Espi Industries And Chemicals … vs Commercial Tax Officer And Ors. on 10 October, 2007

0
83
Andhra High Court
Espi Industries And Chemicals … vs Commercial Tax Officer And Ors. on 10 October, 2007
Equivalent citations: (2008) 12 VST 112 AP
Author: R Ranganathan
Bench: B Nazki, R Ranganathan


ORDER

Ramesh Ranganathan, J.

1. The assessment order of the first respondent dated May 10, 2007, levying tax and penalty, is impugned in this writ petition as arbitrary, illegal and contrary to the provisions of the Andhra Pradesh Value Added Tax Act, 2005 (Act No. 5 of 2005) (hereinafter referred to as “the APVAT Act”) and the petitioner seeks a declaration that aluminium hydroxide paste, and magnesium hydroxide paste, manufactured by them, and certified by the Director, Drugs Control Administration, are “bulk drugs” and are taxable for the assessment year 2005-06 only at four per cent under entry 16 of Schedule IV of the APVAT Act.

2 The petitioner, a private limited company carrying on the business of manufacture and sale of bulk drugs, pharmaceutical formulations, etc., is an assessee with the first respondent. For the assessment year 2005-06, the petitioner reported a net turnover of Rs. 5,39,60,737 of which sale of pharmaceutical formulations were for Rs. 3,49,97,675 and bulk drugs for Rs. 1,80,56,069. According to the petitioner they collected and paid tax at four per cent. The first respondent issued notice dated March 1, 2007 proposing to assess the petitioner, on the turnover of bulk drugs, at 12.5 per cent instead of four per cent on the ground that aluminium hydroxide paste and magnesium hydroxide paste, though “bulk drugs”, were taxable as unclassified goods at 12.5 per cent under Schedule V of the APVAT Act. The petitioner, vide letter dated April 12, 2007, submitted their objections to the show cause notice contending that levy of tax at 12.5 per cent on the sales turnover of bulk drugs was without jurisdiction as the competent authority, the Director, Drugs Control Administration, had classified both aluminium hydroxide paste and magnesium hydroxide paste as “bulk drugs” and, since “bulk drugs” were listed under entry 16 of Schedule IV, they were taxable only at four per cent. The petitioner contended that entry 16 of Schedule IV applied to all bulk drugs without limitation, that sub-classification thereof by way of an executive order was impermissible in law, that G.O. Ms. No. 398 dated March 31, 2005 issued by the Government, in purported exercise of its powers under Section 76(2) of the APVAT Act specifying certain HSN code numbers to some of the goods mentioned in the Schedule, was contrary to law, that an executive order could not override legislation covering the field and, since bulk drugs were classified under entry 16 of Schedule IV of the APVAT Act and were taxable only at four per cent, the Government could not, by an executive order, restrict operation of the said entry and hold that only eight categories of “bulk drugs” were entitled to be taxed at four per cent.

3. The first respondent, in his assessment order dated May 10, 2007, relied on an order passed by the Authority for Clarification and Advance Ruling, in the case of M/s. Elegant Chemical Enterprises Pvt. Ltd., wherein it was held that, in the light of G.O. Ms. No. 398 dated March 31, 2005 read with G.O. Ms. No. 419 dated April 15, 2005, G.O. Ms. No. 1596 dated August 27, 2005 and G.O. Ms. No. 1615 dated August 31, 2005, and since the HSN codes as referred in Chapter 28 of the Central Excise Tariff Act was not included in the aforesaid G.Os., only such of the “bulk drugs” covered by the HSN codes notified against entry 16 of Schedule IV were liable to be taxed at four per cent and other bulk drugs taxable at 12.5 per cent. The assessment order dated May 10, 2007 in Form VAT 305 was served on the petitioner on August 2, 2007.

4. The petitioner submits that G.O. Ms. No. 502 dated May 1, 2006 was issued directing levy of tax at four per cent on all bulk drugs falling under Chapter 28 of the Central Excise Tariff Act which includes aluminium hydroxide paste and magnesium hydroxide paste, that, while an appeal could be preferred against the order of the first respondent to the Appellate Deputy Commissioner, it would, however, be an exercise in futility since the order passed and the clarification issued by the Advance Ruling Authority was binding on the Appellate Deputy Commissioner.

5. The short question which arises for consideration is whether the scope of entry 16 of Schedule IV, i.e., “bulk drugs”, can be restricted by an executive order only to eight specified items and other bulk drugs be treated as unclassified goods under Schedule V of the APVAT Act and taxed at the higher rate of tax at 12.5 per cent. Since this question does not involve factual determination, both Sri V. Bhaskar Reddy, learned Counsel for the petitioner and the Special Government Pleader for Taxes would agree that the writ petition itself be disposed of at this stage.

6. Before examining the rival contentions it is necessary to briefly refer to the relevant statutory provisions and the applicable Government Orders placed before us by the learned Special Government Pleader.

7. Section 4 of the APVAT Act relates to the charge to tax. Under Sub-Section (1) thereof, save as otherwise provided in the Act, every dealer registered, or liable to be registered, as a VAT dealer shall be liable to pay tax on every sale of goods in the State at the rates specified in the Schedules. Sub-section (3) requires every VAT dealer to pay tax on every sale of goods taxable under the Act on the sale price at the rates specified in Schedules II, IV and V, subject to the provisions of Section 13. Schedule IV is the list of goods taxable at four per cent and “bulk drugs” are listed under entry 16 thereof. Schedule V provides that all goods, other than those specified in Schedules I, III, IV and VI, shall be taxable at the standard rate of 12.5 per cent. Section 67 relates to clarification and advance rulings. Under Sub-section (1) thereof, the Commissioner may constitute a State Level “Authority for Clarification and Advance Rulings” comprising of three officers not below the rank of Joint Commissioner to clarify, in the manner prescribed, any aspect of the implementation of the Act. Under Sub-section (4), the order of the authority shall be binding (i) on the applicant who had sought clarification ; (ii) in respect of the goods or transaction in relation to which a clarification was sought; and (iii) on all the officers other than the Commissioner.

8 Section 76, which relates to the power to remove difficulties, and Section 79, which prescribes the power to amend Schedules, read thus:

76. Power to remove difficulties.–(1) If any difficulty arises in giving effect to the provisions of the Act in consequence of the transition to the said provisions from the corresponding provisions of the Act in force immediately before the commencement of the Act, the Government may, by order in the Andhra Pradesh Gazette, make such provisions as appear to them to be necessary or expedient for removing the difficulty.

(2) If any difficulty arises in giving effect to the provisions of the Act (otherwise than in relation to the transition from the provisions of the corresponding Acts in force before the commencement of the Act), the Government may, by order make such provisions, not inconsistent with the purposes of the Act, as appear to it to be necessary or expedient for removing the difficulty.

79. Power to amend Schedules.–(1) The Government may, by notification, alter, add to or cancel any of the Schedules.

(2) Where a notification has been issued under Sub-section (1) there shall, unless the notification is in the meantime rescinded, be introduced in the Legislative Assembly, as soon as may be, but in any case during the next session of the Legislative Assembly following the date of the issue of the notification, a Bill on behalf of the Government, to give effect to the alteration, addition or cancellation, as the case may be, of the Schedule specified in the notification, and the notification shall cease to have effect when such Bill becomes law, whether with or without modifications, but without prejudice of the validity of anything previously done thereunder:

Provided that if the notification under Sub-section (1) is issued when the Legislative Assembly is in session, such a Bill shall be introduced in the Legislative Assembly during that session:

Provided further that where for any reason a Bill as aforesaid does not become law within six months from the date of its introduction in the Legislative Assembly, the notification shall cease to have effect on the expiration of the said period of six months.

(3) All reference made in the Act to any of the Schedules shall be construed as relating to the schedule in force for the time being amended in exercise of the powers conferred by this section

9. G.O. Ms. No. 1615 dated August 31, 2005 was issued in exercise of the powers conferred by Sub-section (2) of Section 76 of the APVAT Act and it was ordered that the HSN codes, in respect of 70 items in Schedule IV, shall be as specified in annexure II to the notification which was to come into force with effect from September 1, 2005. At serial No. 12 of annexure II are “bulk drugs”. The eight bulk drugs specified thereunder are:

  Sl. No.  Entry No.        Description of Goods                                    HSN Code
       in Schedule

12          16       Bulk drugs

                    (1) Ketones and quinones, whether or not with other              2914
                        oxygen function and their halogenated, sulphonated,
                        nitrated or nitrosated derivatives.

                    (2) Oxygen function amino-compounds.                             2922

                    (3) Organic derivatives of hydrazine or of hydorxylamine         2928

                    (4) Other organo-inorganic compounds.                            2931

                    (5) Hetero-cyclic compounds with oxygen heteroatom(s) only       2932

                    (6) Hetro-cyclic compounds with nitrogen heteroatom(s) only      2933

                    (7) Nucleic acids and their salts, whether or not chemically     2934
                        defined; other hetero-cyclic compounds

                    (8) Sulphonamides                                                2935

 

10.In exercise of the powers conferred by Section 79(1) of the VAT Act, the Government issued G.O. Ms. No. 502 dated May 1, 2006 amending Schedule IV to the Act and, after entry 99, entry 100 was inserted. The amendment in G.O. Ms. No. 502 came into force with effect from May 1, 2006. Note (1) to entry 100 provides that headings or sub-headings listed under columns 2 and 3 are the HSN Codes under the Central Excise Act, 1985. Under note (2), the rules for interpretation of the provisions of the Central Excise Tariff Act, 1985 apply for the interpretation of the notification.

11 M/s. Elegant Chemical Enterprises (P) Limited filed an application and sought a clarification and advance ruling on the tax applicable to certain bulk drugs. The Authority for Clarification and Ruling, vide proceedings dated May 30, 2006, observed that, on verification of the HSN Codes notified, it was evident that Chapter 28 of the Central Excise Tariff Act was not included in the said Government Order. While holding that the bulk drugs, covered in the HSN codes notified against entry 16 of Schedule IV, alone were liable to tax at four per cent, the authority observed that in view of G.O. Ms. No. 502 dated May 1, 2006, bulk drugs falling under Chapter 28 were also liable to be taxed at four per cent with effect from May 1, 2006.

12 The APVAT Act, 2005 was amended by the A. P. VAT (Second Amendment) Act, 2006 (Act No. 34 of 2006) and the amendment, in G.O. Ms. No. 502 dated May 1, 2006, was inserted into the Act as entry 100 of Schedule IV. In addition entries 102 to 113 were also added to Schedule IV.

13 The power, conferred on the Government, to alter, add or cancel any of the Schedules to the Act, under Section 79(1), can be exercised only for a limited period till the amendment to the Schedule is either approved or rejected by the State Legislature. The power under Section 79(1) is hedged and circumscribed by the conditions stipulated in Sub-section (2) thereof. The notification, issued under Section 79(1) amending the Schedule, is required to be introduced in the Legislative Assembly at the earliest and, in any case, during the next session of the Legislative Assembly following the date on which the notification is issued. Introduction of the notification, in the Legislative Assembly, is to be by way of a Bill giving effect to the alteration, addition or cancellation of the Schedule specified in the notification. On the Bill becoming law, with or without modification, the notification issued under Section 79(1) ceases to have effect without prejudice to the validity of anything previously done thereunder. Under the second proviso to Section 79(2) if the Bill does not become law, within six months from the date of its introduction in the Legislative Assembly, the notification shall cease to have effect on the expiry of the said period of six months.

14 If the goods sold by the petitioner, i.e., aluminium hydroxide paste and magnesium hydroxide paste, are held to fall under Schedule IV of the APVAT Act they are liable to be taxed at four per cent and if they do not, then, under Schedule V, they are taxable at 12.5 per cent. That “bulk drugs” are listed under entry 16 of Schedule IV of the APVAT Act is not in dispute.

15. The learned Special Government Pleader, would, however, contend that it is only the eight bulk drugs, which are given HSN codes under G.O. Ms. No. 1615 dated August 31, 2005, which are alone liable to be taxed at four per cent and that all other bulk drugs are taxable as unclassified goods under Schedule V of the APVAT Act at 12.5 per cent.

16. It is not even the case of the respondents that G.O. Ms. No. 1615 dated August 31, 2005, ostensibly issued in exercise of the power conferred by Section 76(2), is referable to Section 79(1) of the Act, rightly so, since exercise of the power to amend the Schedule under Section 79(1) is hedged by the restrictions stipulated in Sub-section (2) thereof. The very fact that the notification, in G.O. Ms. No. 1615 dated August 31, 2005, was never introduced in the State Legislature in the form of a Bill would establish that the said G.O. was issued only in the exercise of the powers conferred under Section 76(2) and not under Section 79(1) of the Act.

17. The advance ruling dated May 30, 2006, on the clarification sought by M/s. Elegant Chemical Enterprises (P) Ltd., in holding that only such of the bulk drugs which were covered by HSN codes notified against entry 16 of Schedule IV were alone liable to be taxed at the rate of tax of four per cent prior to May 1, 2006, is erroneous. The authority failed to take into consideration that the power conferred on the Government, under Section 76(2) of the Act, is to make provisions not inconsistent with the purposes of the Act. Since entry 16 of Schedule IV requires all “bulk drugs” to be taxed at four per cent, the Government, in the guise of exercising its powers under Section 76(2), cannot restrict the scope of the entry and limit it only to the eight categories of bulk drugs which, under G.O. Ms. No. 1615 dated August 31, 2005, were covered by HSN codes. It cannot be lost sight of that the assessing authority can exercise his power to levy tax only in accordance with the provisions of the APVAT Act. As stipulated in Section 4(3) thereof, the VAT dealer is required to pay tax, on the sale of goods taxable under the Act on the sale price, at the rates specified in Schedule IV. Since Schedule TV is the list of goods taxable at four per cent, and entry 16 thereof relates to “bulk drugs”, all bulk drugs are liable to be taxed only at four per cent. Prescription of HSN codes for eight categories of “bulk drugs”, under G.O. Ms. No. 1615 dated August 31, 2005, is in exercise of the power conferred under Section 76(2) of the Act to remove difficulties and cannot run contrary to the provisions of the Act. Since entry 16 of Schedule IV of the Act, prior to its amendment by Act 34 of 2006, did not classify bulk drugs on the basis of its coverage by HSN codes, no reliance can be placed by the assessing authority, on G.O. Ms. No. 1615 dated August 31, 2005 to treat the bulk drugs manufactured by the petitioner, i.e., aluminium hydroxide paste and magnesium hydroxide paste as other goods taxable under Schedule V of the Act, at 12.5 per cent. It is not even the case of the assessing authority, nor has it been contended before us by the learned Special Government Pleader for Taxes that the aforesaid goods manufactured by the petitioner are not bulk drugs. Since these goods fall under the category of “bulk drugs” they can be charged to tax only at four per cent under Section 4(3) read with entry 16 of Schedule IV of the VAT Act.

18. The impugned assessment order, to the aforesaid extent, is set aside. The writ petition is allowed. However, in the circumstances, without costs.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

* Copy This Password *

* Type Or Paste Password Here *