2023 (2) TMI 1090 - HC - VAT and Sales Tax

Tax Ruling: Mobile phone chargers taxed at 5% when sold with phones

The Court held that mobile phone chargers sold in a composite pack with mobile phones are taxable at the same rate as mobile phones under the Karnataka ... Classification of goods - rate of tax - mobile phone chargers sold along with mobile phone in a composite pack - whether liable to tax at the same rate as applicable to 'mobile phone' only and it cannot be taxed at higher rate as unscheduled goods under Section 4(1) (b) (iii) of the Act? - Applicability of 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:- 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 - the Apex Court had 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%. Applicability of 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. Thus, 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. 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. Issues Involved:1. Whether the Appellate Tribunal was right in law in holding that 'mobile phone chargers' sold along with mobile phones in a composite pack attract tax at the same rate as applicable to 'mobile phones' only, and cannot be taxed at a higher rate as unscheduled goods under Section 4(1)(b)(iii) of the Karnataka Value Added Tax Act, 2003 (KVAT Act).Detailed Analysis:Composite Pack Taxation:The primary issue in these petitions is whether mobile phone chargers sold along with mobile phones in a composite pack should be taxed at the same rate as mobile phones or at a higher rate as unscheduled goods. The Karnataka Appellate Tribunal (KAT) held that mobile phone chargers sold in a composite pack with mobile phones attract tax at the same rate as mobile phones. The Revenue challenged this decision, arguing that mobile phone chargers should be taxed separately at a higher rate.Revenue's Arguments:The Revenue contended that:- Entry 53 of the Third Schedule of the KVAT Act provides that IT Products and Telecommunication equipment are liable to be taxed at the rate prescribed under Section 4(1)(a)(ii) of the KVAT Act.- The mobile charger is not an integral part of the mobile phone and should be taxed separately.- The decision in State of Punjab & Others Vs. Nokia India Pvt. Ltd. (Nokia India Case) supports their view that mobile chargers are independent products and should be taxed at a higher rate.- The Commissioner of Commercial Taxes issued a clarification that mobile chargers attract tax at the rate of 12.5%.Assessees' Arguments:The Assessees argued that:- Once goods are classified under a particular HSN Code, VAT classification should follow the same.- Rule 3(a) and Rule 3(b) of the General Rules of Interpretation (GRI) support the classification of mobile phone sets as a single unit for tax purposes.- The dominant intention test should apply, meaning the primary intent of the transaction is to sell the mobile phone, not the charger.- The Allahabad High Court in Samsung India Case distinguished the Nokia India Case, holding that chargers sold as part of a composite package with mobile phones are taxable at the same rate as mobile phones.- The Notification under the KVAT Act includes chargers as part of mobile phone sets, making them taxable at the same rate.Court's Analysis:The Court analyzed the following:- The Nokia India Case was based on the Punjab VAT Act, which did not include accessories in the definition of cellular phones. However, the KVAT Act and the relevant Notification include 'parts thereof,' which encompasses chargers.- Rule 3(b) of the GRI states that goods put up in sets for retail sale should be classified based on their essential character. In this case, the essential character is the mobile phone, not the charger.- The dominant intention test applies, indicating that the primary intent of the transaction is to sell the mobile phone, with the charger being incidental.- Section 4 of the KVAT Act and Rule 3 of the KVAT Rules do not provide a mechanism for separating the value of individual goods in a composite transaction, supporting the classification of the entire set at the same rate.Conclusion:The Court concluded that:- The Notification under the KVAT Act includes chargers sold with mobile phones in one set, making them taxable at the same rate as mobile phones (5%).- The substantial question of law is answered in favor of the Assessee and against the Revenue.- The revision petitions are dismissed with no costs.