Supreme Court settles tax rate for Mobile Crane Wire Ropes under Rajasthan VAT Act: CTO, Anti Evasion vs. M/s Prasoon Enterprises (26 March 2019)

Date of the Judgment: 26 March 2019
Citation: 2019 INSC 289
Judges: Abhay Manohar Sapre, J., Dinesh Maheshwari, J.

What is the correct tax rate for wire ropes used in mobile cranes? The Supreme Court of India addressed this question, clarifying whether these ropes should be taxed as parts of mobile cranes or under a residuary entry. This decision impacts businesses dealing with mobile crane components in Rajasthan. The bench comprised Justices Abhay Manohar Sapre and Dinesh Maheshwari, with the judgment authored by Justice Abhay Manohar Sapre.

Case Background

The case revolves around the classification of “Mobile Crane Wire Ropes” for the purpose of Value Added Tax (VAT) under the Rajasthan Value Added Tax Act, 2003. The respondent, M/s Prasoon Enterprises, is a dealer in spare parts of mining machinery, steel wire ropes, and other related items. A survey conducted on 16.03.2009 by the Commercial Tax Officer (CTO) revealed that the respondent was charging VAT at 4% on “Mobile Crane Wire Ropes,” which the CTO believed should be taxed at 12.5%.

The CTO initiated assessment proceedings for the Assessment Year 2007-2008, holding that the “Mobile Crane Wire Ropes” should be taxed at 12.5% under the residuary entry of Schedule V of the Rajasthan VAT Act, 2003. The respondent had been paying tax at 4%, considering the goods to fall under Entry 155 of Schedule IV of the Act.

Timeline:

Course of Proceedings

The Commercial Tax Officer (CTO) assessed the respondent for the Assessment Year 2007-2008, concluding that the “Mobile Crane Wire Ropes” were taxable at 12.5% under the residuary entry of Schedule V of the Rajasthan VAT Act. The respondent appealed to the Deputy Commissioner (Appeals), who ruled in favor of the respondent, stating that the wire ropes were essential parts of mobile cranes and thus taxable at 4% under Entry 155 of Schedule IV of the Act.

The State (CTO) then appealed to the Rajasthan Tax Board, which dismissed the appeal and upheld the Deputy Commissioner’s order. The State (CTO) further filed a revision petition in the High Court of Rajasthan, which was also dismissed, leading to the current appeal before the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of two entries under the Rajasthan Value Added Tax Act, 2003:

• Entry 155 of Schedule IV: This entry specifies a 4% tax rate for “Hydraulic excavators (earth moving and mining machinery), mobile cranes and hydraulic dumpers (including parts thereof).” The bracketed portion “(including parts thereof)” was inserted by Notification No.F.12(63)FD/Tax/2005-51 dated 08.05.2006, effective from 09.05.2006.
• Residuary Entry of Schedule V: This entry applies to “Goods not covered in any other Schedule under the Act or under any notification issued under section 4 of the Act” and prescribes a tax rate of 12.5%.

The central question is whether “Mobile Crane Wire Ropes” should be considered ‘parts’ of mobile cranes, thus falling under Entry 155 of Schedule IV with a 4% tax rate, or if they should be classified under the residuary entry of Schedule V with a 12.5% tax rate.

Arguments

Appellant (State/CTO) Arguments:

• The State argued that “Mobile Crane Wire Ropes” do not specifically fall under any entry in Schedule IV or Schedule V of the Rajasthan VAT Act, 2003.
• The State contended that these wire ropes are not parts of Mobile Cranes and thus, the residuary entry of Schedule V, which prescribes a tax rate of 12.5%, should apply.
• The State submitted that since the goods in question are not specified in any of the Entries in Schedule IV and Schedule V of the VAT Act and nor they are the parts of the Mobile Cranes, the only Entry under which they can be taxed is the Residuary Entry of Schedule V of the VAT Act.

Respondent (Dealer) Arguments:

• The respondent argued that the “Mobile Crane Wire Ropes” are essential parts of mobile cranes.
• The respondent contended that a mobile crane cannot function effectively without the wire ropes.
• The respondent supported the High Court’s order, stating that the wire ropes are integral to the mobile crane and should be taxed at 4% under Entry 155 of Schedule IV of the VAT Act.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the High Court was justified in dismissing the appellant’s (State/CTO) revision and thereby justified in upholding the view taken by the Board that the “Mobile Crane Wire Ropes” are chargeable to tax @ 4% under Entry 155 of Schedule IV of the VAT Act.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

• M/s Annapurna Carbon Industries vs. State of Andhra Pradesh [(1976) 2 SCC 273]: The Supreme Court of India laid down the test to determine if an item is a part of another, stating that a thing is a part of another if the other is incomplete without it or cannot function without it.
• Commissioner of Central Excise, Delhi vs. Insulation Electrical Private Limited (2008) 12 SCC 45: The Supreme Court of India reiterated the principle that a thing is a part of another if the other cannot function without it.

Legal Provisions Considered:

• Entry 155 of Schedule IV of the Rajasthan Value Added Tax Act, 2003: Specifies a 4% tax rate for “Hydraulic excavators (earth moving and mining machinery), mobile cranes and hydraulic dumpers (including parts thereof).”
• Residuary Entry of Schedule V of the Rajasthan Value Added Tax Act, 2003: Applies to goods not covered in any other schedule, prescribing a 12.5% tax rate.

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed the principle laid down in M/s Annapurna Carbon Industries vs. State of Andhra Pradesh [(1976) 2 SCC 273]* and Commissioner of Central Excise, Delhi vs. Insulation Electrical Private Limited (2008) 12 SCC 45*, which states that a thing is a part of another if the other is incomplete without it or cannot function without it. The court applied this principle to determine that wire ropes are essential for the functioning of mobile cranes, and thus are parts of mobile cranes.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the functional necessity of wire ropes in mobile cranes. The Court emphasized that a mobile crane cannot operate effectively without wire ropes, thus establishing them as integral parts of the crane. The literature and specifications provided by the respondent further supported this view, highlighting the essential role of wire ropes in the design and operation of mobile cranes.

Logical Reasoning:

The Court considered the argument that the wire ropes should be taxed under the residuary entry of Schedule V, but rejected it. The Court reasoned that since the wire ropes are essential for the functioning of mobile cranes, they are considered parts of the mobile cranes and thus, the specific entry for mobile cranes and their parts under Schedule IV would be applicable.

The court reasoned that the term “parts thereof” in Entry 155 of Schedule IV of the VAT Act should be interpreted to include all components essential for the functioning of the specified machinery. The court emphasized that the wire ropes are not merely accessories but are integral to the operation of mobile cranes.

The Supreme Court quoted the test as to how the Court should decide the question as to whether a particular item is a part of other. The test is “ a thing is a part of the other if the other is incomplete without it ”. In other words, “ a thing is a part of the other, if the other cannot function without it ”.

The court stated, “Mere perusal of the literature would go to show that the Mobile Cranes are not complete without the wire ropes. In other words, in order to use the Mobile Cranes and make them operational, the use of wire ropes is essential. If wire ropes are not fitted in the Mobile Cranes, they will not function much less effectively.”

The court further stated, “It is for this reason, we are of the considered opinion that the Mobile Crane Wire Rope is an essential part of the Mobile Crane and, therefore, falls in Entry 155 of Schedule IV of the VAT Act. It is, therefore, taxable at the rates prescribed for the goods specified in Entry 155.”

The court clarified, “We, however, make it clear that we have examined only the question of taxability of the “wire ropes” in the context of its use in Mobile Cranes as would be clear from the question posed by the High Court in Para one of the impugned order.”

Key Takeaways

• “Mobile Crane Wire Ropes” are considered essential parts of mobile cranes.
• These wire ropes are taxable at 4% under Entry 155 of Schedule IV of the Rajasthan VAT Act, 2003.
• The principle that a part is essential if the main item cannot function without it was upheld.
• This decision provides clarity for businesses dealing with mobile crane components in Rajasthan.
• The ruling emphasizes the functional necessity of a component in determining its classification for tax purposes.

Directions

No specific directions were issued by the Supreme Court in this case.

Development of Law

The ratio decidendi of the case is that “Mobile Crane Wire Ropes” are considered as ‘parts’ of Mobile Cranes and thus are taxable at 4% under Entry 155 of Schedule IV of the Rajasthan VAT Act, 2003. The court upheld the principle that a part is essential if the main item cannot function without it and applied this principle to the case. This case clarifies the classification of mobile crane wire ropes for tax purposes and reaffirms the principle for determining essential parts of machinery.

Conclusion

The Supreme Court dismissed the appeals filed by the State (CTO), affirming that “Mobile Crane Wire Ropes” are taxable at 4% under Entry 155 of Schedule IV of the Rajasthan VAT Act, 2003. The Court held that these ropes are essential parts of mobile cranes, as the cranes cannot function without them. This decision provides clarity on the tax treatment of these goods, ensuring that they are not taxed under the residuary entry.