TMI Blog2014 (8) TMI 859X X X X Extracts X X X X X X X X Extracts X X X X ..... ter and UPS - Period April, 2005 to March, 2006 - Held that:- 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 indispensible 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 under Section 4(1)(b) of the KVAT Act. - Decided against the assessee. Taxable turnover - inclusion of Freight charges collected - Period April, 2005 to March, 2006 - Held that:- 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 opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the powers under Section 63-A of the KVAT Act. The revisional authority reversed the assessment orders dated 11.12.2006 passed under Section 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'). 2. 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 1.1.12.2006, 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 under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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%. 3. In the backdrop of the facts mentioned above, the department filed these revision petitions under Section 65(1) of the Act raising the following questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that RMP being a finished product cannot be catagorised 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 SI.No.133 or 139 of the Notification No.FD 197 CSL 2005(6) Bangalore dated 30.04.2005 (SI.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(l)(b)(iii) of the KVAT Act. 5.1 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 SI.No.139 of the Notification namely sub-headings 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 SI.No.133 and/or SI.No.139 of the Notification. 6.1 He then submitted that SI.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 CCE v. Wood Polymers Ltd. 1998 (97) ELT 193 (SC). He submitted that the explanations appen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0) ELT 497 (SC), Collector of Central Excise v. Wood Polymers Ltd. 1998 (97) ELT 193 (SC), Collector of Central Excise v. Bakelite Hylam Ltd. 1997 (91) ELT 13 (SC) and Jyothy Laboratories Ltd. v. State of Assam [2011] 46 VST 308 (Gauhati). In support, he also invited our attention to the report of the National Test House, Government of India, dated 11-11-2009. 7. 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 SI.No.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. 8. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s thus: Tariff Item Description of goods Unit Rate of duty 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 3911 10 Petroleum resins, coumarone indene or coumarone-indene resins and polyterpenes: 3911 10 10 Coumarone-indene resins kg. 16% 3911 10 90 Other kg. 16% 3911 90 Other 3911 90 10 Polysulphones kg. 16% 3911 90 90 Other kg. 16% 11. To understand and interpret the relevant entries/serial numbers, headings and sub-headings, description of goods in the N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eading, 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. 14. 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 SI.No.133 and 139 in the Notification. SI.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 SI.No.133 heading 3911 or SI.No.139 sub-heading 3911.10.10 or 3911.10.90. It was further submitted that if the legislature intended to cover all sub-headings under tariff 3911 in Chapter 39 of the CST Act, it would not have given specific sub-headings at SI. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 melt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petroleum resin being one of the ingredients/component gives its essential character to the product (RMP). 21. 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. 22. 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 characteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um 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 Hydrocarbon 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25.2 In M.P. Agencies v. State of Kerala [2010] 28 VST 44 (Kar.). The Karnataka High Court after noticing the observations made by the Supreme Court in Sterling Foods v. State of Karnataka [1986] 63 STC 239 observed that when the product made from industrial raw material or commercial commodity with distinct use and purpose, it cannot be treated as raw material from which it is made. 26. 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 resin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. 27.2 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 under Section 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 29. 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 ₹ 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 ret ..... 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