2025 (9) TMI 56 - HC - VAT / Sales Tax

Steel grip insulating tape classified under Entry 50, Part II, Schedule II; taxed at 5%, residuary recovery rejected

M/s Pidilite Industries Ltd Versus The Commissioner of Commercial Tax And 2 Ors. And Others

M/s Pidilite Industries Ltd Versus The Commissioner of Commercial Tax And 2 Ors. And Others - 2025:MPHC - IND:23825 ISSUES PRESENTED AND CONSIDERED 1. Whether the product 'Steel Grip Insulating Tape' is classifiable as an 'insulator' under Entry No.50, Part II, Schedule II of the M.P. VAT Act (specific entry) or falls under the residuary Entry No.1, Part IV, Schedule II (general/residuary entry). 2. Whether the Commissioner's determination under Section 70 of the M.P. VAT Act, relying on a departmental circular, was a valid exercise of the power to determine the correct rate of tax or amounted to mechanical reliance without independent application of mind. 3. Whether classification under Section 70 and consequent reassessment / notices under Section 18(5) can be applied retrospectively to recover differential tax for earlier periods. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Proper legal framework for classification (specific vs residuary entry) Legal framework: Taxing statutes with schedules require classification of goods under specific or residuary entries; settled principles require that goods be identified by their functional character and by their ordinary/commercial meaning where statutory definitions are absent. Precedent treatment: The Court relied on the established principle that a specific entry, if applicable, prevails over a general/residuary entry; where a commodity falls under both, the interpretation favourable to the taxpayer applies. Prior authorities emphasise identification by primary function. Interpretation and reasoning: The Court analysed the intrinsic properties, composition and primary purpose of the product (non-conductive backing, dielectric strength, flame retardancy, use by electricians to prevent shock and short-circuits, and absence of any other ordinary non-electrical use). The Court rejected characterisation based solely on trade channels or the fact that the product is sold by dealers dealing in electrical goods. While common parlance is relevant, it must be read in conjunction with the product's primary functional character; where the primary function is insulating electrical conductors, the product fits within the specific description of 'insulator'. Ratio vs. Obiter: Ratio - where a commodity's primary function is insulation of electrical conductors and it is specifically engineered and marketed for that purpose, it is classifiable under a specific entry for 'insulators' rather than under a residuary entry. Obiter - observations on distinctions between insulators and insulating materials in commercial parlance as a general proposition. Conclusion: 'Steel Grip Insulating Tape' is an insulator within the meaning of Entry No.50, Part II, Schedule II and not taxable under the residuary Entry No.1, Part IV, Schedule II. Issue 2 - Validity of the Commissioner's determination under Section 70 and reliance on departmental circular Legal framework: Section 70 empowers the Commissioner to determine the correct rate of tax for a commodity by examining its nature, characteristics, marketability and use; such determinations require independent application of mind and cannot be mere mechanical adoption of previous circulars. Precedent treatment: Authorities establish that administrative circulars may guide classification but do not substitute for an individual determination after examining the commodity's characteristics and primary function. Interpretation and reasoning: The Court noted that the Commissioner had placed reliance on Circular No. CT/VAT CEL/2004/292 and on the fact that the product is commonly traded by electrical goods dealers, without conducting an adequate assessment of the product's functional character, composition and primary purpose. Nevertheless, on an independent examination of the product's material (PVC backing), dielectric properties, adhesive formulation and exclusive electrical safety use, the Court itself concluded that the tape is primarily an insulator. Thus, while the Commissioner's mechanistic reliance on the circular was criticised, the ultimate classification reached by the Court differed from the Commissioner's and was based on independent evaluation of the goods. Ratio vs. Obiter: Ratio - a determination under Section 70 must be predicated on an independent, material-based assessment, not merely on administrative circulars or trade-channel factors. Obiter - comment that departmental circulars may have persuasive value but cannot override specific product characteristics. Conclusion: The Commissioner's mechanical reliance on the circular without sufficient examination was unsustainable; however, on independent application of mind, the Court determined the correct classification as 'insulator'. Issue 3 - Validity and scope of reassessment / notices under Section 18(5) and retrospective application of Section 70 determination Legal framework: Section 18(5) permits proceedings where returns contain incorrect particulars; Section 70 determinations fix the correct rate of tax. Principles of fairness and settled practice require that reassessment/demand be justified by demonstrable incorrectness in returns and that determinations be applied in accordance with statutory limits. Precedent treatment: Courts have held that returns prepared in good faith on a bona fide view cannot be treated as incorrect arbitrarily; demands must follow from a legally sustainable reclassification or proven incorrect particulars. Interpretation and reasoning: The petitioner had filed returns on a bona fide basis treating the product as an insulator in earlier assessments. The Court, having found that the product is indeed an insulator, held that the reassessment notices issued to recover differential tax premised on classification under the residuary entry were not sustainable. The Court also observed that a Section 70 determination should not be used to justify retrospective demands where taxpayers had earlier acted on a bona fide, consistent classification accepted in prior assessments. Ratio vs. Obiter: Ratio - reassessment and recovery notices under Section 18(5) premised on a classification found to be incorrect should not survive where returns were filed in good faith based on the specific entry and prior assessments accepted that classification; Section 70 determinations should not be mechanically applied retrospectively to penalise bona fide taxpayers. Obiter - commentary on prospective operation of determinations in general circumstances. Conclusion: The consequential reassessment and recovery notices founded on the residuary classification were unsustainable in view of the Court's classification of the product as an insulator; the impugned notices/order were set aside. Relief and operative conclusion of the Court (ratio) The Court set aside the impugned order classifying the product under the residuary entry and held that the steel grip insulating tape is an insulator liable to tax under Entry No.50, Part II, Schedule II at the applicable lower rate (5%). The writ petition was allowed and consequential notices based on the higher/residuary classification were quashed.