Penalty on re-seller unsustainable as classification done by importer adopted by re-seller

Professional Copier Services India (Pvt) Ltd Vs State of Kerala (Kerala High Court)

Kerala High Court held that as importer-seller classified the HSN 8443 3100, the purchaser/re-seller cannot be said to have wilfully classified the machines under a wrong head with the intention to evade payment of correct/higher rate of tax. Hence, penalty unsustainable.

Facts- The petitioners are companies engaged in the business of sales of IT products. The petitioner had purchased two models of machines, ‘TaskAlfa 180’ and ‘TaskAlfa 220’ from the importer-seller – M/s. Kyocera Mita India Pvt. Ltd. These machines were classified under Entry 69 of the Third Schedule to the Kerala Value Added Tax Act, 2003.

The importer-seller classified the machines as ‘Digital Multifunctional Device’ with HSN Code 8443 3100 under the provisions of the Customs Act, 1962, and the Customs Tariff Act, 1975. The petitioners/ purchasers – re-sellers followed the same classification adopted by the importer-seller while re-selling the machines to their customers. The petitioners classified the machines under Entry 69(22)(c)(i) falling under the Third Schedule to the KVAT Act. The products under Entry 69(22)(c)(i) attract 5% VAT. The Intelligence Officer instituted penalty proceedings u/s. 67 of the KVAT Act for the years 2011–12, 2012–13, and 2013–14, on the premise that there was a wilful misclassification of the machines sold by the petitioners. The intelligence officer was of the view that the machines sold by the petitioners would come under serial No. 30 in the ‘list of goods taxable at 12.5%, 13.5%, and 14.5%, as opposed to the classification of the petitioners under Entry 69(22)(c)(i) falling under the Third Schedule to the KVAT Act. The intelligence officer passed the penalty orders for three years separately affirming the imposition of the penalty proposed in the show cause notices issued to the petitioners. These penalty orders are challenged vide the writ petition.

Conclusion- Held that in the present cases, when the importer- seller had classified the said machines as ‘Digital Multifunctional Devices’ with HSN Code 8443 3100 under the provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975 at the time of import and the said HSN Code is identical to Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act, the petitioners cannot be said to have wilfully classified the machines under a wrong head with the intention to evade payment of correct/higher rate of tax at 13.5%. The penalty proceedings has to be initiated when there is wilful or contumacious act on the part of the assessee to evade payment of correct tax. The petitioners had reason to adopt the said classification as ‘Digital Multifunctional Devices’, as they being re-sellers could not have classified the machines to a different classification.

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