2026 (1) TMI 646 - HC - VAT / Sales Tax

Turnover from car audio systems classified as domestically taxed finished goods, not imported components; domestic rate upheld, revision allowed

Whether turnover from sale of car audio systems is taxable at the domestic rate or as imported goods: HC held that imported items were mere components ... Reversal of order of the First Appellate Authority, who discussed the issue meticulously with the available documentary evidences - sustenance of Assessment Order which is apparently passed by the Assessing Officer, based on the direction of his superiors and who was not allowed to apply his independent discretion - whether the rate of tax on turnover from sales of car stereo systems would be 12% as applicable to domestic products, or 20%, as imported goods? - HELD THAT:- Under the license agreement, Kenwood has agreed to provide the use of its intellectual property, technical expertise and some signature parts of the audio systems, to the petitioner. However, the parts are of little use if they are not integrated and assembled with other parts to form a car audio system - It is undisputed that the petitioner has a unit in Noida where it carries on the process of manufacture of audio systems that it clears on payment of central excise duty. The imported components are integrated with the domestically sourced materials to arrive at the final product, which is a complete car audio system. It is this which is ultimately sold. There has been no allegation that the business arrangement that the petitioner is engaged in is opaque or is designed specifically to avoid or reduce tax liability. What has been imported by the petitioner constitute only components or parts of sound systems, that are distinct, commercially saleable goods in their own right. The parts do not, by themselves, constitute a complete car audio system as contemplated under Schedule Eleven. What has been sold however is a complete car audio system, as contemplated under First Schedule/Part D/Entry 14 (vi). The order of the first appellate authority confirmed and order of the Tribunal reversed - the substantial questions of law are answered in favour of the assessee and adverse to the Revenue - Tax Case (Revision) is allowed. Issues: Whether turnover from sales of car audio/stereo systems manufactured and sold by the assessee should be taxed at the rate applicable to domestically manufactured products under Entry 14(vi)/Part D/First Schedule of the Tamil Nadu General Sales Tax, 1959, or at the higher rate applicable to imported items under Schedule Eleven/entry 9.Analysis: The Court examined the license agreement, annexures, and the bill of materials showing imported and indigenous components. The agreement permits use of licensor's designs, signature parts and technical assistance but envisages assembly and manufacture in India by the licensee; quality control provisions contemplate integration of locally procured parts with licensed/custom parts. The imported items are components and parts that require integration with domestically sourced materials to form a complete car audio system. The assessee operates a manufacturing unit and clears finished goods on payment of central excise duty. There was no finding of an opaque arrangement or purpose to avoid tax. The statutory entries were interpreted with focus on the nature of the final product actually sold: a complete car audio system falling under Entry 14(vi) rather than an imported good within Schedule Eleven.Conclusion: The turnover from sales of the assembled/manufactured car audio systems is taxable under Entry 14(vi)/Part D/First Schedule of the Tamil Nadu General Sales Tax, 1959 (i.e., as domestically manufactured goods). The Tribunal's order is reversed, the first appellate authority's order is confirmed, and the substantial questions of law are answered in favour of the assessee and against the Revenue.