The Kerala High Court has nullified penalties imposed under the Kerala Value Added Tax ( KVAT ) Act, asserting that resellers of machines did not deliberately misclassify them but adhered to the same classification as the original seller.
The petitioners are Companies engaged in the business of sales of IT products.
The petitioners sought to call for the records leading to Exhibits P7, P8 & P9 orders issued by the 3rd respondent and quash the same by the issuance of a writ of certiorari or such other writ, order or direction and declare that the “Multi-Function Printer” traded by the petitioner, falls under Entry 69(22)(c)(i) of the 3rd Schedule to the KVAT Act, 2003, attracting tax atexm 4% or 5% as applicable in the respective year.
The petitioner in WP(C) No.22343/2015 had purchased two models of machines, ‘TaskAlfa 180’ and ‘TaskAlfa 220’ (hereinafter referred to as “machines” for short) from the importer-seller – M/s.Kyocera Mita India Pvt. Ltd., Ernakulam, presently Kyocera Documents Solutions India Pvt.Ltd., Ernakulam, which is the petitioner in WP(C) Nos.31955, 32003 & 31902 of 2015.
In the case of the petitioner in WP(C) No.23630/2016, the machine, ‘TaskAlfa 180’, was purchased from the very same importer-seller during the said period. 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 Customs Tariff Act, 1975. The petitioners/purchasers – re-sellers followed the same classification adopted by the importer seller while reselling 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 under Section 67 of the KVAT Act for the years 2011-12, 2012-13 and 2013-14, on the premise that there was wilful misclassification of the machines sold by the petitioners.
The bench remarked that, “This Court would have relegated the petitioners to the alternate remedy of appeal under the provisions of the KVAT Act. However, considering the fact that, earlier, this Court had entertained WP(C) No.33728/2014(M) filed by the petitioner in WP(C) No.22343/2015 and remanded the matter back to the intelligence officer for reconsideration, and that these writ petitions have been admitted long back and pleadings are complete and, therefore, at this stage, relegating the petitioners to the alternate statutory remedy of appeal would not be justified in the facts and circumstances of these cases.”
Rajakannan, counsel for the petitioners, submitted that there is a mandatory requirement of ‘satisfaction’ of the assessing authority, inter alia, regarding the assessee submitting untrue or incorrect return and this is an essential ingredient to attract the penalty proceedings under Section 67(1) of the KVAT Act.
It is also submitted that the KVAT Act had adopted the same commodity classification and HSN Code, which are in the Customs Tariff Act. It cannot be said that the petitioners had wilfully misclassified the machines and there was an element of mens rea to evade tax or higher rate of
tax. He further submitted that no penalty proceedings could be initiated when there was dispute of classification of the goods.
Mohammed Rafiq, learned Special Government Pleader (Taxes), submitted that the machines did not have more than one functions, viz. ‘printing’ and ‘copying’. The goods/products are covered under Entry 30 of the list of goods taxable at 13.5% as published in SRO 88/2006.
It was added that, Misclassification of ‘single function machine’ as ‘multi function device’ was contrary to the manufacturing Company’s own product specification in the brochure and the ‘Operation Guide’ supplied along with the products for claiming tax at concessional rate, and this itself would amount to contumacious intention of the petitioners to evade higher rate of tax.
The Single Bench of Justice Dinesh Kumar Singh observed that, “It is not in dispute that the Customs authorities had accepted classification of the machines under HSN Code 8443 3100 under the head ‘Digital Multifunctional Device’ under the provisions of the Customs Act and the Customs Tariff Act, which is corresponding to Entry 69(22) (c)(i) of the Third Schedule to the KVAT Act.”
It was also noted that, “The importer-seller itself had classified the said products under Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act with HSN Code 8443 3100 under the Customs Act and the Customs Tariff Act. When the importer-seller had classified its machine under HSN Code 8443 3100, which falls under Chapter 84 of the Customs Tariff Act corresponding to Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act, the petitioners herein being re-sellers of the machines purchased from the importer-seller could not adopt a different classification”, referring to the Supreme Court decision in Sarvesh Refractories (P) Limited v. Commissioner of Central Excise and Customs.
The department argued that the machines in question were limited to the functions of ‘printing’ and ‘copying’. The petitioners were well-informed about the machines they sold, specifically designed for a singular function – copying. To avoid a higher tax rate, the petitioners falsely claimed under Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act. They deliberately misclassified the machines in their returns to evade higher tax rates, rendering the returns inaccurate. Consequently, penalty proceedings under Section 67(1) of the KVAT Act were initiated and concluded against the petitioners. The court, exercising its jurisdiction under Article 226 of the Constitution of India, asserted that there is no need for intervention as the penalty was rightfully imposed.
The court’s decision highlighted that the importer-seller had classified the machines as ‘Digital Multifunctional Devices’ with HSN Code 8443 3100 during import, adhering to the Customs Act, 1962, and the Customs Tariff Act, 1975.
This HSN Code corresponds precisely to Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act. Therefore, the court concluded that the petitioners cannot be accused of intentionally misclassifying the machines to evade the accurate or higher tax rate of 13.5%.
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