparable part of the machine. We have perused a photograph of the machine which clearly shows that the computer (CPU) is inbuilt and it cannot be separated and can be operated with monitor and keyboard. It may be true that the monitor and keyboard, supplied by the assessee, can be detached or any other monitor and key board can be attached to the machine, however, we are not dealing with the case of monitor and keyboard separately. We are concerned with a Colour World Machines, consisting of tinting machine, UPS, and computer, and that too when it is sold as one single unit. Monitor and keyboard are supplied/sold by the assessee as parts of the computer for the purpose of mixing of various colours as per the desired requirements of the customers. UPS which is known as converter, is used for continuous supply of electricity so that the dispensation process in the tinting machine is not affected. The tinting machine is usable only in combination with computer and UPS. The question is when they are sold together whether it should be treated as one single unit. There is no dispute that without computer and UPS, tinting-colour world machine cannot be used for the purpose of intermixing paints. As per the brochure provided by the Company, colour world machine constitute an equipment comprising of tinting machine, computer and UPS. It is not in dispute that the assessee-Company give the colour world machines on rent, consisting of all the three units and the lease rental is paid to the assessee by the lesseses as one unit.
27.1. Thus, we find ourselves in agreement with the findings recorded by the assessing authority, that the tinting machine, computer and UPS, when are sold as one single unit, should be taxed as unclassified attempt u/s 4(1)(b) of the KVAT Act. The finding of fact recorded by the Tribunal that all three units are independent and dealers have a choice to purchase either one or two or all three together and, therefore, cannot be treated as one single unit, in our opinion, is perverse. The Tribunal has not taken into consideration that the Department levied tax @ 12.5% only when all three machines, which are inseparable or indispensable, are sold as one single unit. As observed earlier, Computer (CPU) cannot be separated from the machine and it is inbuilt and therefore, it cannot be treated as different from the tinting machine. It is not in dispute that the tinting machine cannot be operated without computer and UPS, and that they are indispensable parts of tinting machine and, therefore, all three together deserve to be treated as one single unit and liable to be taxed at 12.5%, as unclassified item u/s 4(1)(b) of the KVAT Act. The second question is accordingly answered in favour of the Department against the assessee.
27.2. The third question raised by the department pertains to freight charges, which according to the assessee cannot be included or does not form part of the turnover. According to the assessee, they do not recover freight charges from the customers separately. In other words, they, did not collect freight charges separately and that they included the same in the price of the goods collected from the customers/dealers.
28. It reveals from the record that the assessee effected sales from its warehouses to various dealers/distributors through transportation network arranged by it. The assessee was under an obligation to transport the goods to buying dealers/distributors and the expenditure incurred by the dealer-company on the freight in order to carry the goods from the warehouse to the buying dealer or distributor is under implied contract as per the scheme of sales as the delivery of goods is at the premises of customer. Therefore, it may be true, the freight incurred by the assessee, becomes a part of the amount for which the goods are sold to the buying dealer/distributor. The assessing authority overlooked that the freight charges were not separately collected by the assessee and they were a part of the price of the goods. The Tribunal, in our opinion, has rightly held that the assessee has included freight charges with the consideration amount of goods. We do not find any reason to interfere with the finding of fact. On the face of it the question as framed is not a question of law and it does not arise for our consideration. There is sufficient material on record, as referred to by the Tribunal, to sustain the findings of fact that the freight charges were received along with the price of goods and/or that the assessee paid freight charges and that they never recovered from the buying dealers/distributors. The third question stands answered accordingly. The last question of law pertains to disallowance of assessee''s claim towards "sales returns". The assessee has produced adequate documents and detail statement on record which reveal invoice numbers, date and when the goods were received in their premises. In order to demonstrate the methodology adopted, they have also placed on record VAT-100 Form filed in the month of November 2008, during which, sales returns were shown of Rs. 1,28,65,773/-. They have also placed on record lorry receipts regarding the return of goods mentioning invoice numbers along with dates in support of their case of sales returns. Sales returns are also filed on record for the relevant period which show the movement of goods including lorry receipt numbers. It is against this backdrop the case of the department was that the assessee did not produce on record sufficient material to show that the buying dealers returned the goods. Learned AGA for the petitioner-State invited our attention to the observations made by the Tribunal that the department ought to have cross-verified with the buying dealers to find out whether they returned the goods. It may be difficult for the department to cross verify every entry but, it was possible for the department to cross-check at least one or two entries so as to find out whether the material placed on record by the assessees in support of their case of return of goods was genuine. On the other hand, the Tribunal has, after assessing the entire material on record, recorded a categoric finding that all the documents insofar as sales returns are concerned, have been properly maintained by the assessee as provided for in law and answered this question in favour of the assessee. The department has not made out any case so as to interfere with this finding of fact and we are not inclined to interfere with the same. The fourth question also is not a question of law that arise for our consideration.
In the result, these STRPs are disposed of in terms of this judgment with no order as to costs.
