Karnataka VAT: Charger sold with mobile phone in one set taxable at 5%

State of Karnataka Vs Intex Technologies India Ltd (Karnataka High Court)

Karnataka High Court held the charger which is sold along with the mobile phone in one set and accordingly taxable at 5% as covered under entry 53 of Schedule III of KVAT Act.

Facts- M/s. Intex Technologies India Ltd. are, it is a registered dealer under the Karnataka Value Added Tax Act, 2003. It is engaged in trading mobile phones, parts and accessories. It sells mobile phones in a composite package which also contains accessories such as headsets, cables, ejection pin, adapter, charger, manual etc. The AO passed an order u/s. 39(1) of the KVAT Act subjecting to tax, the sales turnover of mobile charger at the rate of 13.5% to 14.5% for A.Y. 2010-11 to 2013-14. The assessee filed an application for rectification and the AO passed orders u/s. 69 of the KVAT Act, rectifying the order by dropping estimated turnover as per the return and books of accounts. The JCCT(A) dismissed assessee’s appeal. On further appeal, KAT, by the impugned order, has allowed assessee’s appeal. Feeling aggrieved, the Revenue has preferred these petitions.

Conclusion- The Assessees’ have rightly canvassed the application of Dominant Intention Test. There can be no doubt that the main intention of a purchaser/seller while buying/selling a ‘Mobile Set’ is to buy/sell the mobile phone and not charger alone. Supply of charger, headset, and ejection pin are incidental to the sale. Therefore, the Dominant Intention Test would apply to the present case and hence, charger cannot be differently taxed.

The mobile phone finds its place in III Schedule and taxable at 5% and therefore, the charger which is also sold along with mobile phone in ‘one set’ is together chargable at 5%.

We are of the considered view that 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%.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

This batch of Revision Petitions by the Revenue is being disposed of by this common judgment as they involve common questions of law.

2. The facts are illustratively taken from STRP No.8/2022 (State of Karnataka Vs. M/s Intex Technologies India Ltd.) directed against the order dated March 10, 2021 in STA No. 88-91/2018 passed by the KAT¹, Bengaluru. Though it has been admitted to consider three questions of law, after hearing Learned AGA for the Revenue and Learned Advocates for the Assessees, in our opinion only the following question arises for consideration in all these petitions:

1) Whether on the facts and in the circumstances of the petitioner’s case, the Appellate Tribunal was right in law in holding that “mobile phone chargers” sold along with mobile phone in a composite pack attracts 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?

3. Briefly stated the facts in M/s. Intex Technologies India Ltd. are, it is a registered dealer under the Karnataka Value Added Tax Act, 2003². It is engaged in trading mobile phones, parts and accessories. It sells mobile phones in a composite package which also contains accessories such as headsets, cables, ejection pin, adapter, charger, manual etc. The AO³ passed an order under Section 39(1) of the KVAT Act subjecting to tax, the sales turnover of mobile charger at the rate of 13.5% to 14.5% for A.Y.⁴ 2010-11 to 2013-14. The assessee filed an application for rectification and the AO passed orders under Section 69 of the KVAT Act, rectifying the order by dropping estimated turnover as per the return and books of accounts. The JCCT(A)⁵ dismissed assessee’s appeal. On further appeal, KAT, by the impugned order, has allowed assessee’s appeal. Feeling aggrieved, the Revenue has preferred these petitions.

4. Shri. Jeevan J. Neeralgi, Learned AGA for the Revenue, praying to allow the petition, submitted that:

• Entry 53 of Third Schedule of the KVAT Act provides that IT⁶ Products and Telecommunication equipment are liable to be taxed at the rate prescribed under Section 4(1)(a)(ii) of the KVAT Act. However, insofar as it relates to Telecommunication equipment, the same requires to be notified by the State Government in exercise of powers conferred under the KVAT Act and the State Government has been issuing Notifications specifying the products which would be treated as IT products;
• Notification No. FD 43 CSL 07(02) dated April 4, 2007 states that IT products falling under Entry 53 of the Third Schedule of the KVAT Act have to be treated as IT
• the issue involved in these petitions are covered by the authority in State of Punjab & Others Vs. Nokia India Pvt. Ltd⁷ (hereinafter referred to as the Nokia India Case).
• mobile charger is not an integral part of the mobile phone to treat among ‘composite goods’ because merely making a composite package of cell phone, charger shall not make it eligible as one of the composite goods for the purpose of interpretation of the provisions;
• the decision in Samsung (India) Electronics Pvt Ltd. Vs. State of Gujarat ⁸ has no relevance; the decision in Samsung (India) Electronics Pvt. Ltd. Vs. State of UP⁹ (hereinafter referred to as the Samsung India Case) also has no relevance. The said authority cannot be treated as a binding precedent because the facts of present case are similar to the facts in Nokia India Case. In the Samsung India Case, the Hon’ble High Court of Allahabad has interpreted the provisions contained in Article 366(29A) of the Constitution of India which mainly relates to the transfer of goods in due course of execution of a ‘works contract’. Therefore, the said authority does not support the case of assessee;
• re-opening of assessment is not based upon the judgment rendered in Nokia India Case by the Apex Court. The Commissioner of Commercial Taxes, in exercise of powers vested under Section 59(4) of the KVAT Act has issued a clarification on September 06, 2008 clarifying that the Mobile chargers attract tax at the rate of 12.5%;
• the Tribunal has erred in interpreting the Notification and holding that “Telephone sets, including telephones for Cellular networks” would include “sets” of Cellular Phones also;
• chargers though sold with the mobile phones, are independent gadgets and therefore, cannot be taxed at par with a mobile phone;
• the Tribunal has erred in holding that charger sold along with mobile phone in a composite pack attracts tax as that of mobile phone, is contrary to law laid down in Nokia India Case.

5. Opposing the appeal, Shri. T. Suryanarayan, Shri. K. Arvind Kamath, Shri. Sandeep Huilgol, learned Senior Advocates and other Advocates for respective assessees, in substance, contented that:

• once the goods are manufactured/imported and cleared by classifying them under a particular HSN¹⁰ Code, then the only question that needs determination for VAT classification is whether the said goods is listed in IT product notifications or not;
• as per Rule 3(a) of the GRI¹¹, the entry of ‘telephone sets’ is more specific and therefore, resorting to a ‘residuary entry’ namely, the unscheduled goods, is unwarranted and as such Rule 3(b) of the GRI is applicable;
• the application of Rule 3(b) and the test of essential character was not argued in the Nokia India Case and there is no finding on the said aspect. However, this issue has been considered in Samsung India Case and it has been held that Nokia India Case is not applicable;
• it is settled that a special entry in law would over-ride a general entry and therefore, Entry 53 of the III Schedule of the KVAT Act, being a special entry for ‘IT products and telecommunication equipment’ read with the Notifications would undoubtedly take precedence;
• the sale of mobile phones along with its charger in a single retail package constitutes a composite contract and requires the application of the dominant intention test, which is a proposition that was neither urged nor considered in Nokia India Case; and requires the application of the dominant intention test, which is a proposition that was neither urged nor considered in Nokia India Case;
• as per Section 4 of the KVAT Act, charge is on the taxable turnover of a dealer. Under Rule 3 of the Karnataka Value Added Tax Rules 2005¹², there is no mechanism by which the Revenue may artificially spilt the single value for goods forming part of a set;
• pursuant to the judgment in Nokia India Case, the Central Government have issued Office Memorandum F.No.34011/18/2015-SO(ST) dated 30.11.2015 clarifying the position and advising States that accessories be treated as a part of the main item when they are sold as a single unit;
• entries under the KVAT Act and Punjab Value Added Tax Act, 1914¹³ are wholly different;
• the Allahabad High Court in Samsung India case, under similar circumstances, has distinguished the decision of Hon’ble Supreme Court in Nokia India Case and held that chargers sold as part of a composite package with mobile phones are taxable at the same rate as the mobile phones.

6. We have carefully considered the rival contentions and perused the records.

7. One of the main contentions raised by Revenue is that the decision in Nokia India Case delivered by the Hon’ble Supreme Court is applicable to the present case.

8. The issue involved in Nokia India Case 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 said Entry reads as follows:

“Telephones, cell phones, tele-printer, wireless equipment and parts thereof, Digital Video Disc and Compact Disc and Information Technology products as given hereunder –

1. 6. Transmission apparatus other than apparatus for radio or TV broadcasting:

(g) Cellular telephone”

9. In Nokia India Case, the Apex Court has held that:

“19. in view of the aforesaid facts, we find that the Assessing Authority, Appellate Authority and the Tribunal rightly held that the mobile/cellphone charger is an accessory to the cellphone and is not part of the cellphone. We further hold 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.”

10. 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%.

11. Now, we shall analyse 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, which is for consideration in these present Revision Petitions before us.

12. Entry 53 of Schedule III of the KVAT Act reads thus:

“IT Products including telecommunication equipment as may be notified.”

13. The Notification No. FD 43 CSL 07(02) dated April 4, 2007 is similar to the Entry in Heading 8517 of the Central Excise Tariff Act, 1985¹⁴ and the Customs Tariff Act, 1975¹⁵, which reads as:

“Telephone sets, including telephones in cellular network, or for other wireless networks and other apparatus for the transmission or reception of voice, imagers or other data, including apparatus for communication in a wired or wireless network (such as local or wide area network)  and parts thereof, but excluding attachments and transmission or reception apparatus of heading 8843,8525,8527 or 8528.”

(Emphasis Supplied)

14. The Apex Court in Nokia India Case, further held that:

“14. …’Cellular telephone’ is in schedule B at Entry No. 60(6)(g) vide HSN Code No.8525.20.17. The Tariff No.8525.20.17 only relates to cellular telephone and not the accessories. The Schedule ‘B’ does not  indicate that the cellular phone includes the accessories like the  chargers either in the HSN Code  or by elaborating in  words.”

15. The Assessing Authority, Appellate Authority and the Tribunal rightly held that the battery charger is not a part of the mobile/cell phone. If the charger was a part of cell phone, then cell phone could not have been operated without using the battery charger. But in reality, it is not required at the time of operation. Further, the battery in the cell phone can be charged directly from the other means also like laptop without employing the battery charger, implying thereby, that it is nothing but an  accessory to the mobile phone.”

15. In Madhav Rao Jiwaji Rao Scindia Bahadur and Ors. Vs. Union of India¹⁶, the Apex Court has observed that:

“…It is difficult to regard a word, a clause or a sentence occurring in a judgment of this Court, divorced from its context, as containing a full exposition of the law on a question when the question did not, even fall to be answered in that judgment.”

16. Para 14 of the judgment in Nokia India Case, clearly indicates that the said decision is based on Entries of the Punjab VAT Act, wherein the prime issue for consideration was whether the mobile charger is an accessory or not. But in the case on hand, the issue involved is, when the mobile phone is sold along with the charger what must be the rate of tax?

17. The Allahabad High Court, in the facts of that case has distinguished Nokia India Case and held thus:

“9. On the submissions made and decision relied on, we have no hesitation in holding that all the material was before the authorities concerned Judgment in State of Punjab v. Nokia India Pvt. Ltd., (2014) 16 SCC 410, could not have been followed so as to invoke the jurisdiction under Section 29 of the Act because in the case on hand as far as Nokia was concerned, the phone charger was sold as a separate accessory and, therefore, Apex Court held that it is not part of mobile phone. The battery was supplied with mobile phone and, therefore, battery charger was earlier classified as cell phone and it’s part and that battery charger was sold as a separate entity and not as accessory. On merit, we hold that petitioner placed before respondents various facts to show that petitioner was a single unit as a cell phone and that assessments, which were made, could not have been reopened on the basis of a subsequent judgment and same was bad in the eyes of law…

1. 10. In the facts of this case, it cannot be said that there was any fresh material nor any tangible material which would permit the authorities to reassess or issue said notice. Decision of Nokia will not apply to facts of this case.”

(Emphasis Supplied)

18. As noticed hereinabove, 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,

19. Rule 3(b) of the GRI reads as follows:

“Mixtures, composite goods consisting of different materials or made up different components, and goods  put up in sets for retail sale, which cannot be classified by reference to 3 (a), shall be classified as if they consisted of the material or component which gives them their essential character, in so far as the criterion is applicable“.

20. Explanation X of Rule 3(b) of the GRI reads:

“For the purposes of this Rule, the term “goods put up in sets for retail sale” shall be taken to mean goods which:

(a) consist of at least two different articles which are, prima facie, classifiable in different headings.

(b) consist of products or articles put up together to meet a particular need or carry out a specific activity; and

(c) are put up in a manner suitable for sale directly to users without repacking (eg. in boxes or cases or on boards).”

21. Therefore, in view of the above, ‘telephone sets’ can be considered as ‘goods put up in sets for retail sale’ under Rule 3(b) of the GRI.

22. Further, Rule 3(b) states that goods put up in sets for retail sale shall be classified as if they consist of the material or component which gives them their essential character. In the present case, the essential character of mobile set is the mobile phone and not the charger. Thus, the classification based on components mentioned above would apply and as per the essential character, the retail set containing of a mobile phone and a mobile charger shall be classifiable as ‘mobile phones’ under heading 8517.

23. In BSNL v. Union of India¹⁷, relied upon by the assessees, it has held that:

“50. What are the “goods” in a sales transaction, therefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject-matter of sale or purchase. The court would have to arrive at the conclusion  as to what the parties had intended when they entered into a  particular transaction of  sale, being the subject matter of sale or purchase. In arriving at a conclusion the court would have to approach the matter from the point of view of a reasonable person of average intelligence.”

(Emphasis Supplied)

24. The Assessees’ have rightly canvassed the application of Dominant Intention Test. There can be no doubt that the main intention of a purchaser/seller while buying/selling a ‘Mobile Set’ is to buy/sell the mobile phone and not charger alone. Supply of charger, headset, and ejection pin are incidental to the sale. Therefore, the Dominant Intention Test would apply to the present case and hence, charger cannot be differently taxed.

25. Section 4 of the KVAT Act reads as follows:

“4. Liability to tax and rates thereof.-

(1) Every dealer who is or is required to be registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover,

(a) in respect of goods mentioned in,-

(i) xxx

(ii) Third Schedule, at the rate of five per cent, and

(iii) xxx”

26. The mobile phone finds its place in III Schedule and taxable at 5% and therefore, the charger which is also sold along with mobile phone in ‘one set’ is together chargable at 5%. This view is in consonance with the law laid down by the Apex Court in CIT Vs. B.C. Srinivasa Setty¹⁸, wherein it is held that the charging section and the computation provisions constitute an integrated code and if these two requirements are not jointly present, no tax can be levied or sought to be recovered. The relevant portion of the judgment reads

“10. …A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income Tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the  charging section and the computation provisions together constitute an integrated code. When there is  a case to  which the computation provisions cannot apply at all, it is  evident that such a case was not intended to fall within  the charging section…”

(Emphasis Supplied)

27. 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.

28. In view of the above discussion, we are of the considered view that 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%.

29. Resultantly, this revision petition fails. Hence, the following:

ORDER

(a) These revision petitions are dismissed.

(b) The substantial question of law is answered in favour of the Assessee and against the Revenue.

No Costs.