2008 (7) TMI 868 - HC - VAT and Sales Tax

Classification of 'craft paper' under Kerala General Sales Tax Act favors assessee, taxable at 4%

Cochin Cadalas (P) Ltd. Versus State of Kerala

The court determined that 'craft paper' should be classified under entry 94(i) of the Kerala General Sales Tax Act, taxable at 4%, rather than as a 'paper ... Whether 'craft paper' falls under entry 94(i) or 94(ii) of the First Schedule to the Kerala General Sales Tax Act, 1963 and the rate of tax payable thereon? Held that:- The test laid down by the Appellate Tribunal in understanding the meaning of the word 'craft paper' with reference to purchaser of the commodity is not a correct test. In our view, the correct test would be to apply common parlance test, and if that test is applied, in our considered view, the craft paper produced and sold by the assessee would not fit into any of the items enumerated in sub-entry (ii) of item 94 of the First Schedule to the KGST Act. Therefore, keeping in view the wider definition that is provided by the apex court in Khatema Fibres Ltd.'s case [2000 (12) TMI 796 - SUPREME COURT OF INDIA], while explaining the meaning of the expression 'paper', thus hold, in the facts and circumstances of this case, that, 'craft paper' would fit into the description of paper and falls under sub-entry (i) of item 94 of the First Schedule to the KGST Act, taxable only at four per cent. Issue is answered in favour of the assessee and against the Revenue. Issues Involved:1. Classification of 'craft paper' under the Kerala General Sales Tax Act, 1963.2. Determination of the applicable tax rate for 'craft paper.'Detailed Analysis:1. Classification of 'Craft Paper' under the KGST ActThe central issue in these revision petitions is whether 'craft paper' falls under entry 94(i) or 94(ii) of the First Schedule to the Kerala General Sales Tax Act, 1963. The assessing authority classified 'craft paper' as a 'paper product' under entry 94(ii), which was upheld by the Appellate Tribunal but contested by the assessee.The Tribunal's findings for the assessment year 1996-97, as per order dated February 1, 2002, stated that the assessee is engaged in the production and sale of craft papers primarily to carton manufacturers. The Tribunal concluded that craft paper should be classified as a 'paper product' under entry 94(ii), taxable at five percent.The assessee argued that craft paper should be classified under entry 94(i) as 'paper,' relying on the Supreme Court's decision in Khatema Fibres Ltd. v. State of Uttar Pradesh [2004] 135 STC 193, which held that craft paper is a type of paper, irrespective of its use for packing.The court noted that 'craft paper' is produced from wood pulp through the kraft process and is used for various packaging purposes. The Supreme Court in Kores (India) Ltd. [1977] 39 STC 8 explained that 'paper' in common parlance includes substances used for writing, packing, or decorating.The court further elaborated that 'paper product' means an article derived from paper, whether by a simple physical process or chemical reaction. The Appellate Tribunal applied the 'user-test theory,' classifying craft paper as a 'paper product' because it is sold to carton manufacturers.2. Determination of the Applicable Tax RateThe relevant entries in the First Schedule to the KGST Act are:- Entry 94(i): 'Paper' taxable at 4%.- Entry 94(ii): 'Newsprint, cardboard, paper products, note books and printed materials including greeting cards' taxable at 5%.The court examined whether the observations made by the Supreme Court in Khatema Fibres Ltd. could be applied. The Supreme Court had ruled that 'paper' in its generic sense includes craft paper, even if used for packing purposes.The court emphasized that in a taxing statute, words must be understood in their common parlance. The Legislature's intention, as inferred from the language of the Schedule, is to treat products made from paper and sold as paper products to be taxed at a higher rate. However, the court found that craft paper, as understood in common parlance, is a type of paper and should not be classified under 'paper products.'Applying the common parlance test, the court held that craft paper fits the description of 'paper' under entry 94(i) and is taxable at 4%. The court rejected the Tribunal's application of the 'user-test theory' as incorrect.Conclusion:The court concluded that 'craft paper' falls under entry 94(i) of the First Schedule to the KGST Act and is taxable at 4%. Consequently, all revision petitions were allowed, and the Tribunal's order for the assessment years in question was set aside. The issue was resolved in favor of the assessee and against the Revenue. All pending interlocutory applications were dismissed.