State of Karnataka vs Honey Comb International Inc.

N. Kumar, J.—The Revenue has preferred these petitions challenging the order passed by the Karnataka Appellate Tribunal holding that the honeycomb partition frames supplied by the assessee to the railways, form part of a railway coach and therefore, it falls under specific entry at Sl. No. 76 and liable to tax at 5% only and it cannot be taxed under unscheduled goods at 13.5%. The assessee is a dealer registered under the provisions of the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as ''the KVAT Act'', for short) and Central Sales Tax Act, 1956 (hereinafter referred to as ''the CST Act'', for short). The assessee is in the business of manufacture of general honeycomb partition frames to Rail Coach Factory, Indian Railways, Kapurthala, Punjab State. The assessee filed monthly returns and paid tax at the rate of 5% for the assessment year 2010-2011 in respect of sale of honeycomb partition frames to Indian Railways. The Assistant Commissioner of Commercial Taxes, after verification of the returns, proposed to pass a reassessment order on the ground that the claim made by the assessee that supply of honeycomb partition frames is liable to be taxed at the rate of 5% as per Entry 76 of Third Schedule to the KVAT Act, is not correct. It has to be taxed as an unscheduled goods under Section 4(1)(b) of the KVAT Act at 13.5%. Accordingly, a proposition notice was issued and the assessee filed his objections. However, overruling the objections of the assessee, the Assessing Authority rectified the order passed on 18-10-2012 and passed rectification order on 22-10-2012 under Section 69 of the KVAT Act read with Section 9(2) of the Central Sales Tax Act, 1956. Aggrieved by the said order, the assessee preferred an appeal before the Joint Commissioner for Commercial Taxes who dismissed the appeal. The assessee preferred a second appeal to the Karnataka Appellate Tribunal. The Karnataka Appellate Tribunal, on careful consideration of the rival contentions and after taking note of the various judgments on which reliance was placed, held that it is conclusive from the material on record that the honeycomb partition frames manufactured by the assessee and supplied to the Rail Coach Factory, Indian Railways, Kapurthala are parts of rail coaches falling under Sl. No. 76 of Third Schedule to KVAT Act which specifies rail coaches, engines, wagons and parts thereof. It does not call for applying any user or of common parlance understanding or commercial parlance understanding for determining the nature of the goods. The assessee did not sell merely honeycomb boards but manufactured honeycomb partition frames and sold the honeycomb partition frames exclusively to the railways. The honeycomb partition frames were manufactured to the specifications and drawings provided by the railways and were meant for use as parts in the construction of railway coaches and not for any other use. The assessee did not place the honeycomb partition frames in the open market catering to the customers for different uses so that it could be said that commercial parlance or common parlance understanding was applicable for construction of the correct nature of the goods. Even if the commercial parlance understanding is to be applied, the honeycomb partition frames manufactured by the assessee and supplied to the Rail Coach Factory for exclusive use for the construction of rail coaches are to be held as part used in the construction of the rail coaches and not differently. Therefore, it allowed the appeal and set aside the orders passed by the lower authorities and held that the tax paid at 5% is what is legally due. Aggrieved by the said order, the revenue has preferred this appeal.

The learned Government Advocate, assailing the impugned order, contended that the honeycomb partition frames are available in the market. Merely because the said partition frames are used in the construction of rail coaches, it does not become a part of a rail coach as it is not a scheduled item. It has to be taxed as an unscheduled goods and the rate of tax payable is 13.5% and the order passed by the Karnataka Appellate Tribunal is erroneous and requires to be set aside.

Per contra, the learned Counsel for the assessee reiterated the grounds which he urged before the Tribunal.

In the light of the aforesaid facts and rival contentions, the question of law that arise for our consideration in this revision petition is:

Whether honeycomb partition frames manufactured and supplied by the assessee to the Indian Railways is a part of rail coach, falling under Entry 76 of Third Schedule to KVAT Act?

The facts are not in dispute. The assessee is a manufacturer and supplier of honeycomb partition frames to Rail Coach Factory, Indian Railways, Kapurthala, Punjab State. Rail Coach Factory at Kapurthala places orders with the assessee for supply of honeycomb partition frames set for AC 3 tier coach. They also prescribed their requirements and the characteristics they look for. They also gave the drawings and the specifications. It is thereafter, the assessee-manufactures the honeycomb partition frames set for AC 3 tier coach according to the specifications prescribed by the railways. These honeycomb partition frame sets are not available in the market because it is of no use for others. These honeycomb partition frames are used for partition in a rail coach. Once these frames are used for partition in a rail coach, it becomes part thereof. In fact, it is manufactured according to the specifications of the Railways as a part of the rail coach and then it is supplied. A rail coach, without these partitions, is something which, in common parlance, one cannot think of. It is not a case of, to what purpose these partition frames are used. Without such partition frames, there cannot be a rail coach as understood in common parlance. Therefore, it falls under Sl. No. 76 of Third Schedule to KVAT Act which specifies rail coaches, engines, wagons and parts thereof.

The Counsel for the revenue relied on a judgment of the Division Bench of this Court in the case of Mysore Agro Service Centre Vs. State of Karnataka, and contended, articles cannot be taxed depending on the user in individual cases. In Atul Glass Industries (Pvt.) Ltd. Vs. Collector of Central Excise, , the Supreme Court applied the said test of functional character of the product in question. That was a case where the Court had to consider whether mirror was treated as "glass and glassware". The Supreme Court held thus:

"It is a matter of common experience that the identity of an article is associated with its primary function. It is only logical that it should be so. When a consumer buys an article, he buys it because it performs a specific function for him. There is a mental association in the mind of the consumer between the article and the need it supplies in his life. It is the functional character of the article which identifies it in his mind. In the case of a glass mirror, the consumer recalls primarily the reflective function of the article more than anything else. It is a mirror, an article which reflects images. It is referred to as a glass mirror only because the word ''glass'' is descriptive of the mirror in that glass has been used as a medium for manufacturing the mirror. The basic or fundamental character of the article lies in its being a mirror".

Again, the Apex Court in the case of Mukesh Kumar Aggarwal and Co. Vs. State of Madhya Pradesh and Others, , held as under:

"Here again, pushed to its logical conclusions, the reasoning incurs the criticism of proceeding to determine the nature of the ''goods'' by the test of the use to which they are capable of being put. The ''user-test'' is logical; but is, again inconclusive. The particular use to which an article can be applied in the hands of a special consumer is not determinative of the nature of the goods. Even as the description of the goods by the authorities of the Forest Department who called them varyingly as ''eucalyptus fuel-wood'', ''eucalyptus wood-heap'', etc., is not determinative, the fact that the purchasers were dealers in timber is also not conclusive".

From the aforesaid judgments it is clear, a particular use to which an article can be applied in the hands of a special consumer is not determinative of the nature of the article. The intention of the Legislature seems to levy a particular rate of tax in respect of sales transactions pertaining to a particular goods as enumerated in the Schedules of the Act. What falls from that judgment is, if a particular goods is enumerated to the Schedule of the Act, then, levy of tax should be according to the said specification. In fact, a Division Bench of this Court in the case of State of Karnataka Vs. Mysore Thermo Electric Private Limited, , dealing with the question of battery being the part of the railway which falls under Sl. No. 76 of the Third Schedule, held that if battery sold to the railways under the expression ''part thereof, were manufactured as per the specifications of the railways, the dealers are liable to collect tax at the rate of 4% falling under Entry 76 of the Third Schedule as the battery is an integral part of the rail coaches, engines and wagons and falls under ''part thereof''. On the same analogy, the honeycomb partition frames used for partition, of the rail coaches becomes a part thereof of the rail coaches and therefore, the Tribunal was justified in holding that the honeycomb partition frames manufactured and supplied by the assessee to the railways, form part of a rail coach and falls within Entry 76 to the Third Schedule of the KVAT Act. We do not see any error committed by the Tribunal. Accordingly, the question of law framed is answered in favour of the assessee and against the revenue. Hence, we pass the following

ORDER

The revision petitions are dismissed.