Classification of Commodities by Sanjay K Agarwal

Classification of Commodities

by

Sanjay K Agarwal

Classification of Commodities

by

Sanjay K Agarwal

• Relevance

• Indirect Taxes

• Direct Taxes

• Regulation of trade

• Consumer protection

• Export incentives

Contents

There is no general fit for all rule for classification

There is no general fit for all rule for classification

TransactionsTransactions

• -Dictionary meaning

• -Advertisement

• Availability on a particular type of shop

• User Test

• Function Test

• Predominance by material; weight

• Common Parlance

ClassificationClassification

• Classification of product makes lot of difference in indirect

taxes

• Being trader, classification is dictated by vendor

• VAT is liability at every point of sale – classification by

vendor would not impress upon Court at the time of dispute

• For CST purchased / Stock transferred-in material

classification by vendor is not available

• popular sense, the sense being that in which people conversant

with the subject matter with which statute is dealing would

attribute to it. Words of every day use must be construed not in

their scientific sense but as understood in common parlance. -

Ramavatar Budhaiprasad v. The Assistant Sales Tax Officer, Akola

And Another [1961] 12 STC 286 (SC) – Judgment dated March 14,

1961 repeatedly affirmed in subsequent Judgments by the SC

Common Parlance MeaningCommon Parlance Meaning

• The particular use to which an article can be applied in the hands of a

special consumer is not determinative of the nature of goods

• Mahamaya Agencies v. State of Tripura [2008] 12 VST 529 (Gauhati

HC)- Judgment dated January 7, 2008 – In view of specific entry for

‘Bearings’ it can not be taxed as Motor Vehicle Parts


• Functional test, i.e. the design of the product itself can be a decisive

test for some class of products.

• ‘Diesel Engines And Diesel Generator Sets’. Diesel engines and

diesel generator sets are machinery when used in commercial

activities. However, diesel engine and diesel generator which are

designed to be used exclusively for domestic purpose cannot be taxed

as plant and machinery - Kasaban Services v C.S.T., Kolkata which

in turn is quoted in Premier Diesel Pvt Ltd v Commissioner of Sales

Tax, Kolkata [2009] 25 VST 195 (West Bengal Taxation Tribunal –

WBTT) Judgment dated September 5, 2008


• where a contest exists between the scientific and technological

connotation of the word on the one hand and its understanding in

common parlance on the other. In interpreting the entries of taxing

statutes, preference should be given to the common parlance meaning

over the one as defined in a dictionary

• Commissioner of Sales Tax v Suraj Rubber Industries [2008] 11 VST

480 (Allahabad HC) – Rickshaw is not understood as tri-cycle in

common parlance.


• Recourse to a residuary entry should be taken by way of last resort.

• - Maruti Yeast India Pvt Ltd v State of U P [2008] 14 VST 259/ 5

SCC 680

• Specific entry will exclude general entry

• -Shree Ram Industries v State of Gujarat [1974] 34 STC 153

(Gujarat); State of Tamil Nadu v Blue Star Engineering Co. Madras

Private Limited [1977] 39 STC 194 (Madras); State of Tamil Nadu v

Anikal Corporation [1992] 87 STC 167 (Madras HC)

Specific Entry v residuary entrySpecific Entry v residuary entry

• Specific entry will exclude general entry

• An electronically operated survey instrument would be classified

under entry talking about ‘survey instruments’ and not under the

entry talking about ‘electronic instruments’ - Electro Optics (P) Ltd v

State of Tamil Nadu And Others [2010] 30 VST 23 (Madras HC)

Judgment dated September 29, 2009


• If there are two competing entries for taxing an article, the entry

which is beneficial to the assessee ought to be preferred

• Anhydrous ammonia (a term applied to a chemical substance free

from water) was held to be chemical not gas. - Ammonia Supply

Company v Addl Comm, Trade Tax [2010] 30 VST 587 (Allahabad

HC), Judgment dated March 30,2010.

• Also CIT v Vegetable Products Limited [1973] 88 ITR 192;

S.Raghuram Reddy v Commissioner of Commercial Taxes [2004]

134 STC 598.


Definition of one statute would not automatically apply to another statute


• Dant Manjan Lal manufactured by Baidyanath Ayurved Bhawan Ltd

• Drug as per definition of ‘Ayurvedic, Siddha or Unani Drug’ as contained in section 3(a) of the Drugs and Cosmetics Act, 1940 was held to be not applicable in a classification dispute under Central Excise - Commissioner of Central Excise, Nagpur v Shree Baidyanath Ayurved Bhawan Ltd [2010] 1 GSTR 1 (SC) Judgment dated April 13, 2009

• Central Excise Duty cannot be equated with sales tax. They have different connotations and apply in different situations. Central Excise duty is chargeable on the excisable goods and not on the goods which are not excisable. - Commissioner of Central Excise v Acer India Limited [2004] 137 STC 596/ 8 SCC 173



• Contemporaneous exposition by the administrative authorities is a very useful and relevant guide to the interpretation of the expressions used in a statute.

• Pepsico India Holdings Pvt Ltd v State of Assam And Others [2009] 25 VST 41 (Gauhati HC) Judgment dated April 28, 2009

• Potato Wafers classified as preparation of vegetables under CE Act, Potato Chips treated as vegetable-based product by Ministry of Food Processing – Logic would apply to VAT also.

Different classification may be claimed in different years

Different classification may be claimed in different years

• Municipal Corporation of City of Thane v. Vidyut Metallics Ltd. And Another [2009] 20 VST 680 (SC) – Matter involving classification of Stainless Steel Strips for manufacturing safety Razor Blades – A long list of precedence for Direct and Indirect Taxes.

• Shree Metallic Yarn Industries v. Commercial Tax Officer, Ajmer [2009] 19 VST 270 (Rajasthan High Court) Judgment dated August 8, 2007 – In Registration application commodity claimed to be falling under one entry and in assessment claimed to be falling in another entry

burden/onus to prove the classification of a particular product is upon the Revenue burden/onus to prove the classification of a particular product is upon the Revenue

• Union of India v Garware Nylons Ltd AIR 1996 SC 3509

• Commissioner of Central Excise v Sharma Chemical Works [2003] 132 STC 251 (SC); [2003] 5 SCC 60

• Dabur India Ltd v Commissioner of Central Excise, Jamshedpur [2005] 5 RC 50; [2005] 4 SCC 9 a three-judge Bench

Cosmetics and Medicines Cosmetics and Medicines

• sugar of milk i.e.saccharum lactis – Whether bulk drug or residuary goods as a mere vehicle of homeopathic medicine.

• Held a component of homoeopathic medicine and hence a drug like empty gelatin capsules. - Sujit Kumar Datta v Commercial Tax Officer [2009] 26 VST 307 (WBTT) Judgment dated July 11, 2008

• Held falling entry for ‘Sugar including khandasai and boora’ - State of Haryana v Swiss French Laboratories [2010] 29 VST 254 (P&H High Court) - having used sugar to the extent of 90 percent or more


• Surgical gloves and examination gloves • are surgical equipments not rubber goods• Kanam Latex Industries Pvt Ltd v State of Kerala [2010] 27

VST 172 (Kerala HC) Judgment dated February 12, 2009

• Hajmola Candy is confectionery - Dabur India Limited And Another v. ACCT Corporate Division And Others [2007] 5 VST 190 (WBTT)

• Kajal is Ayurvedic medicine and not a product for beautification of eyes - State of Kerala v. Tips & Toes Cosmetics India Limited [2008] 11 VST 74 (Kerala High Court) Judgment dated August 22, 2003


Twin Test

CCE V. Richardson Hindustan Ltd. 2004 (9) SCC 156

Whether the item is commonly understood as a medicament which is called the common parlance test

Are the ingredients used in the product mentioned in the authoritative text books on Ayurveda

percentage of medicaments in the product is not determinatitive.

Vicks Vaporub has only 2 per cent of medicament element.


• Cotton bandage is textile; medicated cotton bandage is Drugs & Medicines

• Vaseline white petroleum jelly is drug - Ponds India Ltd. v. Commissioner Trade Tax, Lucknow [2008] 15 VST 256 (SC) Judgment dated May 16, 2008 Entries under consideration were cosmetics and drug

• Petroleum jelly would not fall under entry for chemical but would be a residuary item. - M.Vijayan v. Comm.Tax Officer [2009] 22 VST 117 (Kerala HC) Judgment dated August 26, 2008 Entries under consideration were chemical and petroleum products

Electrical and Electronic Goods Electrical and Electronic Goods

• Such articles the use of which cannot be had except with the application of electrical energy are called electrical goods.

• An electronic device can be an electrical device but an electrical device cannot be an electronic device.

• Electrical goods involve the consumption of electricity, whereas an electronic device functions through the creation of an electron vacuum in the semi conductor material.


• The fact that the electronic goods cannot be used without the aid of electricity is not the only criterion to determine whether those goods can be treated as electrical goods.

• The really important criterion is whether those goods are regarded as electrical goods in common parlance.


• Laundry machine is not an electric goods - Asst.Commercial Tax Officer v. Puran Lal Dry Cleaners And Another [2008] 16 VST 537 (Rajasthan HC) Judgment dated April 26, 2007

• Diesel Generating sets are to be classified as machinery. Despite their generating electricity they are not electrical goods.- Venkateshwara Engineering Works v. Additional Commissioner of Commercial Taxes [2006] 146 STC 681 (Karnataka HC)


• Automatic washing machines electronically programmed will fall under ‘electronic goods’, even though specific entry was provided for electrically operated washing machines.

• BPL Ltd. v. State of Andhra Pradesh [2001] 121 STC 450 (SC)

• Voltage Stabilizer is an ‘electronic goods’.

• Commissioner of Trade Tax v Parikh Gramodyog Sansthan [2010] 34 VST 1 (SC) Judgment dated August 11, 2010.

Branded and unbranded goods Branded and unbranded goods

• General definition in CE adopted in Maharashtra VAT Act

• ‘brand name’ when used in the schedule means a brand name, (whether registered or not), that is to say, a name or a mark such as symbol, monogram, label, signature or invented words or any writing which is used in relation to a product for the purpose of indicating, or so as to indicate, a connection in the course of trade between the product and some person using such name or mark with or without any indication of the identity of that person.’ – Section 3-a


• States of Gujarat, Rajasthan, Tamilnadu and Kerala have confined meaning of branded with reference to Trade marks Act 1999

• Label is different than Trade Mark.

• A Trade mark cannot exist in vacuum. It can only exist in connection with the goods in relation to which it is used or intended to be used - American Home Products V Mac Laboratories AIR 1986 SC 137, 154


• If the assessee opts not to take advantage of the brand name in its trade, it could at least have the benefit of the rate of duty applicable to unbranded product

• Tarai Food Ltd v CCE 2006 (198) ELT 323 (SC)

Packed and unpacked Packed and unpacked

The container is considered to be a sealed container if it is closed in a manner that it is not possible to access the contents or remove the contents without breaking either the container or fastening if it is closed. In cases of both stapling and crimping, the staples and pins can be removed by the customer without breaking anything. Undoing the fastening cannot amount to breaking the fastening.


Dressed chicken sold by the appellant in polythene bags, were closed either by stapling or by crimping and fastening. Stapling was done by using ordinary stapler. Crimping and fastening was done by using a crimping machine. The name and address of the appellant and the description of the contents were printed on polythene bag. Dressed chicken so packed and sold were held not to be a ‘sale in a sealed container’. Balkrishna Hatcheries v Clarification and Advance Ruling Authority, Karnataka [2007 UPTC 80 SC] Judgment dated September 11, 2006


Packing material means a container in which goods may be found and it is usually referred in ordinary parlance to mean to place together the things, prepare for transportation so that the goods can be used by the user. Thus, packing material of any kind which serves this purpose will continue to be a packing material. – State of Karnataka v Jyothi Gas (P) Ltd [2010] 3 VST 289 (Karnataka Hc) Judgment dated February 26, 2010.


Even inner packing used to protect fragrance etc of the product would fall within the definition of term packing material.

Supreme Packaging Pvt Ltd v Commissioner Trade [2009] 26 VST 385 (All HC) Judgment dated August 5, 2008

Hangers are not packing material for readymade garments. These are not such items but for which packing cannot be done and delivery cannot be made.

Thakur Das Chotrani v. Sales Tax Officer [2009] 19 VST 518 (WBTT) Judgment dated June 27, 2008

Parts, Component and accessory Parts, Component and accessory

‘Accessory’ is something supplementary or subordinate in nature and need not be essential for the actual functioning of the product. – CCE v Insulation Electrical (P) Ltd 2008 (224) ELT 512 (SC).

Car seat covers and upholstery are accessories to motor vehicles

-Mehra Brothers v. Joint Commercial Tax Officer [1991] 1 SCC 514


Name plates put on electric fans are parts of fan and not accessory. Fan does not become marketable without name plate. –

Jay Engineering [1989] 75 STC 313 (SC)

An article is a component of another when it forms a constituent part of the other and is essential for completing it.

Agarwala Brothers v Commissioner of Sales Tax [1969] 23 STC 306 (All HC)

)


A component may be an independent product also. A tanker mounted on chassis of a vehicle is not a component of motor vehicle. – Facts in this case revealed that tanker was capable of being used for different purposes including after mounting on chassis of motor vehicle.

Commissioner of Sales Tax v Jayanand Khira & Co Private Ltd [1975] 36 STC 242 (Bombay HC) Judgment dated February 4, 1975

Other border line cases Other border line cases

Milk and flavoured milk

Butter Milk and spiced butter milk

Edible oil and hair oil

Insecticides and disinfectants

Bread and Hippo (Parle Product)

Utensiles and coated utensiles

)

Promo configuration Promo configuration

Buy X and get y free

Buy X and get Y at discounted price (Rs 1)

Buy one and get one free

Buy two at the price of one

Stock Transfers Stock Transfers

Haryana Punjab Delhi

Basic Value 100 100 100 Tax 14 14

14 Reversal on ST 14 4 2

)

Entry Tax on Capital Goods Entry Tax on Capital Goods

Storage Hubs should be in State where there is no entry tax

Material should be brought in State only when required for use

Thank you !

Classification of Commodities by Sanjay K Agarwal

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