2023 (2) TMI 1228 - HC - VAT and Sales Tax

Classification of goods - rate of tax - mobile phone chargers sold along with mobile phone in a composite pack - taxable at the same rate as applicable to mobile phone only or taxed at higher rate as unscheduled goods under Section 4(1) (b) (iii) of the Act? - HELD THAT - The issue involved in Nokia India Case 2014 (12) TMI 836 - SUPREME COURT was whether mobile charger should be excluded from the entry of concessional rate of tax which applies to cellphones under the Entry 60(6)(g) of Schedule B of the Punjab VAT Act where it was held that the battery charger cannot be held to be a composite part of the cellphone but is an independent product which can be sold separately without selling the cellphone. The High Court failed to appreciate the aforesaid fact and wrongly held that the battery charger is part of the cellphone. It is relevant to note that the decision in Nokia India Case is based on Entry 60(6)(g) of the Schedule B of the Punjab VAT Act. In the said Entry only cellular phone is defined and accessories are not included. The Hon'ble Supreme Court of India has upheld Revenue's contention in that case because Entry 60(6)(g) of Schedule B of the Punjab VAT Act does not mention accessories for the purpose of taxing the items/product at 4%. Entry 53 of Schedule III of the KVAT Act read with the Notification No. FD 43 CSL 07(02) dated April 4, 2007 issued by the State Government - HELD THAT - In Entry No. 60(6)(g) of the Punjab VAT Act, the expression used is 'cellular telephone' whereas in the Notification issued under KVAT Act, the words used are 'and parts thereof'. Further, the parts falling under Heading 8843, 8825, 8527 or 8528 have been specifically excluded. It is relevant to notice that, battery charger which falls under Entry 8504 40 30 under the CET Act and CT Act, has not been excluded. This makes it clear that charger is a composite part in the package. Thus, the intention of the Revenue is unambiguous that the Notification was applicable for telephone sets and parts thereof which includes charger. Therefore, the Entries in Punjab VAT Act and the KVAT Act are different and the Entry under the Punjab VAT Act is limited only to cellular telephones in contradistinction to the Notification under KVAT Act - 'telephone sets' can be considered as 'goods put up in sets for retail sale' under Rule 3(b) of the GRI. A bare perusal of the Section 4 (charging section) of KVAT Act and Rule 3 (computation provision) of KVAT Rules would clearly indicate that there is no prescribed mechanism provided for determining the value of individual goods in a composite transaction. Thus, in the absence of a valuation mechanism, tax cannot be levied differently on each of the component by separating a single composite package - the definition contained in the Notification issued under the KVAT Act includes the charger which is sold along with the mobile phone in one set and accordingly taxable at 5%. These revision petitions are dismissed.

Summary

Issues Involved:
1. Whether mobile phone chargers sold along with mobile phones in a composite pack attract the same tax rate as mobile phones or a higher rate as unscheduled goods under Section 4(1)(b)(iii) of the Karnataka Value Added Tax Act, 2003 (KVAT Act).

Issue-Wise
Detailed Analysis:

Composite Taxation of Mobile Phones and Chargers:
Facts and Background:
The case involves the taxation of mobile phone chargers sold in a composite package with mobile phones. The Assessing Officer (AO) had subjected the sales turnover of mobile chargers to a higher tax rate of 13.5% to 14.5% for the assessment years 2010-11 to 2013-14. The Karnataka Appellate Tribunal (KAT) allowed the assessee's appeal, leading the Revenue to file revision petitions.

Revenue's Arguments:
The Revenue argued that:
- Entry 53 of the Third Schedule of the KVAT Act specifies that IT products and telecommunication equipment are taxable at the rate prescribed under Section 4(1)(a)(ii).
- The mobile charger is not an integral part of the mobile phone and should be taxed separately.
- The Nokia India Case (2014) supports their view that mobile chargers are independent products and should be taxed at a higher rate.
- The Tribunal erred in interpreting the Notification and holding that "Telephone sets, including telephones for Cellular networks" would include sets of cellular phones.

Assessee's Arguments:
The Assessee contended that:
- Once goods are classified under a particular HSN Code, VAT classification should follow accordingly.
- Rule 3(a) and Rule 3(b) of the General Rules of Interpretation (GRI) apply, making the mobile phone and charger a composite product.
- The dominant intention test should be applied, indicating that the primary purpose is to sell the mobile phone, with the charger being incidental.
- The Allahabad High Court in the Samsung India Case distinguished the Nokia India Case and held that chargers sold as part of a composite package with mobile phones are taxable at the same rate as mobile phones.

Court's Analysis:
The court noted that:
- The Nokia India Case was based on the specific entries of the Punjab VAT Act, which did not include accessories for concessional tax rates.
- Entry 53 of Schedule III of the KVAT Act and the relevant Notification include "Telephone sets, including telephones in cellular network, or for other wireless networks and parts thereof."
- The Notification under the KVAT Act does not exclude battery chargers, implying that chargers are part of the composite package.
- Rule 3(b) of the GRI supports the classification of goods based on their essential character, which in this case is the mobile phone.
- The dominant intention test indicates that the main intention in purchasing a mobile set is to buy the mobile phone, with the charger being incidental.

Conclusion:
The court concluded that the mobile phone and charger sold in a composite package should be taxed at the same rate. The definition in the Notification under the KVAT Act includes the charger sold with the mobile phone, making it taxable at 5%.

Order:
- The revision petitions are dismissed.
- The substantial question of law is answered in favor of the Assessee and against the Revenue.
- No costs.

This comprehensive analysis ensures that the mobile phone and its charger sold in a composite package are taxed uniformly at the rate applicable to mobile phones, aligning with the intention of the KVAT Act and relevant legal precedents.