2025 (9) TMI 255 - HC - VAT / Sales Tax

Manufactured woollen felt is machinery/conveyor component, not fabric under Entry 48/Entry 34; taxed under Schedule II Part IV

M/s Blue Chip Felt Through The Proprietor, Mr. Ashok Chordia, M/s Sealwell Industries Through Partner Mr. Abhimanyu Versus Commercial Tax

M/s Blue Chip Felt Through The Proprietor, Mr. Ashok Chordia, M/s Sealwell Industries Through Partner Mr. Abhimanyu Versus Commercial Tax - 2025:MPHC - ... ISSUES PRESENTED AND CONSIDERED 1. Whether the product described as 'Woollen Felt Component' is taxable as a 'Fabric' under Entry 34 of Schedule II Part II (or Entry 48 of Schedule I) of the VAT Act or is properly classifiable as a 'Machinery Part' under Schedule II Part IV Entry 1 (residuary entry), attracting a higher rate of tax. 2. Whether classification must be determined by the inherent and essential characteristics of the goods or may be governed by the nomenclature used by the manufacturer/recipient, and whether the courts below erred in relying on nomenclature or prior orders. 3. Whether the common parlance / commercial usage test is the appropriate standard for classification in the taxing statute and, relatedly, the applicability of precedent authorities cited by the parties. 4. Whether an assessment may be reopened on the basis of an audit objection and a change of opinion, and whether the reopening in these matters was impermissible. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification of 'Woollen Felt Component' as Fabric vs Machinery Part Legal framework: Classification under the VAT Act depends on locating the goods within the relevant schedule entries (Schedule I, Schedule II Part II, Schedule II Part IV, and residuary entries). When specific entries cover goods, those entries govern taxation; residuary entry applies only when no specific entry covers the goods. Precedent Treatment: The appellants relied on authorities treating certain felts as textiles/fabrics for exemption/classification purposes; respondents relied on authorities endorsing common parlance/commercial usage tests to classify industrially used items as machinery parts. Interpretation and reasoning: The Court examined the character and actual use of the product. Although 'felt' in dictionaries is defined as a cloth made from wool or fibres, the Court emphasized usage and purpose: the manufactured Woollen Felt Component was supplied to industries and used principally as a conveyor or machinery component (e.g., in paper industry), not as dress material or in the functional applications enumerated under Entry 48 of Schedule I (towel, gamchha, chadar, quilt cover, bed cover, handkerchief, unbranded pillow covers). The Court observed that Entry 48 is list-specific and does not generically cover all woollen textiles, unlike broader tariff provisions in other statutes considered in conflicting precedents. Ratio vs. Obiter: Ratio - where a product, though named 'felt', is manufactured and used primarily as an industrial/machinery component and is not of the kind of fabric enumerated or intended by the specific fabric entries, it can properly be classified under the machinery/residuary entry. Obiter - dictionary definitions alone are insufficient to displace classification based on actual use and the statutory textual context. Conclusion: The Court upheld classification of the Woollen Felt Component as a machinery part under the residuary entry (Schedule II Part IV Entry 1), sustaining the assessment at the higher tax rate. The appeals on this point were dismissed. Issue 2 - Role of Inherent Characteristics versus Nomenclature and Use of Prior Orders Legal framework: Classification should consider inherent and essential characteristics and commercial usage; however, statutory language and the specific scope of schedule entries govern whether a named product falls within a particular tariff item. Precedent Treatment: Appellants invoked authorities emphasizing inherent characteristics over nomenclature; respondents invoked authorities endorsing common parlance/commercial usage. The Court considered both lines. Interpretation and reasoning: The Court acknowledged that nomenclature alone cannot determine classification but held that nomenclature must be read against actual functionality and the statutory language of the entries. Given that Entry 48 enumerates specific fabric products and does not generically cover all variants of woollen textiles, the mere label 'felt' does not compel classification as 'fabric.' The Court also noted absence of evidence that the product served the customary fabric uses listed in the schedule; instead, its industrial use as a machinery component was determinative. Ratio vs. Obiter: Ratio - classification requires assessment of actual use and statutory context; mere nomenclature without demonstration of the product's use in the ways contemplated by the relevant fabric entry cannot override classification as machinery part. Obiter - general statements about preferring inherent characteristics where entries are ambiguous, though recognized, were not sufficient to change the outcome here. Conclusion: The courts below did not err by considering use and statutory scope rather than relying solely on nomenclature or dictionary definitions; reliance on actual usage justified classification as machinery part. Issue 3 - Appropriateness of Common Parlance / Commercial Usage Test and Application of Precedents Legal framework: The common parlance (popular test) and commercial usage tests are legitimate aids for classification under taxing statutes but must be applied in light of statutory entries and the specific language used therein. Precedent Treatment (followed/distinguished): The Court distinguished the earlier authority relied upon by the appellant (which treated certain industrial felts as textiles) on facts and on differences in the statutory schedules - specifically, where earlier schedules used broad generic language covering all varieties of textiles, whereas the tax schedule in question contains narrow, product-specific fabric entries. The Court accepted the respondent's reliance on authorities endorsing common parlance/commercial usage as appropriate tests for classification, applying them to the facts here. Interpretation and reasoning: Because the Schedule's fabric entries are by specific product names rather than broad catch-alls, the Court found the precedential analogy inapposite. The common parlance/commercial usage test supported viewing the product as a machinery part given its industrial usage; consequently, prior decisions treating felts as textiles under differently worded tariff entries did not control. Ratio vs. Obiter: Ratio - where statutory entries are specific and do not generically embrace all textile variants, the common parlance/commercial usage test may legitimately lead to treating an industrially used felt as machinery part; precedent treating felts as textiles under broader tariff language is distinguishable. Obiter - observations on the general utility of dictionary meanings and the principle to prefer specific tariff entries over residuary entries where both arguably apply (referenced but applied in context). Conclusion: The common parlance/commercial usage approach was properly applied; precedents cited by the appellant were distinguishable on statutory and factual grounds and did not require reclassification as fabric. Issue 4 - Reopening of Assessment on Audit Objection / Change of Opinion Legal framework: Reopening assessments on audit objections or a change of opinion is subject to statutory safeguards and legal principles, but the Court's consideration in these appeals was limited to whether the impugned outcomes raised a question of law warranting interference. Precedent Treatment: Parties raised contentions about reopening; the Court did not undertake an extended separate legal exposition on the permissibility of the specific reassessments but noted the factual posture and reasons for reassessment. Interpretation and reasoning: The Court observed that the central controversy in these appeals concerned classification and that the lower authorities had reasonably concluded-on application of the appropriate tests and on examination of use-that the products were machinery parts. Given that conclusion, the Court found no substantial question of law arising from the manner of reopening that would justify interference. Ratio vs. Obiter: Ratio - having concluded classification was correctly determined on merits, any subsidiary contention about reopening did not merit interference in the absence of a distinct legal error. Obiter - no definitive pronouncement was made on standards for reopening generally; the Court decided the matter on classification grounds. Conclusion: The Court declined to disturb the reopening in these matters because the classification outcome rendered the reopening contention immaterial to a question of law warranting relief. Final Disposition The Court found no question of law necessitating interference with the Appellate Board's orders and affirmed the assessments classifying the Woollen Felt Component as a machinery part under the residuary entry; the appeals were dismissed. Cross-reference: the reasoning on classification (Issues 1-3) is dispositive and underpins the refusal to entertain the reopening objection (Issue 4).