The Hindu Business Line : Entry tax on earthmoving machinery

ENTRY tax was first levied by Karnataka in 1979 on certain specified goods. The concept of entry tax on motor vehicles was adopted by certain States to prevent diversion of trade and consequent loss of revenue.

Entry tax on motor vehicles was basically considered a deterrent for customers resorting to purchasing from neighbouring Union Territories and States at nil rate of tax or at lower rates.

Most of the States had borrowed the definition of `motor vehicle' from the Motor Vehicles Act, 1988 (MV Act) for defining motor vehicle under the entry tax legislation. The definition of the term `motor vehicle' as per the MV Act is as follows:

"Motor vehicle or vehicle means any mechanically propelled vehicle adapted for use upon roads...; but does not include ... .a vehicle of a special type adapted for use only in a factory or in any other enclosed premises... "

It may be appreciated that the above definition fulfils the twin objectives of ensuring the safety and regulation of the road users as also the collection of road tax by making registration compulsory.

However, it is doubtful as to whether the entry tax legislation when originally enacted would have contemplated bringing in earthmoving machinery under the ambit of entry tax levy.

Now let us examine if earthmoving machinery is capable of being called as a motor vehicle and the difference in treatment between the earthmoving machinery vis-à-vis motor vehicles under various statutes.

Earthmoving machinery is primarily used in the infrastructure sector and, hence, the same has always been accorded preferential treatment both by the Union Government and the State governments.

Also, while motor vehicles are fully finished products and, hence, invariably charged to higher rate of sales tax, earthmoving machines are critical for the infrastructure sector and are given preferential treatment.

This clear distinction of earthmoving machinery vis-à-vis motor vehicles has been recognised in various statutes. Motor vehicles manufactured in India attract cess.

The Government has clarified that earthmoving machines would be classified as machinery under the Industrial (Development & Regulation) Act, 1951 and accordingly has exempted these machines from cess under the Automobiles Cess Rules, 1984.

Earthmoving machines are classified under the broad category of machines under Central Excise Chapter Heading 84 under the Central Excise tariff Act, 1985 and attract basic excise duty of 16 per cent.

Whereas motor vehicles such as cars are classified under Central Excise Chapter Heading 87 under the Central Excise tariff Act, 1985 and attract basic excise duty of 16 per cent plus special excise duty 8 per cent. The same is the case under the Customs Tariff Act, 1975 also.

The Income-Tax Act also makes a distinction between earthmoving machinery and motor vehicles. The Companies Act, 1956 also recognises the term earthmoving machinery and specifies a higher rate of depreciation for such machinery employed in heavy construction works.

Clearly, therefore, earthmoving machines cannot be equated with or classified as motor vehicles and charged to entry tax as applicable to motor vehicles.

The Supreme Court, in Bose Abraham vs State of Kerala (121 STC 614), had held that excavators would fall under the definition of motor vehicles under the Motor Vehicles Act, 1988.

This decision came in handy for States to levy entry tax on earthmoving machinery on the ground that these are motor vehicles within the meaning of the Motor Vehicles Act and, hence, earthmoving machinery would get covered under the entry tax legislation.

It may be possible that certain types of earthmoving machinery may fall under the definition of `motor vehicle' and may require registration under the MV Act.

However, the question as to whether earthmoving machinery should be classified as motor vehicle and subjected to entry tax needs to be viewed from a broader perspective. It should not be based on the strict and narrow interpretation of the term `motor vehicle' but from the overall intention of the scheme of entry tax.

In this context, the decision in the Bose Abraham case needs to be reviewed.

In this context, a decision under the Income Tax Act, 1961, Gujco Carriers vs Commissioner of Income-tax (2002 256 ITR 50), would be relevant to this discussion.

In this case, the Gujarat High Court had to decide whether for the purpose of higher depreciation, a mobile crane mounted on a motor truck would fall under the entry `Motor buses, motor lorries and motor taxis used in a business running them on hire.' The revenue contended that the term `crane' was not included in the entry and, hence, higher depreciation should not be allowed.

The assessee contended that the crane was mounted on a motor truck and was registered as motor vehicle and should, therefore, fall under the term `motor lorry'.

The assessee further contended that as the mobile crane was used for running on hire, the same should be given higher depreciation. The High Court considered various decisions in this regard and held that the assessee was entitled to higher depreciation at the rate of 40 per cent on the basis that the mobile crane would be treated as lorry.

It may be noted that the court went beyond the literal interpretation of the words and based its decision on the true intention of the legislature.

It is pertinent to quote an interesting decision rendered in the UK in the Clark (Inspector of Taxes) vs Perks; Macleod (Inspector of Taxes 2001 1 WLR 17) case. In this case, the court of appeals had an occasion to examine the meaning and definition of the word `ship'. The assessees were employed in North Sea oil drilling rigs. Each rig had a floating hull and retractable legs. The rigs had no independent power for motion and were moved by being rowed by tugs or carried by cargo vessels. The assessees claimed income-tax relief under the Income and Corporation Taxes Act 1988 under the head "emoluments from employment as a seafarer" on the ground that their employment consisted of "performance of duties on a ship".

While this contention was accepted at the first level, on appeal, it was held that "the meaning of ship was a question of law" and relief was rejected on the ground that the term rigs would not fall under the meaning of the term `ship'.

On appeal, the Court of Appeals agreed with the appellant assessees and held that the conclusion that the structure was a ship was an inference to be drawn on facts. Further, the court held that the question whether the word `ship' was to be treated as an ordinary English word simplicitor or was to be given some refined or expanded meaning by analogy with the definition in Merchant Shipping Act 1894, was a question of fact and not of law.

Thus, the court interpreted the term `ship' to include rigs, for the limited purpose of the Income and Corporation Taxes Act and extended the benefit of relief to those employed in rigs.

The analogy brought out in this decision would apply to the case of entry tax on earthmoving machinery. In this case, the term ship has been interpreted to mean a rig to extend a benefit to the seafarers. The extended definition of ship was not with reference to the Merchant Shipping Act but to the Income tax and Corporation Taxes Act.

Similarly, the term motor vehicle needs to be interpreted for the purpose of, and in the context of, the Entry Tax Act, to determine whether earthmoving machinery would fall under the definition of motor vehicle. If rig can be termed as a ship to extend a benefit to seafarers, earthmoving machinery needs to be differentiated from motor vehicles to mitigate the hardship to the manufacturers of earthmoving machinery as well as the end users of earthmoving machinery.

(The author is a Chennai-based advocate.)

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