Court invalidates tax classification change for computer parts, upholds lower tax rate, and rejects reassessment notice

M/s. Dax Networks Ltd. Versus The Commissioner of Commercial Taxes, The Commercial Tax Officer

M/s. Dax Networks Ltd. Versus The Commissioner of Commercial Taxes, The Commercial Tax Officer - 2018 (359) E.L.T. 627 (Mad.) , [2018] 1 GSTL ( STC ) 138 ... Issues Involved:
1. Legality of the clarification dated 29.07.2004 issued by the Commissioner of Commercial Taxes.
2. Validity of the notice proposing to re-open the assessment for the year 2004-2005 based on the said clarification.

Issue-wise Detailed Analysis:

1. Legality of the clarification dated 29.07.2004 issued by the Commissioner of Commercial Taxes:

The petitioner, a dealer in computer parts and peripherals, initially received a favorable clarification on 24.08.1998 from the Commissioner of Commercial Taxes, classifying items like switches, hubs, and routers as computer peripherals taxable at 4% under Entry 18 (i) of Part B of the first schedule to the TNGST Act. This classification was based on an expert opinion from the Electronics Corporation of Tamil Nadu Ltd. (ELCOT), which is recognized as a technical body in the State.

However, a subsequent clarification dated 23.12.2002, issued in favor of another dealer (WIPRO Ltd.), reclassified switches and electronic cables as taxable at 10% and hubs and routers at 12%. This led to the issuance of the impugned clarification on 29.07.2004, which classified the petitioner’s products as taxable at 12% under Entry 14 (iv) Part D of the first schedule to the TNGST Act.

The court noted that the impugned clarification was issued without providing the petitioner an opportunity to present objections and without any tangible material or reasoning to deviate from the earlier clarification of 1998. The court emphasized the importance of the expert opinion from ELCOT, which classified the products as computer peripherals, and found no substantial basis for the contradictory clarification in 2004.

Additionally, the court referenced a decision in State of Tamil Nadu Vs. CMS Limited, which supported the classification of routers as computer peripherals. The court also considered a certificate from the Dean of the College of Engineering, Guindy, confirming that the products in question are used in connecting computers and are indeed computer peripherals.

2. Validity of the notice proposing to re-open the assessment for the year 2004-2005 based on the said clarification:

The second writ petition challenged the notice issued by the Assessing Officer to re-open the assessment for the year 2004-2005, which was based on the impugned clarification dated 29.07.2004. Since the court found the clarification dated 29.07.2004 to be unsustainable and set it aside, the basis for the re-opening notice was invalidated.

The court held that without a valid clarification to support the re-opening of the assessment, the notice issued by the Assessing Officer lacked jurisdiction and was not sustainable. Consequently, the notice dated 27.04.2007 was also set aside.

Conclusion:

Both writ petitions were allowed. The clarification dated 29.07.2004 was set aside, and the earlier clarification dated 24.08.1998, which classified switches, hubs, and routers as computer peripherals taxable at 4%, was upheld. The notice proposing to re-open the assessment for the year 2004-2005 was also set aside, as it was based on the invalidated clarification. No costs were imposed, and connected miscellaneous petitions were closed.