Madras HC upholds 14.5% VAT on Inter-State Sales, Denies Benefit of Capital Goods as Goods ‘Not Used within State’ [Read Order]

The Madras High Court has upheld the levy of 14.5% Value Added Tax (VAT ) on inter-State sales, holding that moulds and dies sold by the assessee could not be treated as “capital goods” under the TNVAT Act as the goods were not used within the State of Tamil Nadu.

M/s Kosei Minda Aluminum Company Private Limited, challenged an assessment order dated March 29, 2023 passed by the State Tax Officer imposing tax at the rate of 14.5% on inter-State sales effected during the assessment year 2016-17 in the absence of C-Forms.

The company contended that the goods involved in the transactions, namely moulds and dies, qualified as “capital goods” under the TNVAT Act and were therefore liable to tax at only 5%.

Before the Court, the petitioner argued that Section 8(2) of the Central Sales Tax Act, 1956 provides that where inter-State sales are made without C-Forms, the applicable tax rate should be the rate prescribed for sale or purchase of such goods within the State.

Since moulds and dies are specifically included within the definition of capital goods under Section 2(11) of the TNVAT Act, the petitioner claimed entitlement to the concessional rate applicable to capital goods under Entry 5 of Part-B of the First Schedule to the TNVAT Act.

The petitioner further argued the assessing authority mistakenly relied on an Advance Ruling. Stating the Veesons Energy Systems judgment, the company contended that circulars cannot override statutory provisions and tax liability must be determined strictly by law.

Opposing the petition, the State Tax Department quoted the Division Bench judgment of the Madras High Court in Schwing Stetter (India) Pvt. Ltd. v. Commissioner of Commercial Taxes and argued that merely falling within one of the categories specified in the definition of capital goods was insufficient.

To qualify as capital goods under Section 2(11) of the TNVAT Act, the goods must also satisfy the additional statutory requirement of being “used in the State” for manufacturing, processing, packing or storing goods. Since the moulds and dies sold by the petitioner were admittedly not used within Tamil Nadu, the benefit of the capital goods classification was unavailable, asserted the department.

Justice Senthilkumar Ramamoorthy noted that while moulds and dies are specifically covered under clause (d) of Section 2(11) of TNVAT Act’s definition, the provision also contains a qualifying condition that such goods must be used within the State for manufacturing, processing, packing or storing goods in the course of business.

The Court observed that the issue had already been settled in Schwing Stetter, which held that two cumulative conditions must be satisfied before goods can be classified as capital goods under the TNVAT Act.

First, the goods must fall within any of the categories listed in clauses (a) to (g) of Section 2(11), and second, they must be used within the State for the specified business purposes. Both requirements are mandatory and not merely alternative conditions.

However, the Court found that although the moulds and dies sold by the petitioner fell within the specified category of capital goods, the admitted position was that they were not used within Tamil Nadu.

Therefore, one of the essential conditions contained in Section 2(11) remained unfulfilled. As a result, the goods could not be treated as capital goods for the purpose of determining the applicable tax rate under the TNVAT Act.

The petitioner was unable to find any other explicit inclusion in the TNVAT Schedule that would apply to the goods in question, the Court further observed. Therefore, the Department was correct to classify the items under the residuary Entry 69 of Part-C of the First Schedule to the TNVAT Act, which resulted in 14.5% VAT.

Accordingly, the court upheld the levy of 14.5% VAT and dismissed the writ petition. It rejected the assessee’s claim for the concessional 5% tax rate applicable to capital goods.

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