Dismissed

The State of Karnataka v. M/S Bharath Electronics Limited

Karnataka HC2 Dec 2022STRP/102/2018

Case brief

AI extract

What is this about?

The High Court dismissed the Revenue's Stray Reference regarding classification of Electronic Voting Machines (EVMs) under the Karnataka VAT Act. The Court held that since Central Excise Authorities classified EVMs under tariff heading 8471 (Automatic Data Processing Machines), the VAT authorities were bound to treat them as IT products eligible for the concessional tax rate of 5.5%.

What did the court decide?

Petition dismissed; questions of law answered in favour of the assessee and against the Revenue.

The State of Karnataka Vs M/S Bharath Electronics… — GST and Indirect Tax | Karnataka HC (2022)

¶1

STRP No.102/2018

¶2

¶3

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

¶4

DATED THIS THE 2^ND DAY OF DECEMBER, 2022

¶5

PRESENT

¶6

THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR

¶7

AND

¶8

THE HON’BLE MR. JUSTICE UMESH M. ADIGA

¶9

S.T.R.P No.102 OF 2018

¶10

BETWEEN :

¶11

THE STATE OF KARNATAKA REPRESENTED BY THE SECRETARY FINANCE DEPARTMENT VIDHANA SOUDHA

¶12

BENGALURU-560 001 ... PETITIONER

¶13

(BY SHRI. DHYAN CHINNAPPA, AAG A/W SHRI. JEEVAN J. NEERALAGI, AGA)

¶14

AND :

¶15

M/S. BHARATH ELECTRONICS LIMITED JALAHALLI POST, JALAHALLI, BENGALURU-560 013 ... RESPONDENT

¶16

(BY SHRI. G. SHIVADASS, SENIOR ADVOCATE A/W SHRI. SYED M. PEERAN, ADVOCATE)

¶17

THIS STRP IS FILED UNDER SECTION 65(1) OF KARNATAKA VALUE ADDED TAX ACT, 2003 AGAINST THE JUDGMENT AND ORDER DATED 22.09.2017 PASSED IN STA NUMBERS 749 AND 750/0016 ON THE FILE OF THE KARNATAKA APPELLATE TRIBUNAL AT BANGALORE, PARTLY ALLOWING THE APPEALS AND FILED AGAINST THE ORDER DATED 27.08.2016 PASSED IN VAT-AP NO.209/ 15-16 AND CST AP NO.133/15-16 ON THE FILE OF THE JOINT COMMISSIONER OF COMMERCIAL TAXES (APPEALS-6),

¶18

¶19

STRP No.102/2018

¶20

BANGALORE, DISMISSING THE APPEALS FILED AGAINST THE REASSESSEMENT ORDER DATED 25.02.2016 IN NO.DCCT/AUDIT-6.3/ RE-ASST/15-16 PASSED BY THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES (AUDIT)6.3, DVO-6, BANGALORE-58 FOR THE TAX PERIODS OF APRIL 2014 TO MARCH 2015.

¶21

THIS STRP, HAVING BEEN HEARD AND RESERVED FOR ORDERS ON 01.09.2022, COMING ON FOR PRONOUNCEMENT OF ORDERS THIS DAY, P.S. DINESH KUMAR J. , PRONOUNCED THE FOLLOWING:-

¶22

ORDER

¶23

This petition by the Revenue directed against the order dated September 22, 2017 in STA Nos.749 & 750/2016 passed by the KAT¹ has been admitted to consider four questions of law. Shri. Dhyan Cihinnappa, learned AAG submitted that the Revenue is concerned only with the clarification of EVM machines in this appeal. After hearing learned AAG and Shri. Shivdass, learned Senior Advocate, in our view, following two questions arise for consideration:

¶24

1) Whether the Tribunal has erred in failing to follow the binding judgment of the Hon’ble Supreme Court in the case of the Commissioner

¶25

1 Karnataka Appellate Tribunal

¶26

STRP No.102/2018

¶27

¶28

of Customs /Vs/ N.I. Systems India Pvt. Ltd., which clearly holds that a commodity is ought to be classified as per its functionality and cannot be classified as an automatic data processing machine merely because the said commodity may contain an automated data processing machine?

¶29

2) Whether the Tribunal has erred in disregarding the functionality of the goods in question, while holding that Electronic Voting Machines and other commodities are classifiable as notified in products machines and thereby eligible to be taxed at the concessional rate of tax under Entry-53 of the III Schedule to the KVAT Act?

¶30

Brief facts of the case are, respondent - BEL² , a registered dealer under the KVAT Act³ is a Public Sector Undertaking engaged in designing, developing and manufacturing Military Radars, Electronic Warfare systems, Naval systems, Avionics, Defence Communication Equipment, Solar products, Electronic Voting Machines (EVM) etc.

¶31

2 Bharat Electronics Ltd.,

¶32

3 Karnataka Value Added Tax, 2003

¶33

STRP No.102/2018

¶34

¶35

The Deputy Commissioner of Commercial

¶36

Taxes(Audit), the Assessing Authority, concluded the re-assessment vide order dated February 25, 2016 under the KVAT Act⁴ and under Section 9(2) of the CST Act⁵ read with Section 36 & 72(2) of the

¶37

KVAT Act in respect of local and Interstate sales turnover of assessee's products sold to various entities including Election Commission of India and Controller of Defence Accounts. The Assessing Officer held that the commodities are taxable at 14.5% under the KVAT Act and not at 5.5%.

¶38

Respondent/assessee had classified

¶39

several goods under relevant entries of the Notifications⁶ issued by the State Government under the KVAT Act and discharged VAT at 5.5%.

¶40

In respect of 52 items, Assessing Officer rejected the classification claimed by the assessee and held

¶41

4 Karnataka Value Added Tax Act, 2003

¶42

5 Central Sales Tax Act, 1956

¶43

6 page 26 red marked portion

¶44

STRP No.102/2018

¶45

¶46

that they are taxable at 14.5% under General Entry in terms of Section 4(1)(b) of the KVAT Act and imposed tax, interest and penalty. The Assessment Order was rectified on March 22, 2016 under Section 69 of the KVAT Act and the additional tax levied was corrected as Rs.3,73,89,773/-, interest as Rs.52,37,177/- and penalty as Rs.37,38,977/-. Accordingly demands were raised. Assessee challenged the said orders before the First Appellate Authority, the Joint Commissioner of Commercial Taxes and the said appeals⁷ stood dismissed.

¶47

On further appeal, by the impugned order, the KAT has partly allowed the appeal and set-aside the rate of tax at 14.5% applied by the Assessing Authority and determined the rate of tax of the goods dealt under CST and KVAT Act as taxable at 5.5% except in respect of the goods mentioned at Sl. Nos.22-27, 36-38, 41 and A-E of 7 VAT Ap.No.209/15-16 and CST Ap. No.133/15-16

¶48

dated 27.08.2016

¶49

STRP No.102/2018

¶50

¶51

the table mentioned in the order. In respect of those items, the KAT has directed the AO to decide the rate of tax after examining the description of the item with reference to the Notifications issued under the KVAT Act for the purpose of entry 53 of Schedule III to the Act after providing opportunity to the assessee. Hence, this appeal.

¶52

Assailing the impugned common order, Shri. Dhyan Chinnappa, learned Additional Advocate General urged following two contentions:

¶53

the assessee has claimed concessional rate of tax in respect of EVMs on the ground that the item is classifiable as Atomatic Data Processing Machines (APDMs) under entry 8471 of the Central Excise Tariff Act specified in Entry 4 of Notification No. FD 116 CSL 2006(9) dated March 31, 2006. But, the EVM is a machine to automate the election and voting process by application of technology.

¶54

STRP No.102/2018

¶55

¶56

Its primary function is to assist in registering, counting and computing the Votes. It is held in Commissioner of Customs, Bangalore Vs. NI Systems (India) Pvt. Ltd.⁸ , that merely because a system contains an ADPM the same cannot be classified as an ADPM merely because, it contains an ADPM and such interpretation would obliterate the specific functionality test under which the goods are to be classified based on the functions performed by them. Therefore, the EVMs must be regarded as data registering, data counting and displaying machines which cannot be categorized under ADPM;

¶57

the other items, viz., Radio Frequency Units, Signal Process Units etc., sold to HAL⁹ have been rightly classified and taxed at residuary

¶58

8 (2010)11 SCC 638

¶59

9 Hindustan Aeronautics Ltd.,

¶60

STRP No.102/2018

¶61

¶62

rate of 14.5% as they are not specified in any

¶63

Notification.

¶64

With the above submissions, Shri. Dhyan

¶65

Chinnappa submitted that the impugned order is unsustainable in law and prayed for allowing this appeal.

¶66

Shri. Shivdass, learned Senior Advocate

¶67

for the assessee, supporting the impugned order,

¶68

submitted that:

¶69

• the EVM Machines fall under Serial No.4 of the Notification No. FD 116 CSL 2006(9) dated March 31, 2006 and therefore, it is an IT product attracting tax at 5.5% under KVAT Act;

¶70

the EVM, once set for operation will not have any control over election process except processing and storage of data;

¶71

STRP No.102/2018

¶72

¶73

Entry 8471 does not contain a condition that only the machines which run without any software are classifiable as ADPM;

¶74

EVMs are not used by a common man on an every day basis. Therefore, popular meaning or understanding is of less reference and what is relevant is the technical and scientific meaning.

¶75

With these main submissions, he prayed for dismissing the petition.

¶76

We have carefully considered rival

¶77

contentions and perused the records.

¶78

In substance, Revenue's case is that EVMs do not fall under CTH-8471 dealing with

¶79

Automatic Data Processing Machines because, the Control Unit is incapable of processing digital data unless specific software is written for such processing and Control units but have specialized

¶80

STRP No.102/2018

¶81

¶82

structure and specific functions to perform. Therefore, an EVM cannot be classified under CTH-8471.

¶83

Assessee's case is, it has been clearing the product namely the Display-cum-Processing Cabinets by classifying them under CTH-8471 and the same has never been disputed by the Excise Authorities.

¶84

The relevant tariff item under the Central

¶85

Excise Tariff Act reads as follows:

¶86

*Tariff Item*	*Descrip*	*tion of goods*
8471	Automatic machines a magnetic o machines data onto coded form processing elsewhere _included. _	data processing nd units thereof; r optical readers, for transcribing data media in and machines for such data, not specified or
847190 00	_-Other _

¶87

STRP No.102/2018

¶88

¶89

The KAT has recorded that the relevant

¶90

portion in the Notification at Sl. No.4 reads as

¶91

follows:

¶92

*Sl.* *No.*	*Heading and* *sub-heading* *No.*	*Description*
4	8471	Automatic data processing machines and units thereof; magnetic or optical readers, machines for transcribing data onto data media in coded form and machines for processing such data

¶93

In Chapter 85 an ADPM is described as

¶94

under:

¶95

"Note 5 of Chapter 85 defines the expression "automatic data processing machine" as under:

¶96

" 5(A) For the purpose of heading 8471 expression "automatic data processing machine" means a machine capable of :

¶97

(i) storing the processing programme or programmes and at least the data immediately necessary for the execution of the programme;

¶98

(ii) being freely programmed in accordance with the requirements of the user;

¶99

(iii) performing arithmetical computations specified by the user; and

¶100

STRP No.102/2018

¶101

¶102

(iv) executing, without human intervention, a processing programme which requires them to modify their execution, by logical decision during the processing run. (Emphasis Supplied)"

¶103

The KAT has rightly recorded in para K12

¶104

that an ADPM is a machine capable of storing the processing programs or the data necessary for execution of program being freely programmed in accordance with the requirements of the user, performing user specified Arithmetical computations and executing without human intervention. It has further held that the Display cum Processing cabinet is intended to integrate display processing and signal processing functions of a sonar system. The mother Board and the data cards are housed in an enclosure used to process the active and passive digital signals. The display-cum processing cabinet aids the operator to detect, track and classify the target by processing the data received.

¶105

STRP No.102/2018

¶106

¶107

The description of goods in Tariff item

¶108

No.8471, contained in the Central Excise Tariff Act and the one contained in the Notification are identical. The Central Excise Authority has accepted clearance of AVMs under 8471 90 00.

¶109

It is settled that if an item is cleared

¶110

under a particular tariff, by the Central Excise Authority, the same is not disputable by the VAT Authorities. In Samsung India Electronics Pvt. Ltd., V/s. State of Gujurat¹⁰ , relied upon by Shri.Shivdass, it is held that a Computer which contains additional function of calling feature and its principal function is that of Automatic Data Processing Machine does not cease to be an IT product. It is further held that the excise classification is binding on the VAT authorities.

¶111

10 2020(2) TMI 1247

¶112

STRP No.102/2018

¶113

¶114

Thus, it is not in dispute that EVM

¶115

Machines are classified under 8471 and ADPM is described at Sl. No.4 in the Notification. It is also not in dispute that assessee has been clearing the EVMs under tariff item 8471.

¶116

The Gujrat High Court in Samsung India has held that the VAT authorities are bound by the classification accepted by the Central Excise Authorities. We respectfully agree with the said view.

¶117

We have carefully perused the

¶118

Notification FD 116 CSL 2006(9) dated March 31, 2006 and it reads as follows:

¶119

"In exercise of the powers conferred by clause (a) of sub-section (1) of section 4 read with entry 53 of the Third Schedule to the Karnataka Value Added Tax Act, 2003 (Karnataka Act 32 of 2004) and in supersession of Notification No.FD 197 CSL 2005(7), dated 30^th April, 2005, the Government of Karnataka hereby specifies with effect from the first day of April, 2006, the goods specified in column (3) of the table below with heading and sub-

¶120

STRP No.102/2018

¶121

¶122

heading numbers under the Central Excise Tariff Act, 1985 (Central Act 5 of 1986), as IT (Information Technology) products, namely:-"

¶123

Thus, the Notification makes it clear that the goods specified under respective headings and sub-headings in the Central Excise Tariff Act, 1985 as IT Products. Admittedly, Central Excise has accepted clearance of EV Machines under Tariff Head 8471. Therefore, the principal contention of Revenue that an EVM does not process anything, is untenable because, the KVAT Authority is bound by the classification accepted by the Central Excise Authority.

¶124