Ashok Agencies vs State of Karnataka

The appellant herein has challenged the correctness of the order of the learned Single Judge of this Court doted 2.4.2007 passed in W.P. No. 5507/07, declining to interim with the combined reassessment and penalty orders dated 29.1.2007 (vide Annexure-A and A-1 to A-6) for the months from April 2006 to October 2006 passed by the Deputy Commissioner of Commercial Taxes, Audit-43, DVO-4 (hereinafter referred to as ''Assessing Authority'' for short) assessing the tax on the turn over relating to sales of Mosquito repellants at 12.5% under the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as ''KVAT Act'' for short).

The brief facts leading to this appeal are as under:

(a) The appellant herein has been a proprietary concern and also a commission agent of M/s. Godrej Sara Lee Limited, which has been manufacturing and marketing household insecticides under license obtained under the Insecticides Act, 1968 and Rules, 1971. The appellant has been selling Mosquito repellants manufactured by the said company. The appellant-firm filed its monthly returns for the months from April 2006 to October 2006. Thereafter, in order to ascertain the correctness or otherwise of the said returns, the department audited its books of accounts. During the said audit, the department noticed that for the said months the assesses- firm had collected and paid output tax on the sale of Mosquito repellants and also Petroleum Jelly (Vaseline) at the rate of 4%, though the same were liable to be taxed at 12.5% as they were not listed in schedule III annexed to the KVAT Act.

(b) Therefore, the Assessing Authority issued to the assessee notices u/s 39 of the KVAT Act (vide Annexure-B and B1 to B6) proposing to tax the turn over of the stales of Mosquito repellants and Petroleum Jelly (Vaseline) at 12.5%. In response to the said notices, the appellant assesses submitted its reply stating that the Mosquito repellent bang insecticide comes within the purview of Entry 23 of Schedule III annexed to the KVAT Act and therefore, it rightly collected and paid tax on its sales at 4% only. Negativing the said contention of the assessee, the Assessing Authority passed the said combined reassessment and penalty orders (Annexure-A & A1 to A6), holding that Entry 23 basically covers commodities used in agricultural operations but not those used for domestic purpose.

(c) Aggrieved by the said orders, the appellant assesses filed the above said Writ Petition urging that in view of the circular issued by the Commissioner of Commercial Taxes (Administration) vide Annexure-E clarifying that the turn over in respect of sales of Mosquito repellants should be taxed @ of 12.5% but not at 4% as the mosquito repellent does not come within Entry 23 of Schedule in annexed to the KVAT Act and therefore, the Appellate Authority viz., the Joint Commissioner of Commercial Taxes being subordinate to the Commissioner of Commercial Taxes (Administration) could not have taken a different view inconsistent with the said Circular and as such, the alternative remedy though was available to the appellant assesses was not efficacious and therefore, it approached this Court by filing said Writ Petition. However, the learned Single Judge did not accept the said contention of the assessee on the ground that the said orders impugned therein were not passed by the Assessing Authority on the basis of the said Circular. Besides this, the decision of this Court in the case of Balaji Computers and Others Vs. The State of Karnataka and Others, as to the maintainability of the Writ Petition despite there being availability of alternative remedy was not considered by the learned Single Judge.

Heard the arguments of Sri. Indra Kumar, the learned Senior Counsel for the appellant - assessee and Sri Gangadhar Sangolli, the learned AGA for the respondents. While placing his reliance on the decision of this Court in the case of Balaji Computers and Others Vs. The State of Karnataka and Others, the learned Senior Counsel for the appellant submitted that the alternative remedy that was available to the appellant before the Joint Commissioner of Commercial Taxes was not efficacious one in view of the Circular issued by the Commissioner of Commercial Taxes (Administration), and therefore the learned Single Judge was not justified in dismissing the Writ Petition. It is observed by the Division Bench of this Court at para 12 in the said case as under.

Merely because, the proviso given to Sub-section (1) of Section 3-A of the Act, prohibits the Commissioner to give any instructions which interferes with the power of the appellate authority, in our view, it is not possible to even remotely think that the concerned authorities will go against the instructions given by the Commissioner in circular, Annexure D and give scope for any disciplinary proceedings against them. It is necessary to point out that going against the instructions would result in revenue loss to the State, and therefore, no officer can afford, apart from the fact that he is obliged u/s 3-A(1) of the Act, to carry out the instructions of the Commissioner, which may attract disciplinary proceedings resulting in his removal from service. Under these circumstances, in the light of the clear unequivocal instruction/directions given by the commissioner as stated above, in my view, filing objections before the assessing authorities would be an empty formality. Such a remedy available to the assessees cannot be considered, in the eye of law, as an effective alternative remedy. Though the proviso given to Sub-section (1) of Section 3-A of the Act prohibits the Commissioner from issue of any instructions which interferes with the discretion of the Appellate Authority, once such instructions are given it is not reasonable to expect that even such Appellate Authorities who are subordinate to the Commissioner, would go against the instructions given by the Commissioner and take a view different to the one expressed by the Commissioner in his instructions circular, Annexure D. The mandate of the proviso is the Commissioner not to give any instructions which would interfere with the discretion to be exercised by the Appellate Authorities. It is also necessary to point out that to file an appeal against the order of assessment or reassessment made, the assessees will have to deposit 50 per cent of the tax assessed.

Further, in the same decision, the Division Bench has referred to the decision of Hon''ble Supreme Court in the case of Filterco and Another Vs. Commissioner of Sales Tax, Madhya Pradesh and Another, , wherein it is held as follows:

Held - that the order passed by the Commissioner was clearly binding on the Assessing Authority u/s 42-B(2) of the Act and though it was open to the appellants to urge their contentions before the Appellate Authority, the Appellate Assistant Commissioner, that would be a mere exercise in futility when a superior officer, the Commissioner had already passed a well considered order in exercise of his statutory jurisdiction u/s 42-B(1). Further, a substantial portion of the tax had to be deposited before an appeal or revision could be filed. In such, circumstances, the High Court ought to have decided the petition on the merits;

Following the above said decisions of Hon''ble Supreme Court and this Court, we are of the considered opinion that alternative remedy by way of appeal that was available to the appellant before the Joint Commissioner of Commercial Taxes was not efficacious and it is also futile exercise of right by the assesses and therefore the learned Single Judge was not justified in declining to interfere with the orders of the Assessing Authority impugned m the Writ Petition.

Having come to the conclusion that the learned Single Judge was not justified in declining to interfere with the orders impugned in the Writ Petition, for the reason that he appellant has got an alternative remedy of appeal we now have to examine the legality or otherwise of the said orders. Sri. Indra Kumar, the learned Senior Counsel appearing fox the appellant, strongly contended that the Mosquito repellant has been manufactured by the said Company by obtaining the licence under the provisions of the Insecticides Act, 1968, and they contain the chemical ''Allethrin'', which is defined as insecticide under Clause 3(e) of the Insecticides Act, 1968 and farther, insecticides are included in Entry 23 of III Schedule to KVAT Act and therefore, the Assessing Authority was not justified in levying the tax on the sales torn over of mosquito repellants at 12.5% instead of taxing the same at 4% only as provided u/s 4(1)(a)(ii) of the KVAT Act.

Per contra, Sri. Gangadhar Sangolli, learned AGA contended that the goods listed under Entry 23 of the said Schedule are mainly used for agricultural purposes and therefore, Mosquito repellant though could be termed as insecticide could not be held to come within the purview of Entry 23 of the said schedule as the same is used for domestic purposes but not for agricultural purposes and therefore, the Assessing Officer was quite justified in treating the same as falling under residuary entry of the said schedule and taxing it at 12.5%. In support of this contention, the learned AOA has relied upon the Division Bench judgment of this Court in the case of Diebold Systems Pvt. Ltd. Vs. The Commissioner of Commercial Taxes, Suffice to say that the principles laid down in the said decision do not lend any support to this contention of the learned AGA.

In order to consider the oval legal contentions urged by the learned Senior Counsel and AGA on behalf of the patties, it would be necessary for us to examine the relevant provisions of KVAT Act, Insecticides Act, 1968 and the Rules thereunder, Section 4 of the KVAT Act reads as under.

Section 4 - Liability to tax and rates thereof-

(1) Every dealer who is or is required to be registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover,

(a) in reject of goods mentioned in-

(i) Second Schedule, at the rate of one percent;

(ii) Third Schedule, at the rate of four percent, and

(iii) Fourth Schedule, at the rate of twenty percent.

(b) in respect of other goods, at the rate of [twelve and one half] percent;

Entry 23 of Schedule III annexed to KVAT Act reads as under:

Chemical fertilizers, chemical fertilizer mixtures; bio fertilizers, micro nutrients, gypsum, plant growth promoters and regulators: insecticides, pesticides, rodenticides, fungicides, weedicides, herbicides

Section 3(f) of the Insecticides Act, 1968, winch defines ''insecticide'', reads as under:

Section 3(e) "insecticide" means,-

(i) any substance specified in the schedule; or

(ii) such other substances (including fungicides and weedicides) as the Central Government may, after consultation with the Board, by notification in the official Gazette, include in the schedule from time to time; or

(iii) any preparation containing any one or more of such substances,

Further, it could be seen from item No. 16 of the Schedule annexed to the Insecticides Act, 1968 that ''Allethrin'' and its stereo isomers (m) is shown as substance which come within the definition of ''insecticide'' as defined u/s 3(e) of the Insecticides Act, 1968.

It is not in dispute that Mosquito repellant contains the chemical Allethrin, as one of its constituents and as such, it is an insecticide. Therefore, on combined reading of the above provisions, it is clear that since Allethrin is a constituent chemical in Mosquito repellant, it comes within the definition of insecticide aid insecticide finds place in Entry 23 of III schedule annexed to KVAT Act without any farther qualification as to its kind, whether an insecticide is used in agricultural operations for the purpose of killing the insects that stuck the agricultural crops or it is used for kitting domestic insects, the fart remains that all kinds of insecticides tall within Entry 23 of the schedule annexed to the KVAT Act Therefore, undoubtedly the mosquito repellant being insecticide rails within Entry 23 of the said schedule.

Sri. Indra Kumar, the learned Senior Counsel appearing for the appellant, has relied upon the decisions of Madras and Kerala High Courts in Transelaktra Domestic Products Pvt. Ltd v. Commercial Tax Officer, Porur Assessment Circle, Madras reported in [1993] 90 STC 436 KER and Transelaktra Domestic Products Pvt. Ltd. v. Stats of Kerala and Ors. repotted in [2001] 122 STC 229 KER. In first of these decisions the High Court of Madras has held as under:

Held accordingly, that mosquito mats manufactured under the brand name "Good Knight", containing; 4 per cent "allethrin" and 96 per cent other ingredients was an insecticide railing under entry 66 of the First Schedule to the Tamil Nadu General Soles Tax Act, 1959.

In the second decision viz., in the case of Transelektra Domestic Products Pvt. Ltd. v. State of Kerala and Ors. the Kerala High Court has held a under.

Where the department took the stand that mosquito repellent mats gave pleasant smell and are harmless to human beings or to domestic pets and the meager quantity of 4 per cent allethrin could not make them an insecticide and that they are liable to tax at multi-point rate as a general item:

Held, that since the mosquito repellent mat contains insecticide allethrin chemicals which is manufactured and sold under licence issued under the Insecticides Act, 1963 and it will fatally affect the nervous system of mosquitoes, it is to be classified as an insecticide till it was specifically classified from April 1, 1991 onwards.

Sri. Indra Kumar, the learned Senior Counsel appearing for the appellant has rightly placed reliance on the decision of the Allahabad High Court in the case of Knight Queen Industries (P) Ltd. Vs. State of U.P. and The Deputy Commissioner (Assessment) Trade Tax, wherein the High Court of Allahabad, has also held, following the decisions of High Courts of Madras and Kerala referred to supra, that Mosquito repellant falls within definition of ''insecticide''.

We respectfully agree with the view taken by the High Courts of Madras, Kerala and Allahabad in the said decisions and hold that mosquito repellent is an ''insecticide''. Further, it is not in dispute that the Mosquito repellents were manufactured by the said company viz., Godrej Sara Lee Ltd., of which the assessee has been an agent, under the license obtained under the provisions Insecticides Act, 1968 and insecticide'' is listed under list 23 of III Schedule to KVAT Act.

Therefore, we are of the considered view that the Mosquito repellant squarely falls within the ambit of entry 23 of Schedule III annexed to the KVAT Act and as such, the learned Assessing Authority committed serious error in law in holding that the turn over in respect of the sales of Mosquito repellents has to be taxed at 12.5% on the ground that the Mosquito repellents fall within the residuary entry of Clause (b) of Sub-section (1) of Sections 4 of KVAT Act the said Schedule. Therefore, the orders impugned in the said Writ Petition at Annexure-A and A1 to A6 deserve to be quashed so far they relate to levy of tax & penalty on the sales of mosquito repellents at 12.5%.

In the result, the present Writ Appeal is allowed The impugned order of the learned Single Judge dated 2.4.2007 passed in WP. NO. 5507/07 is hereby set aside. Consequently, the orders impugned in the said Writ Petition viz., the order dated 29.1.2007 passed by the Assessing Officer viz., the Deputy Commissioner of Commercial Taxes, which are at Annexures - A and Al to M are also hereby quashed aside to the extent they relate to levy of tax on the sales of mosquito repellants at 12.5% and levy of penalty on the unpaid tax. The matter is remitted back to the Assessing Authority with direction to pass appropriate order of assessment in the light of this judgment.