17 November 2015

Valuation of composite goods under VAT laws

by Aayush Singla

In the case of State of Punjab v. Nokia India Pvt Ltd (2014-VIL-23-SC), the Supreme Court held that battery charger of a cell phone is not a composite part of the cell phone but only an accessory and is an independent product. Hence, battery chargers sold along with cell phones were held to be assessable at the rate of 12.5% (Schedule ‘F’ of Punjab Value Added Tax Act, 2005)  and not at concessional rate of  4%  (Entry No.60 of Schedule ‘B’ of Punjab Value Added Tax Act, 2005) as paid by the appellant-manufacturer   on the composite package of cell phone consisting of a cell phone and a battery charger.

The assessing authority had held that the battery charger being a separate item was liable to be taxed at general rate i.e. 12.5% and not at concessional rate applicable to the cell phones irrespective of the fact whether charger is sold in a composite package along with a cellphone or it is sold separately.


Taxpayer’s contention

The product was being sold as mobile/cellular phone under a single solo pack unit and was covered under Entry No.60 of Schedule ‘B’ of Punjab Value Added Tax Act, 2005 and no separate amount for battery charger was being claimed from the customers, and that the only amount charged was for handsets. Charger is an integral part of the cell phone and the cell phone cannot be operated without the charger.


Contention of the department

The battery chargers are not covered under Entry 60(6)(g) in Schedule ‘B’ of the Punjab VAT Act, 2005 and was thus liable to be taxed at the rate of 12.5% on its value under Schedule ‘F’ of the Act which covers all residuary items not falling in any of the classifications of other Schedules of the Act. According to the department battery charger is not a part of the mobile/cell phone since cell phone can be operated without using the battery charger and battery in the cell phone can be charged directly from the other means also, like laptop, without employing the battery charger. The department was of the view that merely, making a composite package of cell phone and a charger does not make it composite goods for the purpose of interpretation of the provisions.


Tribunal’s order

The VAT Tribunal by its order dated 11th February, 2010 dismissed the appeals of taxpayer, inter alia, observing that the battery charger is not a part of the cell phone and that the charger shall be liable to tax at the rate of 12.5% always and shall not be classified with cell phone.


High Court’s order

The Punjab & Haryana High Court by its order dated 17-11-2010 allowed the appeals holding that the battery charger is a part of the composite package of cell phone and hence concessional rate of tax shall be applicable when sold along with cell phone. The High Court, held that  “……….on the other hand, in the present case, the battery charger is sold as composite package along with cell phone. Compared to the value of the cell phone, value of the charger is insignificant. Cell phone cannot be used without the charger. On these undisputed facts, the charger cannot be excluded from the Entry for concessional rate of tax which applies to cell phones and parts thereof.”


Supreme Court’s judgement

The Supreme Court set aside the order of the High Court and affirmed the order passed by VAT Tribunal. The Supreme Court, in para 19 of the order dated 17 December 2014, concluded that:

“…….we find that the Assessing Authority, Appellate Authority and the Tribunal rightly held that the mobile/cell phone charger is an accessory to cell phone and is not a part of the cell phone. We further hold that the battery charger cannot be held to be a composite part of the cell phone but is an independent product which can be sold separately, without selling the cell phone. The High Court failed to appreciate the aforesaid fact and wrongly held that the battery charger is a part of the cell phone.” 


Issues arising out of the judgement

Stock in hand cannot be sold over and above MRP already printed on the cell phone package. Current MRP does not include VAT as governed by the principles emerging out of this judgement. Therefore the burden of differential rate of tax (in this case 12.5% less 4% = 8.5%) on value of charger on stock in hand is on the manufacturer/seller. Hence manufacturer is bearing the burden of indirect tax which should have been borne by the customer.
If manufacturer/dealer have to charge separate rate of VAT on value of charger then they have to issue a bill containing 2 items (cell phone and a charger) with different rates of VAT. But there will be issues related to bifurcation of total amount charged for composite sale into value of charger and cell phone. For example: If the cost of manufacturing a charger is Rs.100 and it is being sold to end customer separately as an accessory for Rs.500 (since accessories have higher profit margins when sold separately). Now, when this charger is packed along with cell phone and entire package is being sold for Rs.10,000 then there will be dispute whether rate of VAT on chargers is to be charged on Rs.100+Notional profit or Rs.500. State governments might start raising demands on past sales made by the manufacturers/dealers.

An example has been set by Karnataka State government where the state government has changed the rate of VAT on “mobile phone chargers when sold along with mobile phones in sealed pack of otherwise” and has made it equal to the VAT rate on mobile phones thereby resolving the entire issue which has been welcomed by the industry. Same can be followed by other states also.

Other industries which provide composite goods or provide complimentary/add-on products like cameras, laptops being sold with carry case and charger might also face issue in valuation consequent to this judgement. Change in packaging of goods and change in billing system (separate rates on each item of accessory sold) may have to be adopted by the industry which can cause operational difficulties for the manufacturer/dealer. It may not be possible to charge different rates on all the accessories or change the packaging in the case of products for which composite sales are made.
[The author is an Associate,  Lakshmikumaran & Sridharan, Delhi]

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