Supreme Court clarifies the scope of “Gypsum in all its forms” under Rajasthan VAT Act: Additional Commissioner vs. Lohiya Agencies (2019)

Date of the Judgment: 08 January 2019

Citation: 2019 INSC 17

Judges: Ranjan Gogoi, CJI, Sanjay Kishan Kaul, J., K.M. Joseph, J.

Can a processed product like ‘gypsum board’ be taxed under the same category as its raw material, ‘gypsum’? The Supreme Court of India addressed this question in a case concerning the Rajasthan Value Added Tax Act, 2003. The core issue was whether ‘gypsum board’ should be taxed at 4% under the entry for “gypsum in all its forms,” or at a higher rate of 12.5% under the residuary entry. The judgment was delivered by a three-judge bench consisting of Ranjan Gogoi, CJI, and Justices Sanjay Kishan Kaul and K.M. Joseph, with the majority opinion authored by Justice Sanjay Kishan Kaul.

Case Background

M/s. Indian Gypsum Ltd. (IGL), a manufacturer of ‘gypsum board,’ sought clarification from the Additional Commissioner, Commercial Tax Department, Rajasthan, regarding the applicable tax rate on its product under the Rajasthan Value Added Tax Act, 2003 (RVAT). The question was whether ‘gypsum board’ would be taxed at 4% under Entry 56 of Schedule IV of the RVAT, which included “gypsum in all its forms,” or at 12.5% under the residuary Entry 1 of Schedule V. The Additional Commissioner ruled that ‘gypsum board’ was a distinct commercial product and therefore taxable at 12.5%. M/s. Lohiya Agencies, a dealer in ‘gypsum board,’ was subsequently assessed for tax evasion for selling the product at a 4% VAT rate. This led to proceedings against them for differential tax, penalty, and interest. The Deputy Commissioner (Appeals) and the Rajasthan Tax Board upheld the assessment, but the Rajasthan High Court reversed these decisions, ruling in favor of the assessee.

Timeline:

Legal Framework

The core of the dispute revolves around the interpretation of Entry 56 of Schedule IV of the Rajasthan Value Added Tax Act, 2003 (RVAT). Initially, Entry 56 specified ‘Gypsum’ as a taxable entity at 4%. However, this was amended by Notification No. F.12(63)FD/Tax/2005-19, dated 19.4.2006, to read ‘Gypsum in all its forms.’ The question was whether this amendment included ‘gypsum board’.

The relevant legal provisions are:

• Entry 56 of Schedule IV of the RVAT: Initially specified ‘Gypsum’ as a taxable entity at 4%. Subsequently amended to ‘Gypsum in all its forms’.
• Entry 1 of Schedule V of the RVAT: The residuary entry, which would apply if ‘gypsum board’ did not fall under Entry 56, with a tax rate of 12.5%.

Arguments

Appellant’s Arguments (The Additional Commissioner, Commercial Taxes, Rajasthan):

• The appellant contended that ‘gypsum board’ is a commercially distinct product from gypsum.
• They argued that the manufacturing process of ‘gypsum board’ involves significant steps beyond the processing of raw gypsum, including the addition of paper, foam, water, and other additives.
• The Additional Commissioner argued that the end use of ‘gypsum board’ is different from that of raw gypsum.
• The appellant relied on the fact that ‘gypsum board’ is known by a different commercial name.

Respondent’s Arguments (M/s. Lohiya Agencies):

• The respondent argued that ‘gypsum board’ is essentially gypsum in a different form, and thus falls under the amended Entry 56 of Schedule IV of the RVAT.
• They emphasized that the primary component of ‘gypsum board’ is gypsum, constituting about 95% of its composition.
• The respondent relied on the judgment of the Bombay High Court in Commissioner of Sales Tax, Mumbai v. India Gypsum Ltd., which held that ‘gypsum board’ falls under the entry for “gypsum of all forms and descriptions”.
• They also cited the Supreme Court judgments in The States of Gujarat v. Sakarwala Brothers and Trutuf Safety Glass Industries v. Commissioner of Sales Tax, U.P. to support their claim that the term ‘form’ is to be interpreted broadly.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether ‘gypsum board’ would fall within Entry 56 of Schedule IV of the RVAT, which specifies ‘Gypsum in all its forms’, and be taxed at 4%, or whether it would fall under the residuary Entry 1 of Schedule V, to be taxed at 12.5%?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Commissioner of Sales Tax, Mumbai v. India Gypsum Ltd. [CITATION]: The Court agreed with the Bombay High Court’s view that the chemical composition of the substance is what matters, and since the main composition of gypsum board continues to be gypsum, it would fall under the entry.
• The States of Gujarat v. Sakarwala Brothers [CITATION]: The Court used this case to emphasize that the chemical composition of the substance is crucial in determining its classification.
• Trutuf Safety Glass Industries v. Commissioner of Sales Tax, U.P. [CITATION]: The Court relied on this judgment to distinguish between the terms ‘in all forms’ and ‘all kinds’, noting that ‘in all forms’ multiplies the same commodity into different forms, thus widening the scope of the entry.
• State of Jharkhand and Ors v. LA Opala R.G. Ltd. [CITATION]: The Court used this case to distinguish between the terms “type” and “form” in the context of taxation statutes.
• Rajasthan Roller Flour Mills Assn v. State of Rajasthan [CITATION]: The Court used this case to explain the concept of consumption in the context of manufacturing.
• Alladi Venkateswarlu & Ors. v. Govt. of Andhra Pradesh & Ors. [CITATION]: The Court used this case to support a broad interpretation of the term ‘rice’ to include parched and puffed rice.
• Tungabhadra Industries Ltd. v. The Commercial Tax Officer, Kurnool [CITATION]: The Court used this case to show that even if an inter-molecular or configurational chemical change takes place, the essential nature of the product remains the same.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The explicit change in the Entry from ‘gypsum’ to ‘gypsum in all its forms’ indicated a legislative intent to broaden the scope of the entry.
• The chemical composition of ‘gypsum board’ is predominantly gypsum, and the manufacturing process does not fundamentally alter its nature.
• The term ‘in all its forms’ should be interpreted broadly to include different forms of the same commodity, as opposed to different kinds of commodities.
• The Court also considered the fact that the legislature had created a separate entry for ‘gypsum board’ in 2014, which indicated that it was not intended to be included in the residuary entry.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Court’s reasoning was more inclined towards the legal interpretation of the term “in all its forms” and the legislative intent behind the amendment, rather than the factual differences in the manufacturing process of gypsum board.

Logical Reasoning:

The Court reasoned that the phrase ‘in all its forms’ was added to expand the scope of the entry beyond just raw gypsum. The court examined the manufacturing process of gypsum board and noted that the primary component remains gypsum. The Court also relied on the principle that the chemical composition of the substance is what matters in determining its classification. The Court also noted that the legislature had created a separate entry for ‘gypsum board’ in 2014, which indicated that it was not intended to be included in the residuary entry.

The Court considered alternative interpretations, such as the argument that ‘gypsum board’ is a distinct commercial product due to its manufacturing process and end-use. However, the Court rejected this interpretation, emphasizing that the essential nature of the product remains gypsum. The Court also rejected the argument that only raw gypsum should be covered under the entry.

The decision was reached by applying a broad interpretation to the term ‘in all its forms’ and by considering the legislative intent behind the amendment. The Court also relied on several precedents that supported a broad interpretation of similar terms in tax statutes.

The Supreme Court concluded that ‘gypsum board’ falls under the entry ‘gypsum in all its forms’ and is taxable at 4%. The court emphasized that the term ‘in all its forms’ should be interpreted broadly to include different forms of the same commodity.

The Court provided the following reasons for its decision:

• The amendment to include “in all its forms” was a conscious decision by the legislature to expand the scope of the entry.
• The primary component of gypsum board is gypsum, and the manufacturing process does not fundamentally alter its chemical composition.
• The term ‘in all its forms’ should be interpreted to include different forms of the same commodity, not different kinds.
• The creation of a separate entry for gypsum board in 2014 indicates that it was not intended to be included in the residuary entry.

The court quoted the following from the judgment:

• “The short question which arises for consideration in the present appeal is whether ‘gypsum board’ would fall within this Entry 56, and be taxed at 4%, for the relevant assessment years, or whether it would fall in the then residuary Entry 1 of Schedule V, to be taxed at 12.5%.”
• “In our considered view, to truly appreciate the controversy at hand, two aspects have to be kept in mind. Firstly, the change of the Entry by a conscious decision of the legislature, whereby the Entry of mere ‘gypsum’ was changed to ‘gypsum in all its forms’. This certainly signified that something more than basic gypsum was sought to be included in the Entry by referring to ‘gypsum in all its forms’.”
• “We are persuaded to come to the aforesaid conclusion on the basis that, it can hardly be doubted that a meaning has to be given to the Entry made by the legislature, expanding the original Entry from ‘gypsum’ to ‘gypsum in all its forms’.”

There were no minority opinions in this case. The judgment was delivered by a three-judge bench, and all three judges concurred with the majority opinion.

The Supreme Court’s reasoning was based on a textual interpretation of the statute, considering the legislative intent behind the amendment, and relying on precedents that supported a broad interpretation of similar terms in tax statutes. The Court applied the ‘common parlance’ test, which requires that terms in taxing statutes be interpreted according to their popular meaning, as understood by those who deal with them.

The judgment has significant implications for future cases involving the interpretation of tax statutes. It clarifies that the term ‘in all its forms’ should be interpreted broadly to include different forms of the same commodity, and not just the raw material. This could lead to more products being taxed under the same category as their raw materials, provided that the essential nature of the product remains the same.

The judgment did not introduce any new doctrines or legal principles. However, it reinforced the principle that the legislative intent behind a statute should be given due consideration while interpreting its provisions. It also reinforced the importance of the ‘common parlance’ test in tax law.

Key Takeaways

• ‘Gypsum board’ is to be taxed at 4% under the entry for “gypsum in all its forms” under the Rajasthan Value Added Tax Act, 2003.
• The term ‘in all its forms’ in tax statutes should be interpreted broadly to include different forms of the same commodity.
• The essential nature of a product is more important than its manufacturing process or end-use in determining its tax classification.
• Businesses dealing in products derived from raw materials should carefully examine the tax statutes to determine the applicable tax rate.
• This judgment may lead to similar interpretations in other tax cases involving the classification of products.

Directions

The Supreme Court dismissed the appeals, leaving it open to the parties to bear their own costs.

Specific Amendments Analysis

The judgment discusses the amendment to Entry 56 of Schedule IV of the RVAT, which changed the entry from ‘Gypsum’ to ‘Gypsum in all its forms’. This amendment was crucial to the case, as it was the basis for the dispute. The Court interpreted this amendment as a conscious decision by the legislature to expand the scope of the entry. The Court also noted that the legislature had created a separate entry for ‘gypsum board’ in 2014, which indicated that it was not intended to be included in the residuary entry.

Development of Law

The ratio decidendi of the case is that the term ‘in all its forms’ in tax statutes should be interpreted broadly to include different forms of the same commodity, provided that the essential nature of the product remains the same. This judgment clarifies the scope of the term ‘in all its forms’ and provides guidance for future cases involving similar issues. There is no change in the previous position of law, but this judgment reinforces the importance of the ‘common parlance’ test and the legislative intent behind a statute.

Conclusion

The Supreme Court’s judgment in The Additional Commissioner (Legal), Commercial Taxes, Rajasthan & Anr. vs. M/S. Lohiya Agencies & Anr. clarifies that ‘gypsum board’ falls under the entry “gypsum in all its forms” and is taxable at 4% under the Rajasthan Value Added Tax Act, 2003. The Court emphasized that the term ‘in all its forms’ should be interpreted broadly to include different forms of the same commodity. This judgment provides important guidance for interpreting tax statutes and classifying products derived from raw materials.