VAT Classification Dispute on Industrial ‘Felt’ Textile: Supreme Court to Examine if Material is ‘Fabric’ or ‘Machinery Part’ [Read Order]

The Supreme Court was recently met with a challenge to a judgment of the Madhya Pradesh HighCourt which upheld the classification of industrial felt as a ‘machinery part’ taxable at a higher rate of Value Added Tax (VAT), rather than as ‘fabric’ which attracted a lower tax rate.

The present petition filed by M/s Sealwell Industries traces its origin to assessments made under the Madhya Pradesh Value Added Tax Act, 2002 between 2008 and 2014.

The petitioner-assessee, along with another entity are engaged in the manufacture of ‘woollen felt components’ supplied exclusively to industrial units, where the material is used as part of machinery including in paper manufacturing plants.

The assessees classified their product as “fabric” and paid VAT at the lower rate of 4% - 5%, applicable to fabrics. However, the Revenue sought to classify the product as a ‘machinery part’ and levied VAT at the higher rate of 12.5% - 13%.

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The product of the assessees were treated as fabric itself for the assessment year 2008-09 and 2009-10, with VAT levied at the rate of 4%.

The assessments were subsequently reopened on the basis of audit objections, and VAT was levied at the higher rate applicable to machinery parts. The assessees filed appeals before the first appellate authority and thereafter before the Madhya Pradesh Commercial Tax Appellate Board, however they were dismissed, leading to the impugned case before the Madhya Pradesh High Court.

Before the High Court, the appellants were represented by Aditya Goyal, who contended that the taxing authorities had erred in classifying “woollen felt components” as machinery parts solely on the basis of their end-use, without appreciating their inherent and essential characteristics.

It was submitted that felt is a textile structure composed of fibres and therefore ought to be classified as “fabric” under the relevant entries of the Madhya Pradesh Value Added Tax Act, 2002.

Reliance was placed on the decision of the Supreme Court in Porritts & Spencer (Asia) Ltd. v. State of Haryana (1979), wherein dryer felts used in the paper industry were treated as textiles. It was further argued that the residuary entry could not be invoked in the absence of a specific entry covering woollen felt components.

The Revenue, represented by Bhuwan Gautam that the product in question was understood in common parlance as a machinery component and not fabric. It was further argued that the Appellate Board had correctly applied the common parlance and commercial usage tests and that consistent orders passed under previous tax regimes had also treated the product as a machinery part.

A Division Bench comprising Justice Vivek Rusia and Justice Binod Kumar Dwivedi held that the decisive factor for classification under the VAT law was the commercial identity and actual use of the product. The Court noted that the felt components were not used as fabric or dress material.

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It was also noted that the felt material was not used as fabrics specified under Entry No. 48 of Schedule I are used, i.e. for manufacturing of towels, gamchha, chadar, quilt, cover, bed cover, handkerchief and unbranded pillow covers, etc, but were primarily used as components of industrial machinery.

The Court also noted that the assessee had a misplaced opinion on the Porritts & Spencer (supra) as the statutory entries under the Madhya Pradesh VAT Act were materially narrower than those considered in the earlier sales tax regime. Noting that no substantial question of law arose for consideration, the High Court refused to interfere with the impugned orders.

Aggrieved by the decision of the High Court, the assessees preferred the present Special Leave Petitions before the Supreme Court of India.

Before the Supreme Court, the petitioners were represented by Kanu Agrawal,

The Supreme Court Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan at first condoned the delay in filing the petitions and proceeded to issue notice to the respondent, returnable in four weeks.

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