PRABHU COFFEE WORKS vs. THE ADDITIONAL COMMISSIONER

-: 1 :- IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 20th DAY OF DECEMBER, 2013 PRESENT THE HON’BLE DR. JUSTICE JAWAD RAHIM AND THE HON’BLE MR.JUSTICE B.MANOHAR SALES TAX APPEAL Nos.507, 508 & 509 OF 2010 BETWEEN: Prabhu Coffee Works 2112, Bhatkanbe Galli Belgaum. Rep. by Mr. Mohandas Prabhu Prop. ... APPELLANT (By Sri. Pramod S. Yadwad Advocate) AND: The Additional Commissioner of Commercial Taxes, Zone-I Gandhinagar, Bangalore … RESPONDENT (By Smt. K. Vidyavathi, AGA) --- THESE STAs ARE FILED U/S.16 OF THE KARNATAKA SALES TAX ACT, 1957, SEEKING TO QUASH THE IMPUGNED ORDER DATED 14.07.2008 PASSED IN CASE NO.ZAC-1/BGM/SMR-4/07-08 ON

-: 2 :- THE FILE OF THE ADDL. COMMISSIONER OF COMMERCIAL TAXES, ZONE-1, BANGALORE, VIDE ANNEXURE ‘A’ AND TO RESTORE THE ORDER PASSED BY THE FIRST APPELLATE AUTHORITY, IN CASE NO.JC/AP/BG/KST-9,10 &11 OF 2007-08 DATED 26.05.2007 AT ANNEXURE ‘H’. THESE APPEALS, HAVING BEEN HEARD ON 06.11.2013 AND RESERVED FOR JUDGMENT, COMING ON FOR PROUNCEMENT THIS DAY, JAWAD RAHIM J PRONOUNCED THE FOLLOWING: JUDGMENT The assessee is in appeal in these three appeals questioning the revisional order passed under Section 22-A(1) of the Karnataka Sales Tax Act, 1957 by the respondent—Addl. Commissioner of Commercial Taxes, Zone-I, Bangalore, withdrawing the concession rate of tax for the three assessment years. 2. Heard the learned counsel for appellant and learned counsel for the Revenue. Perused the records in supplementation thereto. It reveals: The appellant is a registered dealer under the Karnataka Sales Tax Act, 1957 (for short ‘the Act’)

-: 3 :- and is engaged in the business of buying coffee seeds, mixing it, adding small quantity of Chicory to produce coffee powder for consumption. Appellant claims that it purchases coffee seeds within the State from the registered dealers and the purchase of Chicory to a very small extent from dealers outside the State. During the years 1999-00, 2000- 01 and 2001-02, which is under consideration for assessment, it has discharged all legal obligations. The finished products sold by the appellant is described as French Coffee, which is subject matter of tax assessment. It has maintained books of accounts which were examined by the Assistant Commissioner of Commercial Taxes, Circle-I, Belgaum.

The purchase of coffee seeds are observed to be from the local registered dealers, while the chicory is purchased from inter-state sale and is against the C-forms by which concession rate of tax is obtained from the suppliers from Gujarath. The inter-state raw-materials namely Chicory is used

-: 4 :- with coffee seeds purchased locally from registered dealers and French coffee is manufactured, which is sold. The assessing authority has applied Section 6 of the Act in case of inter-state Chicory purchase and application of Section 6 of the Act in the given circumstances for assessment years was held to be illegal. The assessing authority opined Section 6 of the Act is charging Section and it is meant to levy tax in certain circumstances. It is meant to levy in the circumstances where sales tax under Section 5 of the Act is not leviable or cannot be levied. It covers also such goods used in manufacture of other goods for sale or otherwise or consumed otherwise or disposal of such goods for consumption. 3. Being of the opinion that Section 5(3)(a) of the Act is one of the incidents and levy of taxes, it applied the said provision. The assessing authority noticed that goods shown in Schedule II of the Act deals with the facts situation and III Schedule

-: 5 :- applies at the point of purchase. Applying Section 7 of the Act to create liability for taxation under the Act, it brought the transaction within its purview. 4. The assessing authority opined levy of taxes on any transactions of sale or purchase deemed to have taken place inside the State at one single point or more than one stage as prescribed attracts the tax is legitimate. 5.

Chicory is specified at Sl.No.12/C/II Schedule. Thus, it held it is liable to tax on the sale at 4.8% and 4% respectively, as the case may be, during the relevant periods of taxation under revision. 6. As per the provisions referred to above, no sale of Chicory has taken place except using it in manufacture of French Coffee, which is sold, it opined, invocation of Section 6 on the inter-state purchase of Chicory in the assessments is illegal and

-: 6 :- being of such opinion, it denied the benefit of tax to 2%. 7. The revisional authority has considered the order passed by the assessing authority and opined, it stands the test of law, while the order passed by the appellate authority giving the benefit to the appellant to pay tax at 2% was illegal. 8. From the impugned order of the revisional authority, it is noticed, it has observed French Coffee is a separate commodity which itself being a finished product as explained and it is found at Sl.No.18(iv)/Part-C/II Schedule. It is taxable at 10% from 01.04.1998 to 31.03.2002. 9. It is material to notice that the revisional authority was aware of the three Notifications of Government of Karnataka issued with regard to levy of tax for the commodity falling in II Schedule at Sl.No.18(iv) of Part-C at reduced rates. Amongst the various rules, the rate of tax on French Coffee

-: 7 :- under Section 5 of the Act was reduced by the Government to 2% as per the Notification No.FD 86 CSL 99(4) dated 31.03.1999. It applies for the year 1999-2000. The revisional authority noticed in the said Notification, entry No.7 describes the commodity as French Coffee produced out of the tax suffered coffee and chicory. If it is proved that both components i.e., coffee and chicory are tax suffered, then the only benefit of 2% tax will be available. Otherwise, the tax payable will be at 10%. Learned counsel for the appellant has described such opinion as erroneous on the contention that benefit of Government Notifications apply to French Coffee manufactured and sold by assessee and is leviable with only to 2% tax. To support his contention, he would contend: (a) there must be manufacture of French Coffee (b) normally, the French Coffee so produced will be liable to 10%

-: 8 :- taxation, but in view of Government Notification, the tax applicable would be only 2% on the sale. 10. We have examined the contentions of the appellant in the light of objections raised by the Revenue. As could be seen from the order of the appellate authority at Annexure ‘H’, the issue raised in these appeals has been considered at length. We have also examined the assessment orders by which the tax is imposed at 10% and the order passed by the revisional authority restoring the said order, setting aside the order in appeal. 11. The facts not in dispute are, while calculating tax on sale of French Coffee obtained out of the tax suffered coffee seeds purchased from local retail dealers and inter-state purchased Chicory, the product called French Coffee suffers tax under Section 6 of the Act. French Coffee so obtained was eligible to tax by virtue of Government Notification No.FD 86 CSL 99(4) dated 31.03.1999 and

-: 9 :- Notification No.FD 115 CSL 2000(3) dated 31.03.2000 at reduced rate of 2%. As per these two notifications, French Coffee obtained out of the tax suffered coffee seeds and chicory to be taxed only at 2%, whereas French Coffee is taxable as per the entry No.18(iv) of Part-C of II Schedule at 10%, if obtained from the seeds and chicory which have not suffered tax. 12. Therefore, the moot question is whether coffee seeds purchased was tax suffered and also whether Chicory added to coffee seeds to make French Coffee had also suffered tax. 13. There is no dispute that appellant has purchased coffee seeds from the local market which is tax suffered. Therefore, the first requirement is satisfied. As far as Chicory is concerned, it is purchased in inter-state sale, which is subject to taxation. The quantum of chicory is minimum when mixed with coffee seeds to produce French Coffee. There is, therefore, no dispute in the instant case

-: 10 :- that the appellant has purchased coffee seeds from the local retail dealers, which is fully tax suffered and inter-state Chicory is added to it. The appellant had to pay taxes under Section 6 of the Act. The Assessing officer levied the taxes at 2% as per the two Government Notifications supra. The Assistant Commissioner of Commercial Taxes, Circle-I, initiated reassessment proceedings under Section 12-A of the Act for all the three assessment years and proceeded on the premise that though the coffee seeds was tax suffered, chicory was not tax suffered to qualify for beneficial reduction in rate of tax. The opinion of Assistant Commissioner of Commercial Taxes, Circle-I is that the coffee seeds purchased locally were crushed, grounded with interstate purchased Chicory, created a new product called French Coffee, which is taxable under Entry No.18(iv) of Part-C of II Schedule, subject to 10% tax. The tax liability for all the three years had exceeded his pecuniary jurisdiction and thus, it

-: 11 :- transferred the case to DCCT, Transition-1, who in turn issued three notices and concurring with the opinion found by the Assistant Commissioner of Commercial Taxes, Circle-I, has imposed the tax. 14. It must be noticed that appellant has not disputed that French Coffee produced by it is subject to tax under Section 6 of the Act. The only question is whether the tax is payable at 10% or 2%. The three Notifications of Government of Karnataka Viz. (I) 1999-2000 No.FD 86 CSL 99 (4) dated 31.03.1999, (II) 2000-2001 No.FD 115 CSL 2000(3), dated 31.03.2000, (III) 2001-2002 No.FD 97 CSL 2001 (4) dated 31.03.2001, which are at Annexures ‘L-1’, ‘L-2’ and ‘L-3’, clearly spell out that for the relevant periods referred to in the Notifications, the tax has to be levied on the French Coffee produced out of the tax suffered locally purchased coffee seeds and Chicory is 2%. Similarly, in the 2nd notification dated 31.03.2000 at

-: 12 :- Entry No.19, the French Coffee produced out of the tax suffered Coffee and Chicory is 2%. In the 3rd Notification dated 31.03.2001, at Entry No.7, French Coffee produced out of coffee and chicory which has already suffered tax under the Act is shown as 2%. There is no indication in the Notification issued by the Government that benefit of 2% will be applicable only if coffee seeds and Chicory is purchased locally. All that entry indicates, the French Coffee produced out of the tax suffered coffee and chicory. It is also to be noticed that the Notification only reduces the percentage of tax, but not liability. Under the provisions referred to above, viz., Section 5 of the Act, on sale of goods specified in column 2 of the Notification, tax is chargeable at 10%, but by virtue of the Notification, it is reduced to 2%, without disturbing the liability. In other words, liability to pay tax is not in dispute. It is only the reduction of tax granted by the Government, which has to be considered.

-: 13 :- 15. The appellant has not questioned the liability to pay tax. Therefore, the Notification being periodically issued by the Government in exercise of power to vary the percentage of tax will prevail and the benefit of 2% of tax fixed by the Notification apply to the case on hand. The appellant authority by order vide Annexure ‘H’ has assigned sufficient reasons while considering the appeal under Section 20(5) of the Act and for the reasons assigned therein, has rightly set aside the assessment of the assessing authority and granted the benefit of 2% tax levied to the appellant. 16.

Similar issue had come up for consideration before this Court, in the case of S.S.MUDDANNA Vs. STATE OF KARNATAKA (1993) 89 STC 90, this Court relying on the judgment of the Supreme Court in the case of COMMISSIONER OF SALES TAX vs. H.M. ESUFALI H.M. ABDULALI (1976) 32 STC 77, opined:

-: 14 :- “Unless the order of assessing authority is ‘prejudicial to the interests of the Revenue’, it is not to be construed in a petty-fogging manner, but must be given a dignified construction. It may be noted that the use of the expression 'Revenue', in our opinion, is significant. It denotes some kind of abstraction or symbol in the same sense in which the expression 'crown' is used to distinguish it from any person enthroned. The interests of the Revenue is not to be equated to rupees and paise, merely. There is biblical saying that we do not live by bread alone. Varying this saying, it may be said that the Revenue does not live by tax alone. In this sense, therefore, the interests of the Revenue are not tied up merely with realising as much revenue as possible, willy nilly, merely looking to the productivity aspect of taxation. The jurisdiction of the Commissioner under section 263 is undoubtedly a supervisory jurisdiction. It is intended for interference in special cases to counteract orders which are erroneous as well as prejudicial to the interests of the Revenue. In this context, therefore, the

-: 15 :- expression 'prejudicial to the interests of the Revenue' must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the income-tax Officer, which might set a bad trend or pattern for similar assessments……..” 17. Therefore, it is seen the revisional power is to be exercised sparingly. It is not intended to interfere in all orders passed, merely because the assessment may be less. In the instant case, we reiterate to hold that appellant has not disputed the liability to pay tax under Sections 5 and 6 of the Act. In view of the Government Notifications, it only seeks benefit of payment of tax at 2%, to which we are satisfied appellant is entitled. 18. In the result, we confirm the order of the appellate authority dated 26.05.2007 in appeal No.JC/AP/BG/KST-9, 10 & 11/2007-08/B and set

-: 16 :- aside the revisional order passed by the respondent under Section 22-A(1) of the Act dated 14.07.2008 in case No.ZAC-1/BGM/SMR-4/07-08. We answer the question of law framed in favour of the appellant and against the Revenue and allow these appeals as prayed for. SD/- JUDGE SD/- JUDGE RK/-