2023 (4) TMI 1433 - HC - VAT / Sales Tax

Multi-functional digital copiers liable to 1% Entry Tax under Entry No. 70, Part-I despite computer functions

State of Odisha Versus M/s. Zenith Techno Engineers Pvt. Ltd.

State of Odisha Versus M/s. Zenith Techno Engineers Pvt. Ltd. - (2023) 119 G S.T.R. 162 1. ISSUES PRESENTED and CONSIDERED Whether the multi-functional digital copier should be classified under Entry No. 23 of Part-II (Copier, Xerox Machine, Fax, etc.) or Entry No. 70 of Part-I (Computer, its spare parts, accessories, stationeries, consumables, and software) of the Orissa Entry Tax Rate Chart for the purpose of levy of Entry Tax. Whether the classification of the multi-functional digital copier should be determined by the functional test or by the commercial use (common parlance) test. Whether the order of the Sales Tax Tribunal affirming classification of the multi-functional digital copier as a computer peripheral and levying Entry Tax at 1% is sustainable. Whether the assessment order imposing Entry Tax at 2% on the multi-functional digital copier and penalty for evasion is valid and should be restored. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Classification of Multi-functional Digital Copier under Entry No. 23 Part-II or Entry No. 70 Part-I of the Orissa Entry Tax Rate Chart - Relevant Legal Framework and Precedents: The Orissa Entry Tax Act, 1999, and its Schedule provide distinct entries with different tax rates: Entry 23 of Part-II covers 'Copier, Xerox Machine, Fax, VCR, VCP, VCD, DVD, Video Camera,' attracting tax at 2%, while Entry 70 of Part-I covers 'Computer, ITS Spare Parts, Accessories, Stationeries and Consumables and Computer Software,' attracting tax at 1%. The classification determines the applicable tax rate. - Court's Interpretation and Reasoning: The Sales Tax Tribunal classified the multi-functional digital copier under Entry 70 of Part-I, reasoning that the product performs multiple functions (printing, scanning, fax, e-mail) and acts as a computer peripheral, not merely a copier. The Tribunal relied on a functional test, observing that the copier's image generation is computer-based, and noted that such devices are sold in computer showrooms. The First Appellate Authority similarly held that except for the photocopy function, other functions connect to the CPU of an automatic data processing system, supporting classification under computer peripherals. However, the High Court rejected this classification, emphasizing that the principal function of the product is to multiply copies, i.e., photocopying, which falls squarely within the scope of Entry 23 of Part-II. The Court found the functional test applied by the Tribunal to be inappropriate and inconsistent with the product's commercial identity. - Key Evidence and Findings: The product is a multi-functional digital copier used for printing, scanning, photocopying, fax, and e-mail. The dealer was registered to deal in photocopiers (xerox machines). The assessment order noted the dealer's registration and business dealing in photocopiers, electric stabilizers, and computer printers. The dealer had paid Entry Tax at 1% classifying the product as a computer peripheral, which was challenged by the revenue. - Application of Law to Facts: The Court applied the commercial use test (common parlance test) to determine the product's classification, concluding that the multi-functional digital copier is commercially known as a copier and should be taxed accordingly under Entry 23 of Part-II. - Treatment of Competing Arguments: The revenue argued for the functional test, relying on the device's multiple functions and a precedent from a Division Bench of the West Bengal Taxation Tribunal. The Court distinguished that reliance, favoring the commercial use test endorsed by the Apex Court in a related classification case. - Conclusions: The classification of the multi-functional digital copier under Entry 70 of Part-I by the Sales Tax Tribunal and First Appellate Authority is unsustainable. The product falls within Entry 23 of Part-II, attracting Entry Tax at 2%. Issue 2: Appropriate Test for Classification - Functional Test vs. Commercial Use (Common Parlance) Test - Relevant Legal Framework and Precedents: The Apex Court in a precedent case held that classification of goods should be determined by the commercial identity test and not solely by the functional test. The commercial use test ascertains how goods are referred to in the market by those who sell or purchase them. - Court's Interpretation and Reasoning: The Court emphasized that classification should not be based on the functional test alone, especially when the commercial identity of the product is clear. The multi-functional digital copier is commercially recognized as a copier, notwithstanding its additional functions. - Key Evidence and Findings: The product's principal use is photocopying, a fact not disputed. The dealer's registration and business dealings are aligned with photocopiers, reinforcing the commercial identity. - Application of Law to Facts: The Court applied the commercial use test to determine classification, rejecting the functional test applied by the Tribunal and First Appellate Authority. - Treatment of Competing Arguments: The revenue's argument favoring the functional test was rejected on the basis of established legal principles favoring commercial identity as the decisive factor. - Conclusions: The commercial use test is the appropriate method for classification in this case, leading to the conclusion that the multi-functional digital copier is a copier for tax purposes. Issue 3: Validity of Assessment Order Imposing Entry Tax at 2% and Penalty for Evasion - Relevant Legal Framework: Section 16 of the Orissa Entry Tax Act, 1999, allows appeal against assessment orders. Section 9C(5) provides for penalty for evasion of Entry Tax. - Court's Interpretation and Reasoning: The original assessment order imposed Entry Tax at 2% on the multi-functional digital copier under Entry 23 of Part-II and penalty for evasion. The First Appellate Authority reduced the demand by classifying the product under Entry 70 of Part-I at 1%, and the Sales Tax Tribunal affirmed this reduction. The High Court restored the original assessment order, holding that the product falls under Entry 23 of Part-II and is liable to tax at 2%. The penalty imposed under Section 9C(5) was also upheld. - Key Evidence and Findings: The dealer had paid tax at 1% on the product classified as computer peripheral, which was found incorrect. The assessment established the correct tax liability at 2% plus penalty. - Application of Law to Facts: The Court restored the assessment order based on the correct classification and tax rate. It also allowed the dealer to pay dues in installments. - Treatment of Competing Arguments: The dealer's contention for lower tax rate based on classification as computer peripheral was rejected. - Conclusions: The assessment order imposing Entry Tax at 2% and penalty for evasion is valid and restored.