Chargers Sold with Cell Phones cannot be Taxed Separately Under UP VAT Act: Supreme Court [Read Judgment]

The Supreme Court, in a recent judgment upheld the decision of the Allahabad High Court, which observed that the charger sold with a cell phone under the MRP cannot be taxed separately under the UP VAT Act 2008.

The division bench of Justice BV Nagarathna and Justice SC Sharma was considering a challenge to the Allahabad High Court's ruling that a mobile charger included in a cell phone's composite package could not be subject to separate taxation under Entry 28 Part B Schedule II of the U.P. VAT Act 2008. Cell phones and their components are included in the Entry States (List of IT Products Taxed at 5%), with the exception of cell phones with MRPs greater than ten thousand rupees.

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The conflict started when the Uttar Pradesh tax authority tried to tax mobile chargers separately at 14% as unclassified goods, even though they were packaged with cell phones.  The government cited the State of Punjab vs. Nokia India Pvt Ltd decision from the Supreme Court, which categorized chargers as accessories rather than necessary parts of cell phones.

In State of Punjab Vs. Nokia India Pvt Ltd, the Supreme Court held that merely by packaging the mobile phone and its charger together would not make them composite goods. Notably, this observation was made in regard to provisions of Rule 3(b) of the General Rules for Interpretation of the harmonized system.

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The High Court noted that the Supreme Court had neither advocated nor taken into consideration the argument that the sale of a mobile phone and its charger in a single retail package constituted a composite contract and necessitated the application of the prevailing intention test.

In this case, the Court under Sales/Traderevision jurisdiction was considering a challenge to a Tribunal order dated January 12, 2017, which upheld the assessing authority's conclusion that, despite being sold as part of a composite package, the charger was not subject to the 5% tax rate contemplated under Entry-28 appearing in Part-B of Schedule-II. Instead, it was considered an accessory and would be subject to 14% taxation as an unclassified item.

The High Court made a distinction between the Nokia case and the current one. In the former, the Apex Court was asked to decide whether the charger was a composite component of the phone, and the Court determined that it was an accessory.

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 But in this particular instance, the problem is somewhat different.  According to the Court, the argument that is currently being made is that "the sale of the mobile phone along with its charger in a single retail package constitutes a composite contract and requires the application of the dominant intention test was neither urged nor considered by the Supreme Court."

It further noted that Entry No. 28 of Schedule II, Part B clearly states that the MRP indicated on the mobile phone box with the charger serves as the exclusive basis for taxation.  'Disjunctively' does not imply that the Charger is a separately taxed item.

To Read the full text of the Order CLICK HERE

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