2006 (12) TMI 219 - SC - VAT and Sales Tax

Whether computer and parts of computer and computer peripherals are exempted from levy of turnover tax? Held that - Appeal dismissed. In the impugned judgment, the division Bench of the High Court was justified in observing that the parts of computer by employing legal fiction need to be treated as computer under Sr. No. 20(i) of the Part C of the Second Schedule to the Act. The computer itself is produced by assembling various parts or configuration. When the Legislature intended to exempt the computer then by employing the legal fiction it would be appropriate to hold that parts of computer and its peripheral are also exempted from payment of tax. Thus plain construction of the statute leads to a clear conclusion that the Legislature intended to exempt computer and parts of computer and computer peripherals from levy of turnover tax.

Issues Involved:
1. Liability of turnover tax on parts of computer and computer peripherals.
2. Interpretation of exemption notifications under the Karnataka Sales Tax Act, 1957.
3. Applicability of legal fiction in statutory interpretation.
4. Contemporaneous interpretation by authorities.
5. Legislative intent behind exemption notifications.

Detailed Analysis:

1. Liability of turnover tax on parts of computer and computer peripherals:
The core issue was whether parts of computers and computer peripherals were liable to turnover tax under section 6-B of the Karnataka Sales Tax Act, 1957. The respondents argued that these parts were exempt from turnover tax as per the exemption notifications issued by the Karnataka Government under section 8-A of the KST Act. The High Court upheld this view, interpreting that parts of computers and computer peripherals should be treated as computers and peripherals themselves, thereby exempting them from turnover tax.

2. Interpretation of exemption notifications under the Karnataka Sales Tax Act, 1957:
The High Court analyzed the exemption notifications dated March 31, 2001, which exempted computers, computer peripherals, computer consumables, and computer cleaning kits from turnover tax. The court emphasized that the legislative intent was to provide a broad exemption to all items listed under Serial No. 20 of Part "C" of the Second Schedule of the KST Act. The court held that the notifications intended to exempt all forms of computers and their parts, as indicated by the inclusive language used.

3. Applicability of legal fiction in statutory interpretation:
The court discussed the legal fiction created by the definition of "computer" and "peripherals" in the statute, which includes their parts. The court reasoned that the legislative intent was to treat parts of computers as computers themselves for the purpose of taxation. This interpretation was supported by the principle that parts of a whole (computers) should be treated as the whole for taxation purposes, especially when the whole is exempt from tax.

4. Contemporaneous interpretation by authorities:
The court noted that the Commissioner of Commercial Taxes and other assessing authorities had consistently interpreted the exemption notifications to include parts of computers and peripherals as exempt from turnover tax. This consistent interpretation by the authorities was seen as a strong indication of the legislative intent and was given considerable weight in the court's decision.

5. Legislative intent behind exemption notifications:
The court emphasized the importance of understanding the legislative intent behind the exemption notifications. The intent was to promote the information technology industry in Karnataka by providing tax exemptions to computers and related items. The court observed that excluding parts of computers and peripherals from the exemption would contradict this intent and hinder the growth of the IT industry in the state. Therefore, the court concluded that the legislative intent was to exempt all items listed under Serial No. 20 of Part "C" of the Second Schedule, including parts of computers and peripherals.

Conclusion:
The Supreme Court upheld the decision of the Karnataka High Court, confirming that parts of computers and computer peripherals are exempt from turnover tax under the Karnataka Sales Tax Act, 1957. The court dismissed the appeals filed by the State, emphasizing the importance of legislative intent, consistent interpretation by authorities, and the principle of legal fiction in statutory interpretation. The court directed the parties to bear their own respective costs.

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