Safiya Malik

The High Court of Kerala, Division Bench of Justice A. Muhamed Mustaque and Justice Harisankar V. Menon set aside the revisional orders passed by the Deputy Commissioner and upheld by the Commissioner of State Tax concerning the classification of “thermic fluid heaters” under the Kerala Value Added Tax Act, 2003. The Court held that the revisional powers under Section 56 of the Act are limited and cannot be used to give retrospective effect to subsequent clarifications. It further noted that under Section 94(2), only the Commissioner can determine whether a clarificatory order operates prospectively, and such power is distinct from the authority’s power to issue clarifications. Consequently, the clarification issued on April 7, 2016, was held to apply only prospectively, granting relief in the tax dispute.

The dispute arose under the Kerala Value Added Tax Act, 2003, regarding the applicable tax rate for “thermic fluid heaters.” The assessee, engaged in trading this equipment, claimed it attracted tax at 4% under Entry 83(1)(f) of Schedule III as “heat exchange units.” The assessing authority, however, originally imposed tax at 12.5% relying on a 2006 clarification issued by the Commissioner of Commercial Taxes.

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The assessee challenged the original assessment before the first appellate authority, which noted that the clarification relied on had been set aside by the High Court in 2008 and directed the assessing authority to reconsider the case afresh. Subsequently, in October 2015, the assessing authority revised the assessment, fixing the tax rate at 4%.

In April 2016, the authority under Section 94 issued a fresh clarification holding that “thermic fluid heaters” were not specified in Schedule III and should be taxed at 12.5% as a residuary item under S.R.O. No. 82/2006. Relying on this, the Deputy Commissioner initiated suo motu revisional proceedings under Section 56, cancelled the 2015 order favourable to the assessee, and remitted the matter for fresh consideration.

The assessee contended that the Deputy Commissioner lacked jurisdiction to invoke Section 56 because the original assessment had been the subject of appellate proceedings. It further argued that the clarification issued in 2016 could not apply retrospectively to an assessment for 2009–10 and that the product qualified as a heat exchange unit taxable at 4%. An expert opinion from a Chartered Engineer was also submitted, asserting that the equipment was technically a heat exchanger.

The revenue contended that the Deputy Commissioner had acted within his powers under Section 56 since the 2015 order was contrary to the valid clarification of 2016. It maintained that the product’s classification under the residuary entry at 12.5% was correct.

The legal provisions involved were primarily Sections 56 and 94 of the Act, relating to revisional powers and issuance of clarifications, along with references to HSN-based classification under Schedule III and residuary tax rates under S.R.O. No. 82/2006.

The Court observed that “under Section 56 of the Act, the Deputy Commissioner… may call for and examine any order passed… which in his opinion is prejudicial to the interest of the revenue and… may pass such order thereon as he thinks fit.”

It stated that “the appellate authority only directed a reassessment… there was no decision rendered as regards the tax payable by the assessee… hence, the revisional authority was justified in exercising the suo motu power under Section 56.”

Regarding the product classification, the Court recorded that “the proceedings at Annexure-D specifically proceed to clarify the rate of tax with respect to the ‘thermic fluid heater’… categorically found that the HSN Code of the product is 8419.89.90, not appearing in any of the Schedules to the Act, and hence assessable at the higher rate under S.R.O. No. 82/2006.”

The Court stated that “unless and until it is shown that the HSN Code of the product dealt with… is the HSN Code shown in Entry 83(1)(f), the petitioner cannot succeed in his attempt… merely by referring to the opinion of the expert, the petitioner cannot succeed.”

On the issue of retrospective effect, the Bench observed: “with reference to the power to issue clarification under Section 94 of the Act, the Commissioner has been empowered to hold that clarificatory orders would only have prospective operation… the exercise of the power by the Commissioner under Section 94(2) of the Act is independent of the power of the authority to issue clarifications.”

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It further recorded: “we are of the opinion that if the clarificatory order dated 07.04.2016 is provided with any retrospective operation, an assessee would be seriously prejudiced… the reason stated in the impugned order for not exercising the power does not appear to be legal… the clarification at Annexure-D can be made applicable only prospectively.”

It held: “Since the third question has been answered in favour of the assessee, the exercise of the revisional jurisdiction under Section 56 of the Act cannot be sustained.”

Accordingly, the Bench ordered: “Annexure-E order of the Deputy Commissioner, confirmed by Annexure-I order of the Commissioner of State Tax, is set aside. “The Other Tax Revision Petition is disposed of as above.”

Advocates Representing the Parties

For the Petitioners: Sri. P.S. Soman, Advocate; Smt. T. Radhamony, Advocate
For the Respondents: Sri. V.K. Shamsudheen, Senior Government Pleader

Case Title:K.G.REJIMON, PROPRIETOR vs STATE OF KERALA
Neutral Citation: 2025:KER:70520
Case Number: OT.Rev.No.32 of 2023
Bench: Justice A. Muhamed Mustaque, Justice Harisankar V. Menon