IN THE HIGH COURT OF KARNATAKA AT BANGALORE PRESENT THE HON BLE MR JUSTICE N. KUMAR AND THE HON BLE MR JUSTICE B. MANOHAR

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1 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 18 th DAY OF JUNE 2014 PRESENT THE HON BLE MR JUSTICE N. KUMAR AND THE HON BLE MR JUSTICE B. MANOHAR STRP NO.18/2010 & STRP.NOS /2010 BETWEEN: M/S. INTEL TECHNOLOGY (INDIA) PVT. LTD., SY.NO.23-56P, DEVARABEESANA HALLI VILLAGE OUTER RING ROAD, VARTHUR HOBLI BANGALORE SOUTH TALUK PETITIONER (BY SRI.HARISH.R. & SRI.SYED PEERAN, ADVS.) AND: THE STATE OF KARNATAKA REPRESENTED BY THE COMMISSIONER OF COMMERCIAL TAXES, GANDHINAGAR BANGALORE.... RESPONDENT (BY SMT.SUJATHA, AGA.) THESE STRPs ARE FILED UNDER SECTION 65(1) OF KVAT ACT, AGAINST THE JUDGMENT AND ORDER DATED PASSED IN STA NOS.45 TO 65/2008 ON THE FILE OF THE KARNATAKA APPELLATE TRIBUNAL AT BENGALORE, PARTLY ALLOWING THE APPEALS. THESE STRPs COMING ON FOR HEARING THIS DAY, KUMAR, J., MADE THE FOLLOWING:

2 2 O R D E R These revision petitions preferred by the assessee challenging the order passed by the Tribunal holding that the Xerox machines, office stationary, air conditioners, building equipments, security system for building do not qualify for the benefit of input tax rebate. 2. The assessee is engaged in a business of development of software and is a 100% export oriented unit (for short EOU ). They undertake the activity of research, development and export of computer software. The petitioners have been importing capital goods, consumables, spares, etc., for development of software duty-free availing the benefit of Notification No.140/91-Cus dated under the EOU/STPI scheme. They are also procuring the said items indigenously as per the permission granted by the manufacture sanction order of the Deputy Commissioner of Customs. The petitioners after manufacturing the software products,

3 3 with the help of raw materials, export such software products outside India. Monthly returns are filed by the petitioners since April 2005 in Form VAT 100. As their sales are made in the course of export of goods out of the territory of India, the output tax payable every month under the Act is nil. Therefore, they are claiming in their monthly VAT returns, the refund of the input tax paid by them on various goods purchased within the State for the use in the course of export business. The Deputy Commissioner of Commercial Taxes visited the petitioners business premises on for auditing the books of accounts. For the period starting from April 2005 to March 2006, he allowed only a partial amount out of the input tax rebate claimed. The claims regarding, (a) pen drive/ USB drive; (b) Hard disk/ DVD Writer; (c) Video cable/head phone/adaptor; (d) software/serial card port/key boards; (e) CPU/mother board/cd Rom drives and (f) LCD monitors/memory/amplifier adaptor, were allowed. The reassessment notice was

4 4 further revised by issue of notice dated under Section 39(1) of the KVAT Act, The reply was sent by the assessee. However, an order came to be passed holding that the petitioner has overstated the input tax credit for the month of April with regard to mobile phones and chairs. Aggrieved by the said order, an appeal was preferred to the Joint Commissioner of Commercial Taxes. The Joint Commissioner of Commercial Taxes, granted the benefit of input tax on credit in respect of 16 goods set out at para 13 of its order. However, he did not grant the said benefit in respect of Xerox machines, office stationery, air conditioners, building materials, security systems for building, work stations and works contract tax on AMC. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal partly allowed the appeal by allowing the claim of input credit rebate on purchase of work stations and confirmed the orders of the authorities below insofar as the input credit rebate of

5 5 Xerox machines, office purchases, stationery, air conditioners, building materials, security systems for building. It is against this order, the assessee has preferred the appeal. In fact, the revenue has also preferred an appeal challenging the basis for allowing the input tax rebate on work stations. 3. The learned counsel for the assessee assailing the impugned order, contended that though Section 11 of the Act puts tax restriction in respect of the case mentioned in clause (a) of Section 11, Section 12 of the Act allows deduction of input tax in respect of purchase of capital goods which are used in the business of sale of any goods in the course of export out of the territory of India. As the assessee is in the business of export of goods, notwithstanding the restriction under Section 4 of the Act, the assessee is entitled to input tax rebate in respect of capital goods which they have purchased for the purpose of use in the absence of sale of goods in the course of export.

6 6 4. Per contra, the learned counsel appearing for the revenue contended that what is capital goods has been defined under the Act and the goods in respect of which assessee is claiming input tax rebate do not fall within the definition of capital goods and therefore the authorities have rightly declined to grant the rebate and the said order do not call for interference. 5. Section 11 of the Act provides that input tax shall not be deducted in collecting the net tax payable in respect of the goods which are mentioned in the said section for which the assessee has paid tax, in particular, the goods mentioned in Fifth Schedule. However, Section 12 of the Act is in the nature of an exception to Section 11. According to the said Section, if the goods purchased by the assessee are capital goods and it is used in its business of sale of any goods in the course of export out of territory of India, then notwithstanding the fact that the said goods fall in Fifth Schedule to the Act, the assessee is

7 7 entitled to the benefit of tax repaid notwithstanding Section 11 of the Act. Therefore, it is necessary to find out what the capital goods are and how it has been defined under the Act. as under: 6. Section 12 deals with capital goods. It reads 12. Deduction of input tax in respect of Capital goods.- (1) Deduction of input tax shall be allowed to the registered dealer in respect of the purchase of capital goods on or after the commencement of this Act] for use in the business of sale of any goods in the course of export out of the territory of India and in the case of any other dealer in respect of the purchase of capital goods wholly or partly for use in the business of taxable goods. (2) Deduction of input tax under this Section shall be allowed only after commencement of commercial production, or sale of taxable goods or sale of any goods in the course of export out of the territory of the India by the registered dealer and shall be

8 8 apportioned over a specified period, as may be prescribed. 7. Capital goods for the purpose of Section 12 means a plant, including cold storage and similar plant, machinery, goods vehicles, equipments, moulds, tools and jigs, and used in the course of business other than for sale. If the input tax is paid in purchasing the aforesaid capital goods, the assessee is entitled to the input tax rebate. In fact, this Court had the occasion to deal with the scope of Section 12 in the case of Suma Oil Agencies, Nagavara Main Road, Bangalore Vs. the additional Commissioner of commercial Taxes, Zone-II, Bangalore reported in 2014 (79) KLR 153 where it has been held as under: 13. Section 12 speaks about deduction of input tax in respect of capital goods which is used in the business of sale of any goods in the course of export out of the territory of India and in the case of any other dealer in respect of purchase of capital goods wholly or

9 9 partly for use in business of taxable goods. Rule 133 of the KVAT Rules provides that no deduction of input tax shall be allowed where the use of capital goods relates wholly to the sale of exempt goods. Clause (b) of the above Rule provides that where the capital goods used for sale of taxable goods wholly or partly the dealer shall be eligible for rebate on such capital goods. The cumulative reading of the above provisions make it clear that when the dealer purchased the capital goods for the purpose of his business, he is entitled for deduction of input tax under the Act. The language employed in the definition of 'Capital Goods' makes it clear that deduction of input tax shall always be allowed in respect of purchase of capital goods for the use of business wholly or partly for use in the business of taxable goods. Further reading of definition of 'input' makes it very clear that any capital goods purchased by a dealer in the course of his 19 business for re-sale or for use in the manufacture or processing or packing or storing of other goods or any other use in business.

10 10 8. In the background of this legal position, now we have to see as to, whether the goods in respect of which the tax rebate is not given falls within the definition of capital goods. Stationary and building materials cannot, by any stretch of imagination, be construed as machinery, goods vehicles, equipments, moulds, tools and jigs used in the course of business other than for sale. Therefore, denial of benefits to these goods cannot be found fault with. However, insofar as Xerox machines, air conditions, security systems for buildings are concerned, they are either machinery or equipments used in the course of business. In this regard, reliance is placed on a judgment of Andhra Pradesh High Court in the case of Replica Agencies, Hyderabad Vs. State of Andhra Pradesh reported in 2001 (6) ALD 194. The question which arose for consideration in the said judgment was, whether the Xerox machine is to be considered as duplicating machine, falling under Entry-12 of the First Schedule or to be treated as one falling under 'all

11 11 kinds of machinery' specified under Entry-83 of the First Schedule?. Therefore, there was no dispute as to whether the Xerox machine was a machine or not. But the question was whether it should be treated as duplicating machinery or machinery. Therefore, the duplicating machine i.e, Xerox machine is a machine which falls within the definition of machine. 9. Insofar as air conditions are concerned, it is also machinery which is used to keep the temperature of a manufacturing process at a particular temperature. Therefore, it is a machinery used in the course of the business of the assessee and it is also eligible for input tax rebate. Similarly, the security systems for buildings are also machinery installed in the premises of the business for production of the manufacturing and therefore, the finding recorded by the Tribunal that the development software in the computer system is the main activity and after the development it is subsequent act of copying for which Xerox machine is used. The computer itself generates

12 12 software data which in turn is transferred. It is only after taking out copies, the Xerox machine is utilized and it is not different from the main activity of the assessee that is development of software in computer system, is quite unacceptable. From the very description, it is clear that to constitute capital goods what is required is that such machinery should be used in the course of business and the word business is also defined under Section 2(6) of KVAT Act as under: 2(6) Business includes:- (a) any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues therefrom; and (b) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern.

13 13 In view of clause (b) of sub-section (6) of Section 2 of the KVAT Act, any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture adventure or concerned falls within the definition of business and as such the machinery is used in the course of business the assessee is entitled to the input tax rebate. The appellate Tribunal has not looked into this statutory provision before arriving by such conclusion and therefore, it is not sustainable. 10. Similarly, the findings of the Tribunal that there is no requirement that a particular temperature alone is essential for software development, the air conditioner makes the atmosphere good and increases the comforts, but they are not directly connected with the software activity, are concerned, in view of the reasons set out above, while considering the meaning of the word business, it is not necessary that there should be a direct nexus between the machinery and

14 14 the activity that is carried on. Any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture adventure or concern, is sufficient to bring it within the word business and therefore, when Air conditioner is used by the assessee in the course of his business, it falls within the definition of capital goods. In view of Section 12 of the Act, the assessee is entitled to benefit of input tax rebate. For the very same reasons, the security systems for building where business is carried on is also eligible for tax rebate. In that view of the matter, the order of the Tribunal to that extent requires to be interfered with and accordingly, the said findings are set aside. 11. In view of our findings recorded in the connected matters, we do not find any merits in the petitions filed by the State challenging the findings of the Tribunal that the assessee is entitled to input tax rebate in respect of work stations as they do not fall

15 15 under the definition of wood furniture. Therefore, we pass the following: O R D E R These revision petitions are partly allowed. The assessee is entitled to the benefit of input tax rebate on xerox machines, air conditioners and security systems for building. In all other aspects, the order of the Tribunal remains undisturbed. SD/- JUDGE SD/- JUDGE RS/*