M/S. Harsh Polyfabric Private Limited vs Union Of India & Ors
2024 Latest Caselaw 2097 Cal/2

Calcutta High Court

M/S. Harsh Polyfabric Private Limited vs Union Of India & Ors on 19 June, 2024

Author: Rajarshi Bharadwaj

Bench: Rajarshi Bharadwaj

                    IN THE HIGH COURT AT CALCUTTA
                   CONSTITUTIONAL WRIT JURISDICTION
                                  (Original Side)


Present:     THE HON'BLE JUSTICE RAJARSHI BHARADWAJ


                                          W.P.O 588 of 2019
                                                 With
                                          W.P.O 235 of 2021


                                           Reserved on   : 28.03.2024
                                           Pronounced on: 19.06.2024


     M/s. Harsh Polyfabric Private Limited
                                                                       ...Petitioner

                                        -Vs-


     Union of India & Ors.
                                                                   ...Respondents

Present:-

Mr. Vasudeva. A ... for the Petitioner Mr. Anirban Ray, Md. T.M. Siddiqui, Mr. Tanmoy Chakraborty, Mr. Saptak Sanyal ... for the State

Rajarshi Bharadwaj, J:

1. The present writ petition has been filled in relation to the order passed

by the appellate authority wherein Spunbonded Polypropylene Bed Sheets

have been classified under the heading 5603 instead of 6304 thereby partially

denying the refund of accumulated Input Tax Credit on account of inverted

duty structure of Rs. 39,61,030/- for such classification.

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2. The facts in a nutshell are that the petitioner is a company duly

incorporated under the provisions of the Companies Act, 1956 and are inter

alia engaged in manufacturing, exporting and supplying of various non-woven

fabrics and Spunbonded Polypropylene Bed Sheets (hereinafter referred to as

'PPSB Bed Sheet') since 2007. The petitioner classifies such non-woven fabrics

and PPSB Bed Sheet under the chapter headings 5603 and 6304 of the

Customs Tariff Act, 1975 respectively.

3. The Petitioner engages in the production of non-woven fabric utilizing

Polypropylene Granules (referred to hereinafter as "PP Granules") through the

application of Spun Bond technology. The Spun Bond process, a method

employed in non-woven fabrication, involves the transformation of PP

Granules into continuous filaments, which are subsequently deposited and

fused together to yield non-woven fabric.

4. The aforesaid process of manufacture of polypropylene non-woven fabric

and the PPSB Bed Sheet was also verified by the State Tax Officers, Bureau of

Investigation, Govt. of West Bengal, during their visit to the petitioner's factory

on 14.02.2019. A copy of the report of the said visit was also prepared under

the seal of State Tax Officer, Bureau of Investigation, Govt. of West Bengal.

5. The petitioner supplies the Polypropylene non-woven fabric on payment

of GST @ 12% (6% CGST+ 6% SGST) as per SL. No. 135 of Schedule II of

Notification No. 01/2017-CT (Rate) dated 28.06.2017.

6. With regard to supply of the PPSB Bed Sheet so manufactured, in the

pre-GST regime, the Petitioner was a registered dealer under West Bengal

Value Added Tax Act, 2003 and the Central Sales Tax Act, 1956. Bed Sheets

were covered under item Sl. No. 3B of Schedule A to the WBVAT Act. For

goods covered under Schedule A to the WBVAT Act, no tax was payable. The

PPSB Bed Sheet falling under Chapter 63 were also exempt from whole of the

Excise Duty in terms of Notification No. 30/2004-CE dated 09.07.2004.

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Accordingly, the Petitioner was supplying such PPSB Bed Sheets without

payment of VAT/CST or Excise Duty.

7. After the implementation of GST w.e.f. July 2017, the Petitioner has

been classifying the PPSB under the tariff heading 6304 and discharging GST

@ 5% (2.5% CGST+ 2.5% SGST) in accordance with Sl. No. 224 of Schedule I

to the Notification No. 01/2017 CT (Rate) dated 28.06.2017.

8. However, the classification of bed sheets manufactured was disputed

under the erstwhile VAT regime. In the proceedings before the Hon'ble West

Bengal Taxation Tribunal in the case of the Petitioner with Registration

Number 1310/2017, the primary argument put forth by the revenue

department was the purported distinction between bed sheets and PPSB Bed

Sheet. Consequently, it was asserted that bed sheets crafted from

polypropylene non-woven fabric would not qualify for the tax exemption

stipulated in Serial 3B of Schedule A to the WBVAT Act, 2003. Nevertheless,

the Hon'ble Tribunal, in its order dated 30.11.2018, ruled that the PPSB Bed

Sheet manufactured and traded by the Petitioner were exclusively utilized as

bed sheets and thus were entitled to the exemption from tax payment

pursuant to Serial No. 3B of Schedule A to the West Bengal Value Added Tax

Act, 2003.

9. In the present matter, the GST rate applicable to the procurement of PP

Granules, as classified under HSN 3901 or 3902, stands at 18%. Conversely,

non-woven fabric supplies under HSN code 5603 incur a taxable rate of 12%,

while supplies of PPSB Bed Sheet under HSN Code 6304 are taxed at 5%. This

incongruous rate structure has led to the accumulation of credit on the part of

the Petitioner.

10. Section 54(3) of the Central Goods and Service Tax Act, 2017

(hereinafter referred to as the "CGST Act"), in conjunction with Rule 89 of the

Central Goods and Service Tax Rules, 2017 (hereinafter referred to as the

"CGST Rules"), provides for the refund of unutilized Input Tax Credit resulting

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from an inverted tax structure, wherein the GST rate on input supplies

exceeds that payable for outward supplies. The refund of Input Tax Credit for

a tax period necessitated the submission of Form GST RFD-01A as per Rule

89 of the CGST Rules. Consequently, on 23.02.2019, the Petitioner applied for

an online refund by filing Form GST RFD-01A for the accumulated tax credit

amounting to Rs. 39,61,030/- attributable to the inverted tax structure for the

month of July 2017. Subsequent refund applications were lodged by the

Petitioner using Form GST RFD-01A for the subsequent months.

11. On 05.03.2019, the Petitioner submitted physical copies of Form GST

RFD-01A, initially filed online on 23.02.2019, alongside pertinent documents

including Refund ARN Receipt, GSTR 1, GSTR 3B and GSTR 2A returns for

July 2017. Also provided were the Statement of Sales and Purchase for July

2017, Xerox copies of Sale and Purchase invoices and a declaration under

Sections 16(2)(c) and 42(2) of the CGST Act, 2017. Acknowledgment of the

submission of Form GST RFD-01A was received through the issuance of Form

GST RFD-02, with Acknowledgement ARN No. AA1907170033944 dated

23.02.2019. The State Government accepted online submissions of Form GST

RFD-01A for subsequent months spanning from August 2017 to February

2019.

12. The Petitioner was served with Show Cause Notice No. 4079 dated

March 25, 2019, in the format of GST RFD-08, issued by the Learned Deputy

Commissioner of State Tax herein referred to as the respondent no. 5,

pertaining to activities in July 2017. Subsequent to this, similar Show Cause

Notices were issued for subsequent months, contesting the refund of

accumulated input tax credit on goods due to an inverted duty structure. In

these notices, the respondent no.5 proposed to disallow the refund claim of

Rs. 5,75,99,662/- on grounds of doubting the classification of the Petitioner's

final products, namely Non-Woven Fabric and PPSB Bed Sheets under HSN

5603 and 6304 respectively. Thereafter, the Petitioners, in its response filed on

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March 25, 2019, in the form of GST RFD 09, elucidated the reasoning behind

the classification of their final products.

13. However, the respondent no.5, without granting the Petitioner an

opportunity for hearing and without duly considering the detailed submissions

made by the Petitioner, passed orders dated May 4, 2019, to May 31, 2019,

rejecting the refund due to the inverted duty structure. This rejection was

primarily grounded on the assertion that the goods were manufactured using

PP Granules, classifiable under Chapter 39. Consequently, the final products

should also be classified under Chapter 39 and taxed at 18%, rather than

under Chapter headings 5603 and 6304 as claimed by the Petitioner.

14. Discontented with the denial of the refund of accumulated Input Tax

Credit due to the inverted duty structure, the Petitioner lodged an appeal

under Section 107 of the WBSGST Act before the Senior Joint Commissioner

of State Tax, herein referred to as the respondent no. 4 on July 2, 2019, using

Form APL-01. Appeals against the Orders passed for subsequent periods were

also filed before the respondent no. 4.

15. After reviewing the petitioner's arguments, respondent no. 4 revised the

decision issued by respondent no. 5, determining that PPSB Bed Sheet,

originating from non-woven fibres under heading 5603, qualify as textile

products akin to non-woven fabric. Consequently, they are to be categorized

and taxed at a rate equivalent to non-woven fabric, set at 12% (comprising

SGST at 6% and CGST at 6%).

16. Pursuant to Section 112 of the CGST Act, recourse to appeal against the

order dated 31.10.2019 was directed to the Goods and Service Tax Appellate

Tribunal as established under Section 109 of the CGST Act. Regrettably, the

absence of such a tribunal and the invalidation of Sections 109(3) and 109(4)

by the Hon'ble Madras High Court in the case of Revenue Bar Association v.

Union of India reported in 2019 SCC OnLine Mad 8910, left the Petitioner

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devoid of an efficacious recourse. Thus, being aggrieved by the said impugned

order the present petition has been preferred.

17. The Learned Counsel representing the petitioner has advanced the

following arguments:

I. The issuance of the Show Cause Notices contravened fundamental

principles of procedural fairness, as they lacked specificity by failing to

provide any rationale for questioning the petitioner's classification or

suggesting any alternative classification. Consequently, solely due to the

ambiguity within the Show Cause Notices, the contested orders, insofar

as they detrimentally affect the petitioner, are subject to being

invalidated.

II. The respondent No.5 hastily decided without providing the petitioner

sufficient opportunity for a fair hearing prior to passing the impugned

order dated 05.04.2019, thus breaching the Principles of Natural

Justice. Further, Section 73 and 74 of the CGST Act, 2017 outlines the

procedural requirements for adjudication proceedings, mandating the

adjudicating authority to grant the assessee herein the petitioner a

hearing before passing any adverse order. Moreover, the show cause

notices underlying these proceedings were inherently ambiguous,

violating the principles of natural justice. Thus, the notice lacked clarity

regarding the classification of the final products in question, failing to

propose an attentive classification.

III. PPSB Bed Sheets are crafted from polypropylene non-woven material,

thus, do not constitute plastic composition consequently, falls within

the purview of Chapter Heading 6304, encompassing "Miscellaneous

Textile, articles, sets used as garments or for industrial purpose".

IV. The initial appellate authority/ assessment authority erred in its

determination of classification due to a misinterpretation of the Customs

Tariff Act, 1975, specifically under the heading 5603 concerning "Non-

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Wovens, whether or not impregnated, coated, covered or laminated." The

correct classification should have been under heading 6304, as the

referenced 'non-woven fabrics' undergo further processing to become

'PPSB Bed Sheets,' constituting a subsequent stage in fabrication. These

PPSB Bed Sheets are a derivative form of the aforementioned non-woven

fabrics, undergoing shaping and finishing processes such as stitching to

achieve the final product. Consequently, they rightfully merit

classification under Chapter 6304, which pertains to "other made up

Textile Articles, Sets, worn clothing and worn Textile articles and rags of

sale value exceeding Rs.1000 per piece" and thus, shall be liable to GST

@5%.

V. The contested decision delineating the classification of PPSB bed-sheets

under tariff heading 5603, contrary to the petitioner's position, relies on

the Customs & Central Excise Tariff Act to assert that items originating

from Chapters 56 to 62 do not fall within the purview of Chapter 63. By

equating non-woven fabric with PPSB bed-sheets and associating them

with Chapter 5603, it subjects them to a tax rate of 12% (SGST 6% &

CGST 6%). The petitioner rebuts this by asserting that Chapter 63

encompasses items from Chapters 56 to 62, as substantiated by

Chapter Note 1 and Heading 6304. Section note 7(b) to Section IX

elucidates the definition of "made up," endorsing PPSB bed-sheets as

meeting such criteria. Consequently, they are correctly classified under

Chapter 6304. The Counsel for the petitioner has further placed reliance

on the Supreme Court's decision in the matter of CCE, Meerut v. Kapri

International (P) Ltd. reported in 2002 (142) ELT 10 (SC), wherein it

was held that by cutting of the cotton fabrics in running lengths into

small pieces a new marketable commodity like bed sheet, bed spreads,

table cloths and napkins etc. come into existence, having a distinct

name, character and use. Thus, 'bed sheets' ought to be regarded as

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distinct 'made up' textile articles, distinct from the fabric from which

they are crafted. It has been further submitted that Polypropylene Non-

Woven Fabrics are textile materials and are not plastics or plastic

articles to be clarified under Chapter 39 in terms of Note 1 (H) of

Section XI of the Customs Tariff Manual.

VI. Various judicial precedents have emphasized the relevance of the

Common Parlance Test in product classification under the Tariff Act.

According to this test, the interpretation of a product by those who use

or trade in it holds paramount importance. This principle finds support

in judgments such as Union of India v. Garware Nylons Ltd., 1996

(87) ELT 12 (SC), Union of India v. G.D. Pharmaceuticals Ltd., 1999

(108) E.L.T. A56 (S.C) and Puma Ayurvedic Herbal (P) Ltd. v. CCE,

Nagpur, 2006 (196) ELT 3 (SC). The PPSB bed sheets produced by the

Petitioner are commonly recognized and utilized as bed sheets, including

as 'disposable bedsheets' by various customers such as hospitals,

hotels, and railways. This understanding is consistent with the

distinction drawn by the Hon'ble Supreme Court in the case of Kapri

International Ltd. (supra), recognizing cotton fabrics and their

derivatives like bedsheets, bedspreads, and napkins as distinct

commercial entities. Moreover, in Harsh Polyfabric Pvt Ltd v. Sr.

JCCT, Central Audit Unit-1 & Ors dated 30.11.2018, a similar issue

arose regarding the classification of PPSB Bedsheets under the West

Bengal VAT Act. The Hon'ble WBTT employed the Common Parlance

Test to conclude that the Petitioner's products are commonly known as

'bedsheets' in trade and thus classified under Schedule A of the West

Bengal VAT Act.

VII. It is a well-established legal principle that the onus of demonstrating the

classification of a product under a specific tariff heading rests with the

revenue authority. This obligation necessitates proving that the product

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is commonly understood as falling within that classification by

consumers or in common parlance as held in the case of Puma

Ayurvedic (supra). As the department has failed to meet this burden by

demonstrating that the PPSB Bed Sheet manufactured by the Petitioner

is not commonly recognized as a 'bed-sheet' but merely as fabric in

common parlance, the contested order's assertion that the PPSB Bed

Sheets fall under tariff heading 5603 rather than 6304 lacks legal merit.

VIII. Section 56 of the CGST Act prescribes the entitlement to interest on

delayed refund, stipulating that if a refund remains undisbursed beyond

sixty days from the filing of the refund application, interest shall accrue.

The Counsel for the petitioner contends that since the refund remained

unprocessed throughout the dispute period, the petitioner is entitled to

the refund along with accrued interest.

IX. With regards to the refunds already sanctioned for non-woven fabric and

partially for PPSB Bedsheets, statutory interest under Section 56 is due,

as each refund was disbursed after the prescribed sixty-day period.

Nonetheless, the department has failed to remit the interest owed to the

petitioner. Hence, the petitioner is entitled to interest on the sanctioned

refunds as well. The petitioner relies on the precedent set forth by the

Hon'ble Supreme Court in Ranbaxy Laboratories Ltd. v. UOI, 2011

(273) E.L.T. 3 (S.C.).

X. The petitioner asserts that it consistently filed tax returns and remitted

taxes, specifying the classification of PPSB Bedsheets under tariff

heading 6304. Importantly, the department has not contested these

returns to date. It is highlighted that the dispute regarding the product's

classification arose solely upon the filing of refund claims. The petitioner

submits that once the classification adopted in the returns is accepted

by the department, it cannot be contested during the processing of

refund applications. In support of this contention, reference is made to

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the decision of the Hon'ble Allahabad High Court in Commissioner v.

M/s HCL Comnet System & Service Ltd Noida, 2017 (12) TMI 1661.

18. Submissions of the Learned Counsel on behalf of the Respondents no.

3-6 are that:

I. The petitioner company has submitted a claim for reimbursement under

the category "Refund on account of ITC accumulated due to inverted tax

structure" via form RFD-01. The petitioner asserts that the primary raw

material comprised PP granules categorized under HSN 3902 1000 (PP

Granules) taxable at 18%, with the resulting output consisting of non-

woven fabric under HSN 5603 9100 to 9400 taxable at 12%, and PPSB

bed sheet under HSN 6304 1930 taxable at 5%. Recognizing that the

current system of indirect taxation relies heavily on self-assessment and

self-declaration, it was imperative to confirm the accurate classification

of the aforementioned goods. Consequently, pursuant to the stipulations

outlined in sub-rule (3) of Rule 92 of the WBGST Rules 2017, a show

cause notice was issued to the petitioner.

II. The documentary evidence and the application per se were meticulously

examined to ensure accuracy and completeness. Confirmation of this

examination was provided through FORM GST RFD-02 on 09.03.2019,

bearing acknowledgment number 1920170749030000. Upon thorough

review of the records, it is apparent that the petitioner obtained PP

granules under HSN:3901 or 3902, which are subject to a tax rate of

18%. However, the final products, Non-Woven Fabric under HSN:5603

and PPSB Bed Sheets under HSN:6304, resulting in an inverted duty

structure, are taxed at 12% and 5%, respectively. It is undisputed that

the refund request arises from the classification of the final product

under either heading 5603 or 6304. Consequently, based on the

manufacturing process and the documents provided by the petitioner,

clarification was sought regarding why the final products should be

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classified under HSN:5603 & 6304. Owing to which the authorities duly

served a show-cause notice to the petitioner on 18.04.2019.

III. It is also submitted that pursuant to the provisions of the West Bengal

Value Added Tax Act, 2003, the imposition of tax is predicated upon the

nomenclature of the items delineated within the schedules appended to

the Act. Conversely, under the West Bengal Goods and Services Tax Act,

2017, the imposition of tax is exclusively predicated upon the Tariff

Code as stipulated in the first schedule to The Customs Tariff Act, 1975,

inclusive of its associated Schedules and Section Notes, pursuant to

notification number 1125 F.T dated 28.06.2017. Consequently, a

substantial alteration in factual circumstances is evident.

IV. Furthermore, it has been contended that the pertinent jurisdictional

authority duly considered the comprehensive submissions of the

petitioner and addressed the raised objections appropriately.

Subsequent to due consideration and mindfulness of the nature of the

final product, various pronouncements issued by the West Bengal

Authority on Advanced Ruling, the West Bengal Appellate Authority in

Advanced Ruling and judicial precedents rendered by diverse courts, a

final order was issued, incorporating the effective determinations

therein. Therefore, it is asserted that the orders were not issued in

flagrant contravention of the principles of natural justice. Additionally, it

is emphasized that the manufactured product of the petitioner is

categorized as a textile article under Chapter 63, rather than as plastic

under Chapter 39.

V. The order pertaining to the PPSB bed-sheet was rendered subsequent to

affording the petitioner a reasonable opportunity to be heard and after

thorough consideration of all materials presented on record, a

circumstance duly acknowledged by the petitioner in its assertions. It is

contended that note 2 to Chapter 63 unambiguously excludes from its

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ambit all goods encompassed within Chapters 56 to 62 without

delineating any distinction based on the nature of products within said

chapters.

VI. Moreover, it is asserted that the mere acts of stitching, slitting, and

pasting of a non-woven fabric falling under Chapter 56 do not alter its

classification and all such products within Chapter 56 retain their

characterization as non-woven fabric notwithstanding any

modifications. Additionally, it is emphasized that achieving the accurate

classification of goods holds paramount importance in the context of

processing refund applications. Consequently, it is posited that such

classification should be duly addressed during the processing of refund

applications. Furthermore, it is underscored that under the West Bengal

Goods and Services Tax Act, 2017, neither has the classification

adopted by the present petitioner attained finality through any order

issued by an authority designated under the Act prior to the petitioner's

submission of the refund application nor has said classification been

endorsed through the rulings of any authority appointed under the Act.

19. Upon a thorough examination of the documents presented to the Court

and taking into account the arguments put forth by the parties, this Court

opines that respondent no. 4 inadequately considered various factual elements

in its decision-making process. It is firmly established, as reiterated by the

Supreme Court in Puma Ayurvedic (supra), that the onus of proving a

product's classification under a specific tariff heading lies with the revenue

authority, which must demonstrate that such classification aligns with the

understanding of consumers or common parlance. However, the respondent

authorities have failed to fulfil this burden of proving that the PPSB Bed

Sheets, manufactured by the petitioner, fall under tariff heading 5603 rather

than 6304. Furthermore, as established by the Supreme Court in Union of

India v. Garware Nylons Ltd, reported in 1996 (87) ELT 12 (SC), the burden

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of proof rests with the taxing authorities herein the respondent authorities to

substantiate their claims regarding the taxable nature of a particular case or

item. Mere assertions in this regard hold no weight. Thus, this Court has

maintained that there must be tangible evidence to support the appropriate

findings, which may be presented either orally or through documentation. It is

the responsibility of the taxing authority herein respondent no.4 to furnish

such evidence, even before the initial adjudicating authority.

20. Moreover, the respondent authority neglected to recognize that the

aforementioned PPSB Bed Sheets essentially represent a processed

manifestation of the referenced non-woven fabrics. These fabrics undergo

cutting into desired configurations followed by subsequent finishing

processes, thereby transforming them into 'made-up' textile articles.

Consequently, the failure to acknowledge this crucial aspect further

underscores the inadequacy of the respondent's determination. In light of

these considerations, this Court concludes that the respondent's decision

lacks sufficient evidentiary support and proper consideration of pertinent

factual and legal principles, necessitating a reassessment of the matter at

hand. Therefore, the impugned order is quashed.

21. It is imperative to acknowledge that this Court, functioning as a writ

court, operates within a supervisory capacity rather than having an appellate

jurisdiction. Consequently, it refrains from scrutinizing factual determinations

made by lower Courts or Tribunals, regardless of any potential errors therein.

This stance aligns with the doctrine expounded by the Supreme Court in the

case of Hari Vishnu Kamath v. Syed Ahmad Ishaque reported in (1955) 1

SCR 1104. This doctrine maintains that a Court possessing jurisdiction over a

particular subject matter has jurisdiction to decide wrong as well as right and

when the Legislature does not choose to confer a right of appeal against that

decision, it would be defeating its purpose and policy, if a superior Court were

to rehear the case on the evidence and substitute its own findings. Thus, as

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these propositions are well-settled and are not in dispute this Court shall not

get into reviewing of factual findings made by the Appellate Tribunal.

22. In the case of Apparel Export Promotion Council v. A.K. Chopra

reported in 1999 (1) SCC 759, the Supreme Court elucidated the principle of

judicial review. It expounded that judicial review, distinct from an appellate

process, entails an examination of the procedural propriety of a decision

rather than its merits. The court underscored the significance of adhering to

established legal principles and natural justice in arriving at decisions by

tribunals. It emphasized that if due process and fair treatment were accorded

to an individual in the adjudicative process, Writ Courts are constrained from

substituting their judgment for that of the appellate authority. This

pronouncement underscores the limited role of writ courts in matters which

falls squarely within the sphere of jurisdiction of the appellate authority.

23. For the forgoing reasons, order of the appellate authority are quashed

and set aside, the appellate authority is requested to reassess the

aforementioned facts, nonetheless, such reassessment must be conducted de

novo, devoid of any influence from the observations made by this Court,

ensuring impartiality in the process.

24. All pending applications are accordingly disposed of.

25. There shall be no order as to costs.

26. Urgent Photostat certified copies of this judgment, if applied for, be

supplied to the parties upon fulfillment of requisite formalities.

(RAJARSHI BHARADWAJ, J)

Kolkata 19.06.2024 PA (BS)