Sakthi Masala (Private) Limited vs State of Karnataka

B. Manohar, J.—The assessee-M/s. Shakthi Masala Private Limited has filed STA Nos. 34 and 36 to 69 of 2012 challenging the order dated 17-2-2012 passed by the Additional Commissioner of Commercial Taxes in No. SMR/KVAT/APP/2/CR-05/2011-12 in exercise of its power u/s 64(1) of the Karnataka Value Added Tax Act, 2003 setting aside the order passed by the First Appellate Authority confirming the order passed by the Assessing Authority, for the assessment years January 2007 to November 2009. The State Government filed STRP Nos. 77 and 134 to 142 of 2010 and STRP Nos. 196 and 7 to 17 of 2012 being aggrieved by the order dated 31-3-2010 and 9-7-2010 made in STA Nos. 2174 to 2183 of 2009 (M.T.R. Foods Private Limited, Bangalore v State of Karnataka 2010(68) Kar. L.J. 585 (Tri.) (DB)) and STA Nos. 380 to 391 of 2009 (Eastern Condiments (Private) Limited, Bangalore v State of Karnataka, 2010 (69) Kar. L.J. 493 (Tri.) (DB)) respectively passed by the Karnataka Appellate Tribunal, setting aside the order passed by the Assessing Authority holding that the assessee is liable to pay tax at the rate of 4% on Masala powder by setting aside the penalty and interest imposed, for the assessment year December 2006 to September 2007 and for the assessment year January 2007 to December 2007 respectively.

Since the common question of law and facts are involved in these appeals and revision petitions, all these cases are clubbed together and disposed off by this common order.

The assessee in STA Nos. 34 and 36 to 69 of 2012 is a Private Limited Company incorporated under the provisions of Companies Act, 1956 and is a dealer registered under the provisions of Karnataka Value Added Tax Act, 2003 (hereinafter referred to as ''the KVAT Act'') and engaged in the activities of manufacture and sale of masala powder, Curry powder, Rasam Powder, chilly chutney and other alike masala powders. The assessee-company undertakes purchase-cum-manufacture and resale of masala goods. During the assessment years January 2007 to November 2009, the assessee has filed returns claiming 4% tax in respect of masala powders for the aforesaid period as against the tax at the rate of 12.5%. The Assessing Authority invoked the provisions of Section 39(1) of the Act and issued notice to the assessee calling upon the assessee to produce the records. The authorised representative appeared before the Assessing Authority and relied upon the Notification No. FD 140 CSL 06, Bangalore, dated 19-12-2006 and contended that the Government has reduced the tax payable by the dealer under sub-section (1) of Section 4 of the Act and the dealer has to pay tax at the rate of 4% in respect of masala powders and sought for dropping of the reassessment proceedings. The Assessing Authority after considering the objections filed by the assessee held that the Government Notification dated 19-12-2006 referred to above is applicable only in respect of sale of spices in the form of Masala powder being the mixture of one or more spices. In the instant case, the masala powder sold by the assessee is not the mixture of one or more spices. Hence, the assessee is not entitled to claim benefit under the Government Notification dated 19-12-2006 and assessed the tax at the rate of 12.5% imposing penalty u/s 72(2) and interest u/s 36(1) of the KVAT Act, 2003. Being aggrieved by the said order, the assessee preferred appeals before the Joint Commissioner of Commercial Taxes (First Appellate Authority) u/s 62(6) of the KVAT Act in Nos. VAT.AP. 1946 to 1978/2009-10 and VAT.AP. 447 and 448/2010-11. The Joint Commissioner by its order dated 25-8-2010 relying upon the order made in STA Nos. 2174 to 2183 of 2009 passed by the Karnataka Appellate Tribunal in M.T.R. Foods Private Limited''s case allowed the appeals and set aside the order passed by the Assessing Authority. The Revisional Authority on scrutiny of the order passed by the Appellate Authority found that the order passed by the First Appellate Authority is erroneous and prejudicial to the interest of the revenue. Accordingly issued notice u/s 69(1) of the KVAT Act to revise the order passed by the First Appellate Authority. The Revisional Authority after considering the objections raised by the appellant by its order dated 17-2-2012 allowed the revision petition and set aside the order dated 25-8-2010 passed by the First Appellate Authority and upheld the order passed by the Assessing Authority passed u/s 39(1) of the Act. The Revisional Authority held that as per the notification dated 19-12-2006 issued by the State Government, the appellant is liable to pay tax at the rate of 12.5% since the appellant is not the dealer in sale of masala powders being mixture of one or more spices. Being aggrieved by the order dated 17-2-2012 passed by the Revisional Authority, the assessee has preferred these appeals.

STRP Nos. 77 and 134 to 142 of 2010 are filed by the State Government being aggrieved by the order dated 31-3-2010 passed by the Karnataka Appellate Tribunal in STA Nos. 2174 to 2183 of 2010 (M.T.R. Foods Private Limited''s case). The respondent-M.T.R. Foods Private Limited is a private limited company registered dealer under the provisions of KVAT Act engaged in the manufacture and sale of Masala Powders, instant food, food mixture, sweet, pappad, pickles and masala powders constituted mixture of spices and materials like salt, pulse, oil and rice items. For the assessment year December 2006 to September 2007, the assessee claimed the benefit of Government Notification dated 19-12-2006 and paid tax at the rate of 4% as against 12.5%. The Assessing Authority initiated reassessment proceedings u/s 39(1) of the Act and issued notice to the assessee. After hearing the assessee, the Assessing Authority passed an order on 21-3-2009 calling upon the assessee to pay the balance tax under the KVAT Act with penalty and interest. Being aggrieved by the assessment order dated 21-3-2009, the assessee preferred an appeal before the Joint Commissioner of Commercial Taxes (Appeals). The Appellate Authority by its order dated 26-9-2009 dismissed the appeal confirming the order passed by the Assessing Authority. The assessee being aggrieved by the order passed by the First Appellate Authority as well as the Assessing Authority, preferred an appeal before the Karnataka Appellate Tribunal contending that the order passed by the Assessing Authority as well as the First Appellate Authority is contrary to law. As per the Government notification dated 19-12-2006, for sale of spices in the form of Masala Powder being the mixture of one or more spices, they are liable to pay tax at the rate of 4%. The Appellate Authority, by its order dated 31-3-2010 allowed the appeal and set aside the order passed by the First Appellate Authority as well as Assessing Authority and held that the Assessee is liable to pay tax at the rate of 4% in respect of sale of masala powder. Being aggrieved by the order dated 31-3-2010, the State Government has preferred these revision petitions.

In STRP Nos. 196 and 7 to 17 of 2012, the State Government being aggrieved by the order dated 9-7-2010 (Eastern Condiments (Private) Limited''s case) made in STA Nos. 380 to 391 of 2009 passed by the Karnataka Appellate Tribunal setting aside the order passed by the First Appellate Authority dated 10-12-2008 made in Nos. VAT. AP. 836 to 847/2008-09 as well as the order dated 18-8-2008 passed by the Assessing Authority relying upon the order made in STA Nos. 2174 to 2183 of 2009 passed in M.T.R. Foods Private Limited''s case allowing the appeal for the assessment year January 2007 to December 2007 has preferred these revision petitions.

The appeals are admitted to examine the following substantial question of law:

Whether the Additional Commissioner is legally justified in exercising the revisional powers to set aside the order of a Joint Commissioner in appeal, who has passed the said order pursuant to the order of the Appellate Tribunal, wherein the Tribunal has held that the notification dated 19-12-2006 is applicable to masala powder being a mixture of one or more spices?

The above revision petitions have been admitted to consider the following substantial question of law:

Whether the finding of the Tribunal that in view of the notification dated 19-12-2006, the respondent is liable to pay tax at the rate of 4%, is perverse, arbitrary and contrary to law?

Heard the arguments of Sri R.V. Prasad, learned Counsel appearing for the appellants in appeals and Sri Indra Kumar, learned Senior Counsel appearing for the respondent-assessee in revision petitions and also T.K. Vedamurthy, Government Pleader appearing for the revision petitioners/respondent-State in the appeals.

Sri R.V. Prasad, learned Counsel appearing for the appellant in the appeals contended that the order passed by the Revisional Authority is contrary to law and the same has been passed in gross violation of principles of natural justice. The Tribunal has neither considered the objections raised nor the contentions taken in the statement of objections. He further contended that the appellant is engaged in the manufacture and sale of masala powder, curry powder, Rasam powder and alike. Prior to the amendment to Section 4, the appellants are paying tax at the rate of 12.5% on masala powders. Subsequently, the State Government by its notification dated 19-12-2006 issued u/s 4(3) of the KVAT Act reduced the tax payable by the dealers in respect of Masala Powders from 12.5% to 4%. Inspite of the same, the Assessing Authority is demanding tax at the rate of 12.5%. In view of that, M/s. M.T.R. Foods Private Limited, filed an application before the Commissioner of Commercial Taxes u/s 60 of the Act for clarification. The Authority for Clarification and Advance Ruling (hereinafter referred to as ''ACAR''), by its order dated 29-7-2008 clarified that the assessee is liable to pay tax at the rate of 12.5% and held that as per the Government Notification, the Government has reduced the tax to 4% in respect of sale of spices in the form of masala powder being mixture of one or more spices. Since the assessee is dealing with the masala powders which is the mixture of spices with other materials, the assessee is not entitled for the benefit of notification dated 19-12-2006. Being aggrieved by the order passed by the ACAR, the assessee preferred a writ petition before this Court. This Court dismissed the writ petition on 26-8-2008 and the said order was confirmed in W.A. No. 1476 of 2008 disposed off on 15-1-2009. Against the said order, the assessee preferred a Civil Appeal No. 8141 of 2009 before the Hon''ble Supreme Court. In the meanwhile, the Assessing Officer passed an order u/s 39(1) of the Act. The said assessment order was confirmed by the First Appellate Authority. Being aggrieved by the same, the assessee preferred an appeal before the Karnataka Appellate Tribunal. The pendency of the appeal was brought to the notice of the Hon''ble Supreme Court in Civil Appeal No. 8141 of 2009. The Hon''ble Supreme Court disposed off the said civil appeal with the observations that the Appellate Tribunal will decide the pending appeals uninfluenced by the clarification issued by the Commissioner dated 9-4-2008 and 29-7-2008. In view of the order passed by the Hon''ble Supreme Court, the Appellate Tribunal has to consider the appeal afresh without being influenced by the order passed by the ACAR. In fact, on an appeal filed by the M/s. M.T.R. Foods Private Limited, the Karnataka Appellate Tribunal after considering the matter in detail and on interpreting the Government Notification held that the assessee is entitled for the benefit of the Government notification dated 19-12-2006 in respect of masala powder which is the mixture of one or more spices with other materials like salt, pulse, oil and rice items. The order passed by the Karnataka Appellate Tribunal was questioned by the State Government in STRP Nos. 77 and 134 to 142 of 2010. Hence, the Revisional Authority ought to have followed the order passed by the Karnataka Appellate Tribunal. The order passed by the Revisional Authority is contrary to law. Levying of tax at the rate of 12.5% in respect of masala powder with penalty and interest is erroneous in law. As per the notification dated 19-12-2006, the State Government notifies that in respect of sale of spices in the form of masala powder being mixture of one or more spices, the tax is reduced to 4%. In the instant case, the appellant is doing the business of masala powders which contain the mixture of spices and other ingredients which also comes under the notification dated 19-12-2006, hence the order passed by the Revisional Authority under suo motu revision is contrary to law.

Sri Indra Kumar, learned Senior Counsel appearing for the respondents in the revision petitions also supported the arguments addressed by Sri R.V. Prasad and contended that the Hon''ble Supreme Court while disposing of the Civil Appeal No. 8141 of 2009 directed the Appellate Tribunal to decide the appeals uninfluenced by the clarification issued by the Commissioner u/s 60 of the Act. The Appellate Tribunal relying upon the judgment of the Apex Court concerning the interpretation of statute leading to the meaning of masala powder which is the mixture of other ingredients with one or more spices and came to the conclusion that the case of the assessee come under the notification dated 19-12-2006. Hence, he argued in support of the order passed by the Appellate Authority and sought for dismissal of the revision petitions filed by the State Government.

Sri T.K. Vedamurthy, learned High Court Government Pleader appearing for the revision petitioner-State in STRP Nos. 77 and 134 to 142 of 2010 and STRP Nos. 196 of 2011 and 7 to 17 of 2012 and also respondent in STA Nos. 34 and 36 to 69 of 2012 contended that the order passed by the Karnataka Appellate Tribunal setting aside the order passed by the Assessing Authority as well as the First Appellate Authority is contrary to law. The Appellate Tribunal has misunderstood and misread the notification dated 19-12-2006 issued by the State Government. The Tribunal ought to have read the notification as it is. The notification specifically provides that if the masala powder is constituted by one or more spices, then only it attracts 4% tax. If it is inclusion of any other ingredients like rice, pulse, coconut, oil, it carries 12.5% tax. The entire approach made by the Appellate Tribunal is contrary to law. Further, on an application filed by M/s. M.T.R. Foods Private Limited, u/s 60 of the Act, the ACAR considered the clarification sought for by the M.T.R. and held that 4% tax is applicable only in respect of mixture of more than one spices, but not any other ingredients. The review petition filed by the assessee was also dismissed by the ACAR. The said order was confirmed by this Court in W.P. No. 11295 of 2008 disposed of 26-8-2008 and the same was confirmed in W.A. No. 1476 of 2008. Further the Hon''ble Supreme Court has also disposed of the Civil Appeal No. 8141 of 2009 filed by the assessee with an observation that the Appellate Tribunal will decide the issue uninfluenced by the clarificatory order issued by the ACAR on 9th April, 2008 and 29th July, 2008. Hence, it is not open to the Commissioner to interpret in different way contrary to the intendment of the Act. Sri Vedamurthy further contended that in STA Nos. 34 and 36 to 69 of 2012 the Revisional Authority found that the order passed by the First Appellate Authority is erroneous and prejudicial to the interest of the State. The Revisional Authority after issuing notice u/s 64(1) of the Act, after hearing the assessee has set aside the order passed by the First Appellate Authority and confirmed the order passed by the Assessing Authority. The ACAR clarified the notification dated 19-12-2006 and the Division Bench of this Court upheld the order passed by the ACAR. Hence, the appellant is liable to pay tax at the rate of 12.5%. There is no infirmity in the order passed by the Assessing Authority and directed the appellant to pay the difference of tax with penalty and interest. Hence, sought for dismissal of STA Nos. 34 and 36 to 69 of 2012 and allow the revision petitions filed by the State Government.

We have carefully considered the arguments addressed by the parties and perused the orders passed by the Karnataka Appellate Tribunal as well as the Revisional Authority.

It is not in dispute that the assessees are the manufacturers and registered dealers of masala powder. Section 4(1) of the KVAT Act provides that every dealer who is or is required to be registered as specified in Sections 22 and 24 shall be liable to any tax on his taxable turnover as per the specified rate as notified by the State Government in respect of the scheduled goods. The goods mentioned in the First Schedule are exempted from payment of tax u/s 5 of the Act. In respect of the Second Schedule, the dealer has to pay tax at the rate of 1%. In respect of the Third Schedule, the dealer has to pay tax at the rate of 4%. The goods enumerated in the Fourth Schedule attracts tax at the rate of 20%. Clause (b) of Section 41 which is unscheduled goods attracts tax at the rate of 12.5%. Since the masala powder is an unscheduled goods, 12.5% tax is being collected from the dealer. Prior to the amendment of Entry 89 of the Third Schedule it reads as under:

Spices in all forms including jeera (cumin seeds), methi, poppy seeds (kaskas), corriander (dhaniya), shajeera, somph, katha, azwan, kabab chini, bhojur phool, tejpatha, japtri, nutmeg (marathamoggu), kaloovu, aniseed, turmeric, cardamom, pepper, cinnamon, dalchinny, cloves, tamarind and dry chillies and wet dates; hing (asafoetida).

Subsequently, the State Government under Act No. 4 of 2006 as per the notification dated 1-4-2006 inserted the following words in Entry 89 which reads as under:

including cut chillies, spent chillies and chilly seeds, but excluding spices in the form of masala powder, instant mixes or other mixtures containing more than one spice or a spice with any other material.

The masala powder is not defined under the Act. Subsequently, the State Government by its notification dated 19-12-2006 reduced the tax from 12.5% to 4% in respect of masala powder. The notification dated 19-12-2006 reads as under:

No. FD 140 CSL 06, Bangalore, dated 19-12-2006

In exercise of the powers conferred by sub-section (3) of Section 4 of the Karnataka Value Added Tax Act, 2003 (Karnataka Act 32 of 2004), the Government of Karnataka hereby reduces, the tax payable by a dealer under sub-section (1) of Section 4 of the said Act to four per cent on the sale of spices in the form of masala powder being the mixture of one or more spices, with immediate effect.

The assessee on the basis of the notification dated 19-12-2006 have collected tax at the rate of 4% from the consumers and filed the returns paying 4% tax. However, the Assessing Authority found that the assessee is dealing with the masala powder which is the mixture of spices and other ingredients like salt, pulses, oil, starchy and rice etc. Hence, they are liable to pay tax at the rate of 12.5%. Accordingly, called upon the assessees to pay the difference of tax with penalty and interest. The main contention urged by the assessee is that if the spices are crushed into the powder it cannot be called as masala powder. If the spices mixed with other materials like pulses, salt, oil, starchy, then only it becomes masala powder. The Hon''ble Supreme Court in A.P. Products Vs. State of Andhra Pradesh and Others, held as under:

That the ingredients used in preparation of masala after grinding and mixing loses their own identity and character and a new product separately known to the commercial world come into existence. The sales tax is intended to tax sale of different commercial commodities emerge into existence, they become separately taxable goods or entitled for the purpose of sales tax. Therefore, the masala powder prepared after grinding and mixing of various spices and condiments in certain portion is commercial a different commodity liable to be taxed.

Hence, it is clear that the masala powder is the mixture of one ore more spices with any other material, otherwise it will be called as powder. For e.g. if jeera is crushed it will be called as jeera powder and it will not be called as masala powder. Prior to the notification dated 19-12-2006, the assessees were paying tax at the rate of 12.5%. From the assessment year January 2007 onwards, in view of the notification issued by the State Government dated 19-12-2006 reducing the tax from 12.5% to 4%, the assessees are collecting the tax at the rate of 4% from the consumers, accordingly, filed the returns. As stated earlier, the masala powder is not defined under the Act. In the absence of the same, in a common parlance, it is a mixture of many more ingredients in which, at least one or more spices are to be included. The masala powder not necessarily be made of spices alone, but mixed with other non-spicy items. Such a produce after grinding process is termed as masala powder being a mixture of at least one or more spices. Further, the Hon''ble Supreme Court while disposing of the Civil Appeal No. 8141 of 2009 filed by the M/s. M.T.R. Food Private Limited, challenging the order passed by the ACAR, the Apex Court made the following observations:

Leave granted.

By consent, the matter is taken up for final hearing.

We are informed that the appellant (assessee) has preferred STA Nos. 2174 to 2183 of 2009 before the Karnataka Appellate Tribunal at Bangalore against the order dated Nil, received by the assessee on 10th November, 2009 from the office of the Joint Commissioner (Appeals). We are also informed that on the original assessment, all taxes due have been paid by the assessee.

In the circumstances, we hereby direct the Karnataka Appellate Tribunal to hear and dispose of the said pending appeals expeditiously, preferably within three months from today. In the meantime, assessee will also move an application for interim relief, if so advised, in accordance with law. Needless to add that the Tribunal will also dispose of the said application after considering the taxes which have been paid by the assessee during the interregnum.

We make it clear that the Appellate Tribunal will decide the pending appeals uninfluenced by the clarification issued by the Commissioner dated 9th April, 2008 and 29th July, 2008.

Civil appeal is, accordingly disposed of with no order as to costs.

In view of the above, the Karnataka Appellate Tribunal independently considered the matter and passed the order. The relevant portion of the order reads as under:

The notification under reference envisaging the levy of tax at the reduced rate of 4% in respect of masala powder, suffixing with words that such masala powder containing one or more spices, must be borne in mind. If it was pertaining to only spices, they would have used the words powder of spices instead of masala powder, which attracts some other non-spicy ingredients. The spices having the quality of revealing pungent/fragrance/odor, etc., to contain it or sustain if other starchy/cereal/pulses item ingredients are required. In other words powder of some spices and powder of rice or pulses would constitute the masala and may not be spices alone.....All the masala powders constitute certain quantity of spices along with starchy/cereal/pulses items, food stuffs like turdal powder, rice, chenna dal, bengal gram etc. The percentage of ingredients may differ from area to area according to their taste, but it is clear there shall be no masala powder without non-spicy materials. If it was purely made of spices, it would have been called particular spices powder instead of masala powder as contended by learned Advocate for the appellant. Therefore, it is clear that there shall be no masala powder without non-spicy starchy/cereal/pulses item ingredients..... The term masala powder as per the common parlance is a mixture of many more ingredients, in which at least one or more spices are to be included, i.e., to make the masala powder, starchy items like, rice or pulses mixed with spices. There shall be no masala powder only by mixture of spices or only by mixture of starchy/cereal/pulses item.... The masala powder not necessarily made of spices alone but mixed with other non-spicy items. Such a product after grinding process termed as masala powder, being a mixture of at least one ore more spices. In the absence of other non-star chy/cereal/pulses item, it would have been particular spices powder only. The spices are also having a quality of revealing the pungent/acrid smell but different from that of sweet, salt, sour, bitter and stringent tastes. The inclusion of non-spicy starchy/cereal/pulses item forming into masala powder just like drinking tea being a combination of sugar and milk along with tea powder after the process of boiling, we call it a tea, the tea powder alone cannot constitute a tea without water, sugar and milk. Similarly the spices alone may not form a masala powder, irrespective of the quantum of other ingredients. The masala powder excluded from bare spices found in Entry 89, but specifically stated by notification dated 19-12-2006, under which the appellant is entitle to pay the tax at the reduced rate of 4%, as the impugned orders does not stand to reasoning in giving effect to notification reducing the tax on masala powder.

We find no infirmity or irregularity in the order passed by the KAT that in the absence of definition to the masala powder in a common parlance, the masala powder is understood as mixture of one or more ingredients. Hence, the assessee are liable to pay tax at the rate of 4% in respect of masala powder as per notification dated 19-12-2006. Hence, the issue framed in revision petitions is held in favour of the assessee and against the State Government. Since the revision petitions filed by the State are dismissed, we are not inclined to give any finding in respect of the issue framed in STA Nos. 34 and 36 to 69 of 2012. Accordingly, we pass the following:

STA Nos. 34 and 36 to 69 of 2012 filed by the assessee are allowed and the order passed by the Revisional Authority is set aside. STRP Nos. 77 and 134 to 142 of 2010 and 196 of 2011 and 7 to 17 of 2012 filed by the State Government are dismissed.