State of Karnataka vs Mysore Thermo Electric Private Limited

B. Manohar, J.—The State Government has filed these revision petitions challenging the order passed by the Karnataka Appellate Tribunal (for short, ''the Tribunal'') whereby the Tribunal allowed the appeals filed by the respondent-assessees holding that the batteries sold by the respondents-assessees to the Railways are liable to be taxed at 4% under Entry 76 of the Third Schedule of the Karnataka Value Added Tax Act, 2003 (for short, ''the KVAT Act'') while setting aside the interest as well as the penalty levied by the Assessing Authority which was confirmed by the First Appellate Authority for the assessment period from April 2007 to March 2008 (for short, ''the relevant period''). Since the common question of law and facts are involved in these revision petitions and different orders passed by the Tribunal are challenged in these revision petitions, all these petitions are clubbed together and disposed of by this common order.

The respondents-assessees are the Private Limited Companies incorporated under the Companies Act, 1956 and dealers registered both under the KVAT Act, 2003 and Central Sales Tax Act, 1956 (for short, ''the CST Act''). The assessees are carrying on the business of manufacture and sale of varieties of batteries which include low maintenance lead acid batteries manufactured as per the specifications given by the Ministry of Railways, Government of India and supplied to Railways for use in rail engines, wagons, coaches, etc. They filed return of turnover in Form VAT 100 for the relevant period. During the said period, the assessees had charged and collected VAT @ 4% on sale of batteries to Railways. The Deputy Commissioner of Commercial Taxes (Audit) (hereinafter referred to as the ''Assessing Officer'') visited the business premises of the respondents-assessees for inspection and audit of books of account. On verification of the books of account, it was noticed that the assessees had collected VAT @ 4% instead of 12.5% for sale of various types of batteries to the Railways in contrary to the KVAT Act for the relevant period. Accordingly, the Assessing Officer issued proposition notice for reassessment u/s 39(1) of the KVAT Act, 2003 and u/s 9(2) of the CST Act, 1956. The assessees filed objections to the said proposition notice. The Assessing Officer, after considering the objections found that the assessees had manufactured and sold batteries to the Indian Railways, on which, taxes are charged and collected at 4% instead of 12.5%. The tax invoices raised by the assessees were verified and found that in certain invoices, taxes are charged and collected at 12.5% and in certain invoices taxes are charged and collected at 4% in contravention of the provisions of the KVAT Act. In view of withdrawal of the D-Form facility, the assessees had to levy tax at 12.5% for sale of batteries to the Indian Railways and other Departments. Accordingly, concluded the reassessment order holding that the assessees are liable to pay tax at the rate of 12.5% on the sale of batteries to Indian Railways both under the KVAT Act and CST Act for the relevant period and also imposed interest and penalty under Sections 36(1) and 72(2) of the KAVT Act.

The assessees being aggrieved by the reassessment order passed by the Assessing Authority preferred appeals before the Commissioner of Commercial Taxes (Appeals) (hereinafter referred to as ''the First Appellate Authority'') u/s 9(2) of the CST Act read with Section 62 of the KVAT Act, contending that the assessees are supplying lead acid batteries which are used by the Railways to be fitted into the rail engines, wagons, coaches, etc., as per their specifications for the purpose of lighting and air conditioning. It is also contended that the batteries are the part of Railways. It falls under Entry 76 of the Third Schedule. Hence, the assessees have charged tax at the rate of 4%. The First Appellate Authority after considering the matter in detail, dismissed the appeals and upheld the order of assessment and imposition of penalty and interest. Being aggrieved by the order passed by the First Appellate Authority, the assessees preferred appeals before the Karnataka Appellate Tribunal u/s 63(1) of the KVAT Act. The Tribunal by its order impugned in these revision petitions, allowed the appeals and set aside the order passed by the First Appellate Authority as well as the Assessing Authority, holding that the levy of tax on inter-State sales turnover of batteries to Railways as determined at 12.5% under residuary entry by the Assessing Authority which was confirmed by the First Appellate Authority is contrary to law and directed the Assessing Authority to assess the said turnovers at 4% as per Entry 76 of the Third Schedule of the KVAT Act and also quashed the levy of interest as well as penalty. Being aggrieved by the order passed by the Karnataka Appellate Tribunal, the State Government has preferred these revision petitions.

Sri Omkumar, learned Counsel appearing for the State Government contended that the order passed by the Karnataka Appellate Tribunal is erroneous and unsustainable in law. Section 3 of the KVAT Act is the charging provision prescribing levy of tax on sale of goods. Section 4 read with Schedule appended to the Act prescribes the rate of tax in respect of the goods specified in the schedule. Admittedly, the KVAT Act has not provided specific entry for batteries for levy of tax and therefore, the batteries are to be regarded as falling under residuary entry liable to be taxed at 12.5% u/s 4(1)(b) of the Act. The lead acid batteries are used as source of electrical energy for Cranking and Starting of Rail engines and also for air conditioning or lighting. The lead acid batteries are also used in the motor vehicles, ships, submarines, and used as backup power supplies for telephone and computer centers and also used in UPS system, factory lighting, medical equipment, hotel and house lighting etc. The Dry Cell and Dry Cell batteries which are of different make are also used in watches, torches, TV remote controllers. Thus, these verities of batteries of different make and designs can be grouped and classified as batteries with an intention that all these belong to one category. The batteries do not fall under any of the entries of the KVAT Act, they are unscheduled goods falling u/s 4(1)(b) of the Act. In common parlance, battery is an equipment to store electrical energy and cannot be treated as a part of the vehicle or device in which it is ultimately used. The batteries are made for the purpose of supply of electrical energy. Even though the batteries are manufactured by the respondents-assessees as per the specifications and design given by the Railways, they are still to be considered as batteries only. Hence, it cannot be treated as part of rail engines. The reasons assigned by the Appellate Tribunal is erroneous in law. By no stretch of imagination, the batteries can be treated as a part of railway engine which falls under Entry 76 of the Third Schedule of the KVAT Act.

Learned Counsel for the State further contended that prior to 31-3-2007, the Government Departments including Railways were authorised to purchase the batteries against the D Form at concessional rate of tax u/s 8 of the CST Act, 1956 and Central Sales Tax (Registration and Turnover) Rules, 1957. Accordingly, the respondents sold the batteries to the Railways charging tax at 4% on the basis of the D Forms provided by the Railways. Consequent upon the amendment of Section 8 of CST Act and withdrawal of D Form facility, the goods sold to the Government Departments including Railways are made liable to pay tax at the rate prescribed under the KVAT Act read with Section 8(2) of CST Act. Subsequent to withdrawal of D Forms, the respondents filed an application u/s 59(4) of the KVAT Act seeking verification of the rate of tax applicable to the batteries sold to the Railways. The Commissioner of Commercial Taxes, by its order dated 10-7-2007, has clarified that the said goods are not covered under Entry 76 of the Third Schedule to the KVAT Act, and they are liable to pay tax at 12.5% u/s 4(1)(b) of the KVAT Act. Pursuant to the order made in W.A. No. 2168 of 2007 passed by the Division Bench of this Court, the Commissioner re-examined the matter and after giving opportunity to the respondent, passed fresh order on 12-11-2009 holding that the batteries sold to the Indian Railways are unscheduled goods u/s 4(1)(b) of the KVAT Act. It was taxable at 12.5% from 1-4-2007 to 31-3-2008. Subsequently, a representation was also made by the traders to reduce tax in respect of supply of batteries to the Indian Railways from 12.5% to 4%. However, the Commissioner by an order dated 11-9-2008, rejected the same. Subsequently, the State Government by its notification dated 24-3-2008, in exercise of its power conferred by sub-section (3) of Section 4 of the Act, reduced the tax in respect of batteries sold to Indian Railways from 12.5% to 4% with effect from 1-4-2008 onwards. The traders of the batteries once again represented the State Government to give retrospective effect to the said notification with effect from 1-4-2007. The State Government by its order dated 23-8-2010, rejected the request to give retrospective effect to the notification dated 24-03-2008. Hence, having failed to get a favourable order from the State Government, it is not open to the respondents to contend that batteries are the part of railway engines. In support of his contention, learned Counsel for the appellant relied upon the judgments in the cases of Vikas Traders Vs. The State of Gujarat, ; Commissioner, Trade Tax Vs. H.C.L. Limited, ; Reliance Generators Pvt. Ltd. Vs. The Special Commissioner and Commissioner of Commercial Taxes and The Commercial Tax Officer, and Tata Engineering and Locomotive Company Limited Vs. State of Bihar and Another, .

On the other hand, Sri T.N. Keshavamurthy, learned Counsel appearing for the respondents argued in support of the order passed by the Karnataka Appellate Tribunal and contended that as per the agreement entered into between the respondents with the Indian Railways for manufacture and supply of the lead acid batteries which are used by the Railways to be fitted into the wagons and coaches, as per the specifications given by the Railways, they are supplying batteries and claiming tax at the rate of 4% till 31-3-2007 u/s 8 of the CST Act on the basis of the D Forms provided by the Railways. Consequent upon the withdrawal of D Form facility, the tax has to be paid as per the KVAT Act in respect of sale of batteries to the Railways. He contended that originally Entry 52 relating to rail coaches, rail engines in the Third Schedule of the KVAT Act did not include the ''part thereof''. Subsequently, the Third Schedule was substituted by Act No. 7 of 2005 and railway coaches engines, wagons and part thereof were brought under Entry 76. The words ''parts thereof is included to the said entry. Further, entry in the Third Schedule was substituted by Act No. 6 of 2007 with effect from 1-4-2007. The Entry 76 reads as under:

Rail coaches, Engines, wagons and parts thereof.

Hence, the intention of the Legislature is very clear that railway coaches, wagons, engines and "parts thereof" are included under Entry 76. Hence, the batteries are part of the engines, wagons and coaches. Hence, the respondents are liable to levy tax only at the rate of 4% under Entry 76 even though the batteries have a separate identity as batteries. Without the batteries, the railway engine cannot operate. The batteries have to be treated as part of the railways. Just like a car cannot run without tyre and tube, the railway engines/wagons Railways also cannot run without the batteries. Hence, the respondents are liable to levy tax at the rate of 4% under Entry 76 of the Third Schedule. He strongly relied upon the judgment of the Hon''ble Supreme Court in Tata Engineering and Locomotive Company''s case. The Appellate Tribunal after considering the matter in detail held that the batteries manufactured and supplied to the railways attract VAT at the rate of 4% as it falls under Entry 76 of the Third Schedule of the KVAT Act, since it constitutes a part of the railways. Accordingly allowed the appeals and set aside the levy of interest as well as penalty. There is no infirmity in the said order and sought for dismissal of the revision petitions.

We have carefully considered the arguments addressed by the learned Counsel for the parties and perused the impugned order and other relevant records.

The point that arise for consideration in these revision petitions is:

Whether the batteries manufactured as per the specifications of the Railways and sold to them by the assessees can be treated as part of Railway coaches, wagons etc., and the batteries fall under Entry 76 of the Third Schedule of the KVAT Act and are liable to be taxed at the rate of 4%?

The assessees are the dealers registered under the KVAT and CST Acts, carrying on the business of manufacturing and selling of varieties of batteries including low maintenance lead acid batteries as per the specifications of Ministry of Railways, Government of India supplied to Railways for the use of railway engines and railway coaches. Prior to 31-3-2007, the Railways were authorised to purchase the batteries against D Forms at concessional rate of tax at 4% under the provisions of CST Act. With effect from 1-4-2007, Section 8 of the CST Act was amended withdrawing the facility to the Government Departments and Railways to purchase the goods against D Forms. Consequent upon the withdrawal of D Forms, Railways has to purchase the goods as per the rate of tax prescribed under the KVAT Act and CST Act. Sub-section (1) of Section 3 of the KVAT Act is a charging section prescribing levy of tax on sale of goods. Section 4 read with Schedule appended to the Act prescribes the rate of tax. In respect of goods specified in the Third Schedule, rate of tax prescribed is 4% u/s 4(1)(a). Entry 52 in the Third Schedule specifying railway coaches, engines and wagons were substituted thrice. As per Act No. 7 of 2005, railway coaches, engines and wagons were brought under Entry 76 and included the words "parts thereof". The said entry continued till 31-3-2007. Entry 76 reads as under:

Railway coaches, engines, wagons and part thereof.

The rate of tax prescribed under the Third Schedule of KVAT Act is 4%. The dealers contended that the batteries are the part of railway wagons, which fall under Entry 76 of the Third Schedule and they are liable to pay tax at the rate of 4%. Further, the Ministry of Railways also issued a Circular to pay tax at the rate of 4% for supply of batteries. Hence, the dealers are not liable to collect tax more than 4% for the supply of batteries to the Railways. The question that arose for consideration is whether the batteries are the part of railway coaches, engines and wagons, and fall under Entry 76 of the Third Schedule. The batteries are manufactured by the dealers as per the specifications of Indian Railways. The BEML is the sole manufacturer of railway coaches, wagons, etc. The batteries are the essential parts of the railway coaches, engines and wagons. Without the batteries the railway engines cannot work and there cannot be air conditioning and lighting, if the railway coaches are not fitted with the batteries. The batteries are the integral part of the railways. In view of that, while substituting Entry 52 it was brought under Entry 76 and included the words "parts thereof to Entry 76 i.e. Railway coaches, engines and wagons. Any part of railways falls under Entry 76. The Hon''ble Supreme Court in the case of Tata Engineering and Locomotive Company held that no vehicle can operate or work nor can it be said to have been produced unless tyre, tube and batteries are fixed to it. Use of these items is integrally connected with the ultimate production. They retain their identity as ''the end product''. The component part therefore, was an integral part which was necessary to constitute the whole or without which the whole could not be conceived. A motor vehicle is a vehicle propelled by the motor, it may be mechanically or electrically propelled. But it is the battery, which is the most integral part of the motor vehicle, without which, it could never have driving force. Entry 52 in the Third Schedule of the KVAT Act was substituted with effect from 7-6-2005 and renumbered as Entry 76 which includes the words ''parts thereof, meaning any item like batteries, tyre, tube, etc., which are required in making of railway coaches, wagons, etc. are to be treated as part of railway coaches, wagons etc. The Legislature in its wisdom amended entry pertaining to the railway coaches, wagons, engines including the words ''parts thereof. If the Legislature was not intending to tax batteries as part of railway coaches, wagons etc., then perhaps it would have excluded batteries from the entry and in that situation, entry would have been railway coach, engine, wagon and part thereof, excluding batteries. However, the intention of the State Government is not to exclude batteries under the part thereof. Hence, it has to be held that the battery is the part of railway coaches, wagons, engines etc. As stated earlier, without the batteries, the engines of the rail will not work and there cannot be light and air condition to the coaches and wagons. The Legislature intentionally added the words ''parts thereof to the railway coaches, engines and wagons thereof. The battery being the part of the railway which falls under Entry 76 of the Third Schedule, would be liable to tax at the rate of 4% u/s 4(1)(a) of the Act and not u/s 4(1)(b) under residuary clause. The Appellate Tribunal noticed that the batteries do not fall under any of the entries under the KVAT Act. Therefore, the batteries are to be regarded as falling under residuary entry liable to pay tax at 12.5%, unless it is established that batteries can be regarded as part of some other items like railway coaches, engines and wagons etc. However, the batteries sold to the Railways being ''parts thereof and 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 for the period from 1-4-2007 to 31-3-2008. Further, the Government itself by its notification dated 24-3-2008 invoking its power under sub-section (3) of Section 4, reduced the tax from 12.5% to 4% with effect from 1-4-2008 on the sale of batteries to the Indian Railways. Hence, it is clear that the battery is an integral part of the railway coaches, engines and wagons and falls under the ''parts thereof under Entry 76 of the Third Schedule. Hence, it has to be taxed u/s 4(1)(a) of the KVAT Act. The batteries sold to the Railways form part of railway coaches as per Entry 76 of the Third Schedule of the KVAT Act and is exigible to levy tax at 4% and not at 12.5%. Hence, the batteries sold to railways is part within the expression "part thereof" and liable to be taxed at the rate of 4%. Some of the judgments relied upon by the appellant are not applicable to the facts of the case on hand. Accordingly, the question formulated in these revision petitions is held in favour of the assessees. The appellant has not made out a case to interfere with the order passed by the Karnataka Appellate Tribunal. Accordingly, we pass the following:

ORDER

The revision petitions are dismissed. The order passed by the KAT is confirmed.