2014 (4) TMI 807 - HC - VAT and Sales Tax

Indian Railways battery sales taxed at 4% under KVAT Act Entry 76 upheld by High Court.

THE STATE OF KARNATAKA Versus M/s MYSORE THERMO ELECTRIC PVT LTD and others

The High Court upheld the Tribunal's decision, ruling that batteries sold to Indian Railways are to be taxed at 4% under Entry 76 of the third Schedule of ... Rate of Tax - Sale of batteries to Railways - Entry 76 of third Schedule or Residuary Clause – Classification – Interpretation of Statute - Karnataka Value Added Tax Act, 2003 - Levy of penalty - Whether the batteries are part of railway coaches, wagons etc., and fall under Entry 76 of the third schedule - Held that:- Judgment in TATA ENGINEERING AND LOCOMOTIVE COMPANY 1994 (10) TMI 131 - SUPREME COURT OF INDIA] followed- No vehicle can operate or work nor can it be said to have been produced unless tyre, tube and batteries are fixed to it - Use of these items is integrally connected with the ultimate production - They retain their identity as ‘the end product’ - It is the battery, which is the most integral part of the motor vehicle, without which, a motor vehicle could never have driving force - Entry 52 in the third schedule of the KVAT Act was substituted w.e.f 7-6-2005 and renumbered as Entry 76 which includes the word ‘part thereof’, meaning any item like batteries, tyre, tube, etc., which are required in making of railway coaches, wagons, etc. are to be treated as part of railway coaches, wagons etc. - The legislature in its wisdom amended Entry pertaining to the railway coaches, wagons, engines including the word ‘parts thereof'. If the legislature was not intending to tax batteries as part of railway coaches, wagons etc., then perhaps it would have excluded batteries from the Entry and in that situation, Entry would have been railway coach, engine, wagon and part thereof, excluding batteries - Hence, the battery is the part of railway coaches, wagons, engines etc. - The battery being the part of the railway which falls under Entry 76 of the third schedule, would be liable to tax at the rate of 4% u/s 4(1)(a) of the Act and not u/s 4(1)(b) under residuary clause - Further, the Government by notification dated 24-3-2008 invoking its power u/s 4(3) reduced the tax from 12.5% to 4% w.e.f. 1-4-2008 on the sale of batteries to the Indian Railways - Hence, it is clear that the battery is an integral part of the railway coaches, engines and wagons and falls under the ‘part thereof’ under Entry 76 - Hence, it has to be taxed under Section 4(1)(a) – No need found to interfere with the order of Tribunal - Decided in favour of assessees Issues Involved:1. Tax rate applicable to batteries sold to Indian Railways under the Karnataka Value Added Tax Act, 2003 (KVAT Act).2. Classification of batteries as part of railway coaches, engines, and wagons under Entry 76 of the third Schedule of the KVAT Act.3. Legality of the reassessment order imposing a higher tax rate, interest, and penalty on the assessees.Detailed Analysis:1. Tax Rate Applicable to Batteries Sold to Indian Railways:The primary issue was whether the batteries sold by the respondents to Indian Railways should be taxed at 4% under Entry 76 of the third Schedule of the KVAT Act or at 12.5% under the residuary entry. The State Government argued that the batteries did not have a specific entry in the KVAT Act and should be taxed at 12.5% as unscheduled goods under Section 4(1)(b). Conversely, the respondents contended that the batteries, being integral parts of railway coaches, engines, and wagons, should be taxed at 4% under Entry 76.2. Classification of Batteries as Part of Railway Coaches, Engines, and Wagons:The Tribunal had to determine if the batteries could be considered 'part thereof' under Entry 76 of the third Schedule, which specifies 'Railway coaches, engines, wagons and part thereof.' The respondents argued that the batteries are essential for the operation of railway engines and coaches, similar to how tyres are essential for cars, and thus should be classified under Entry 76. The State Government, however, maintained that batteries should be classified as standalone items and taxed as such.3. Legality of the Reassessment Order:The reassessment order by the Assessing Officer imposed a 12.5% tax rate, along with interest and penalties, on the sale of batteries to the Railways. The First Appellate Authority upheld this order. However, the Karnataka Appellate Tribunal set aside the reassessment order, holding that the batteries should be taxed at 4% under Entry 76 and quashed the interest and penalties.Judgment Summary:The High Court analyzed the arguments and evidence presented by both parties. The court noted that the batteries are manufactured according to the specifications of the Indian Railways and are essential for the functioning of railway engines and coaches. The court referred to the Supreme Court's judgment in TATA ENGINEERING AND LOCOMOTIVE COMPANY, which emphasized that integral parts necessary for the operation of a vehicle should be classified as parts of the vehicle itself.The court found that the legislature's inclusion of 'part thereof' in Entry 76 indicated an intention to classify essential components like batteries under this entry. The court concluded that without batteries, railway engines and coaches could not function, making them integral parts of the railway system.The court also noted that the State Government had reduced the tax rate for batteries sold to Indian Railways to 4% effective from 1-4-2008, further supporting the classification of batteries under Entry 76.Conclusion:The High Court upheld the Tribunal's decision, confirming that batteries sold to Indian Railways are to be taxed at 4% under Entry 76 of the third Schedule of the KVAT Act. The court dismissed the State Government's revision petitions and confirmed the Tribunal's order, which set aside the reassessment order and quashed the interest and penalties imposed on the respondents.Order:The revision petitions are dismissed. The order passed by the Karnataka Appellate Tribunal is confirmed.