Re-Sellers Of Machine Adopted Same Classification As Seller: Kerala High Court Quashes Penalty Under KVAT Act

The Kerala High Court has quashed the penalty under the Kerala Value Added Tax (KVAT) Act and held that re-sellers of machines have not wilfully classified machines under the wrong head and have adopted the same classification as the seller.

The bench of Justice Dinesh Kumar Singh has observed that penalty proceedings have to be initiated when there is a willful or contumacious act on the part of the assessee to evade payment of the correct tax. The petitioners had reason to adopt the classification as 'Digital Multifunctional Devices', as they being re-sellers could not have classified the machines to a different classification.

The petitioner or assessee is in the business of selling IT products. The petitioner had purchased two models of machines, 'TaskAlfa 180' and 'TaskAlfa 220' from the importer-seller. The 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, and 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 under Section 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.

The petitioner has challenged the penalty orders issued against it.

The assessee contended that there is a mandatory requirement of'satisfaction' of the assessing authority regarding the assessee submitting an untrue or incorrect return, and this is an essential ingredient to attract penalty proceedings under Section 67(1) of the KVAT Act. In these cases, the mandatory element of'satisfaction' is missing, as the petitioners have adopted the same classification as the importer-seller.

The assessee contended 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 a higher rate of tax. He further submitted that no penalty proceedings could be initiated when there was a dispute over the classification of the goods. The petitioners bona fide classified the machines under Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act, corresponding to HSN Code 8443 3100. The conduct of the petitioners classifying the machines under Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act cannot be said to be contumacious conduct or wilful intend to attract penalty proceedings under Section 67 of the KVAT Act.

The assessee urged that there cannot be two different classifications at the end of the seller and at the end of the purchaser. The petitioners, being the re-sellers of the machines purchased from the importer-seller, could not have adopted a different classification.

The department contended that the machines did not have more than one function, viz., 'printing' and 'copying'. The petitioners were fully aware of the nature of the machines sold to their customers, which would perform only a single function of copying. The petitioners made a false claim under Entry 69(22)(c)(i) of the Third Schedule to the KVAT Act to evade payment of a higher rate of tax. Therefore, they intentionally classified the machines in their returns under the wrong head to evade a higher rate of tax, and the returns would be untrue and incorrect. Therefore, the penalty proceedings under Section 67(1) of the KVAT Act initiated and completed against the petitioners do not require any interference by this Court in the exercise of its jurisdiction under Article 226 of the Constitution of India.

The court has held that when the importer-seller classified the 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 the wrong head with the intention to evade payment of the correct or higher rate of tax at 13.5%.

Counsel For Petitioner: M. Gopikrishnan Nambiar

Counsel For Respondent: A. Muhamed Rafiq

Citation: 2024 LiveLaw (Ker) 40

Case Title: M/S. Professional Copier Services India (Pvt) Ltd Versus State Of Kerala

Case No.: WP(C) NO. 23630 OF 2016

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