Methodex Systems Limited vs The Additional Commissioner of Commercial Taxes

N. Kumar, J.—The assessee has preferred this appeal against the order dated 30-12-2010 passed by the Additional Commissioner of Commercial Taxes (Zone-1), Bangalore in ZAC-1/BNG/SMR-27/2010-11 u/s 15(2) of the Karnataka Tax on Entry of Goods Act, 1979 (for short, hereinafter referred to as the ''KTEG Act'') where the Revisional Authority after setting aside the order of the Appellate Authority has restored the assessment order. The assessee is a public limited company registered under the Karnataka Sales Tax Act, 1957 and the Central Sales Tax Act, 1956. The assessee is a dealer in sale of furnitures. On verification of books of accounts by the Assessing Authority, it revealed that the assessee in addition to has effected sales of furnitures and craft items and electronic items. The assessee has claimed exemption from payment of entry tax under the Act. The Assessing Authority found that on verification of books of accounts, it has revealed that the assessee has received currency counting machines and bundling machines amounting to Rs. 22,50,950/- from its Head Office and also other branches outside the State. The assessee had not declared the said turnover and paid the entry tax thereon. According to the Assessing Authority, currency counting machines and bundling machines comes under the entry machinery (all kinds) and liable for tax at the rate of 2% as per Notification No. FD 11 CET 2002(1), dated 30-3-2002, though the assessee had caused the scheduled goods into the local area. Therefore, he proposed to conclude the assessment to the best of his judgment u/s 5(4) of the KTEG Act.

A proposition notice was issued on 15-10-2005 which was served on the assessee on 27-10-2005. The assessee filed his objections contending that the currency counting machines and bundling machines are not liable for entry tax under the aforesaid notification. Therefore, he sought for dropping of the proceedings. The Assessing Authority on consideration of his objections did not accept the stand of the assessee. Therefore, he proceeded to hold that the assessee has not produced any proof to show that the currency counting machines and bundling machines are electronic goods. Therefore, he proposed to levy of tax at the rate of 2%. Accordingly, a sum of Rs. 45,019/- was levied as entry tax. Though he had proposed to levy penalty of Rs. 40,000/-, he levied the penalty of Rs. 10,000/- u/s 5(5) of the Act.

Aggrieved by the said order, the assessee preferred an appeal to the Joint Commissioner of Commercial Taxes (Appeals), DVO-I and DVO-III, Bangalore. Relying on the judgment of the Division Bench of this Court in the case of Diebold Systems Pvt. Ltd. Vs. The Commissioner of Commercial Taxes, , where, while dealing with the question whether Automated Teller Machine (ATM) installed in the various Banks is an electronic good or a Computer, it was held that if the goods are not technical, the definition in the market parlance would apply. Thereafter, he had proceeded to hold that in commercial circles and in common parlance, a machinery is understood to be a mechanical contrivance which produces output when an input is fed into it either manually or any other means. But in the case of currency counting machine and bundling machine, no input could be induced so as to obtain an output, instead it only displays the number of currencies counted and bundled with the operation of the said machines. When the currencies are placed in the box provided in these machines and when the button provided therein is pressed, the flow of electrons takes place within the machine. When the electrons are flowed, then automatically the machine display the result electronically on the screen provided therein specifying the number of currencies counted and number of currencies bundled. The Assessing Authority has not analysed these aspects before forming an opinion that the currency counting machines and bundling machines are scheduled goods classifiable under "machinery (all kinds) and parts and accessories thereof". The currency counting machines and bundling machines are classifiable as electronic goods in the light of the judgment of the Hon''ble High Court of Karnataka referred to above. Since electronic goods are not scheduled goods under the KTEG Act, 1979 no entry tax is leviable on the purchases of currency counting machines and bundling machines caused entry into the local area by the appellant. Therefore the appeal was allowed, and the assessment order was set aside.

The Additional Commissioner exercising his suo motu power of revision u/s 15(2) of the Act found that the order of the Appellate Authority is erroneous insofar as it is prejudicial to the interest of the Government revenue and therefore, initiated proceedings. Therefore, he issued a notice to the assessee calling upon the assessee to file his written objections within ten days from the receipt of the notice and also giving him an opportunity of being heard. After service of notice, the assessee entered appearance and filed written objections. After hearing the assessee and considering the objections filed by him, the Revisional Authority held that, the judgment relied upon by the Appellate Authority has no application to the facts of this case as the dispute involved therein is, whether the item involved was an electronic good or a Computer? Whereas, in this case, the dispute is, whether the item is a "machinery" or an "electronic good". He held, currency counting machine is not an electronic good. It is a machine which falls under Item No. 7 of the Schedule and therefore, he passed an order setting aside the order of the Appellate Authority, restoring the assessment order passed by the Assessing Authority. He also set aside the reduction of penalty imposed by the Assessing Authority insofar as levy of penalty u/s 5(5) of the Act is concerned. Aggrieved by the said order, the assessee is before this Court.

The learned Counsel appearing for the appellant assailing the impugned order contended as under:

(a) Currency Counting Machine in common parlance is known as an "electronic good" in respect of which no entry tax is payable. It is not a "machine" and therefore, the finding recorded by the Revisional Authority is illegal and requires to be set aside.

(b) The Currency Counting Machine could be construed as a machinery or as an electronic good. When two views are possible, it is not open to the Revisional Authority to interfere with the order of the Appellate Authority, which has taken a particular view and substituted his another view. Such an exercise cannot be done u/s 15(2) of the Act while exercising revisional power.

(c) The Revisional Authority cannot interfere with the reduction of penalty imposed by the Appellate Authority.

Per contra, the learned Government Advocate supported the impugned order.

In view of the aforesaid facts and the rival contentions, the points that arise for our consideration in this appeal are as under:

Whether the currency counting machine is a machine or electronic goods?

Whether a Revisional Authority in exercise of power u/s 15(2) of the Act could interfere with the order of penalty, on the ground that the maximum penalty as prescribed under law is imposed?

Point No. 1:

The material on record discloses that the assessee has classified currency counting machine as "machinery" under Entry l(iii)(a) of Part ''M'' of Second Schedule to Karnataka Sales Tax (KST) Act, 1957. The assessee has understood the commodity in question as machinery only. As per the copies of the annual maintenance contract and invoices raised thereto, the buyers who have entered into annual maintenance contract have clearly considered cash/currency counting machines as machines only. The buyers as seen from the aforesaid documents are Banks and Financial Institutions like Bank of India, Punjab National Bank, State Bank of Mysore, etc. It is clear that both the seller and buyer have traded in the goods on bargains as machinery. As per statements available in the assessment records like profit and loss account, purchase statements, stock statement etc., the goods in question is classified as machinery. It is in this background, the question for consideration is, is it a "machinery" or an "electronic good?" The Appellate Authority was of the view that in commercial circles and in common parlance, a machinery is understood to be a mechanical contrivance which produces output when an input is fed into it either manually or any other means. But in the case of currency counting machine and bundling machine, no input could be induced so as to obtain an output instead it only displays the number of currencies counted and the bundled with the operation of the said machines. When the currencies are placed in the box provided in these machines and when the button provided therein is pressed, the flow of electrons takes place within the machine. When the electrons are flowed, then automatically the machine display the result electronically on the screen provided therein specifying the number of currencies counted and number of currencies bundled. The currency counting machines and bundling machines are classifiable as electronic goods in the light of the judgment of the Hon''ble High Court of Karnataka referred to supra and it is not a scheduled goods under the Act. As such, no tax is payable. Therefore, in the view of the Appellate Authority, to call particular goods as a "machine", there should be a manufacturing activity. When a raw material is fed into a machine, a finished product should emerge, then only it should be construed as a machine. The question is, whether this reason is justifiable? Therefore, it is necessary to ascertain the correct meaning of the word "machinery".

The earliest case in which the word "machinery" was interpreted is the decision of the Privy Council in 26 CWN 761 (Privy Council) . The Privy Council while dealing with the question, whether a overhead tank was a machinery has laid down the basic guidelines, which are as under:

(i) The word "machinery" must mean something more than a collection of ordinary tools. It must mean something more than a solid structure built upon the ground, whose parts either do not move at all, or if they do move, do not move the one with or upon the other in interdependent action with the object of producing a specific and definite result.

(ii) It is not possible to define "machinery" as applicable to all cases. However, it could be said that, when used in ordinary language, prima facie, means some mechanical contrivances, which by themselves or in combination with one or more other mechanical contrivances, by the combined movement and interdependent operation of their respective parts, generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result. The tanka and its supporting structure do not satisfy this definition.

(iii) Determination as to what is or what is not "machinery" must, to a large extent depend on the special facts of each case.

(iv) Illustrations are better guides to ascertain the true meaning of the word "machinery" when used ordinarily and not as a specific definition.

(v) Whether an intelligent person would, in the ordinary use of language, describe a particular thing as machinery.

The said judgment of the Privy Council has been followed subsequently by various Courts by this Country.

A Division Bench of this Court following the said judgment of the Privy Council in the case of The State of Mysore Vs. M.N.V. Rao, held as under:

In simpler language ''machinery'' is a contrivance whereby several things are put together to work in such a way that force may be applied at a most convenient point in a most convenient way to get a particular work or an item of work done or to produce a specific article or manufactured goods.

If this is the essential feature of a machinery which distinguishes it from other things, the mode or the manner in which power is fed into it or force is applied, need not and should not make any difference. It is conceded, for example, that a machinery would be a machinery whether it is fed by electrical power or other form of power applied by steam or generated by burning combustible oils. If the mode or the manner in which the power is applied makes no difference in these specified cases, it should make no difference either if the source of power is either human or animal.

Following the aforesaid judgment, a Division Bench of this Court in the case of K.B. Dani Vs. State of Karnataka, , held as under:

The above meaning indicates that "Machine" means a mechanical device consisting of a planned and an organised arrangement of various parts, each part having definite functions and as a result of combined functioning some work, which may be impossible or difficult for human physical power to perform or even if it can be done, it cannot be done continuously for a long period or with the speed and with the same uniformity with which the machinery does the same work. Supply of power to the machine could be either by the natural forces or by human or animal energy, or electric energy or any other type of energy.

Therefore, in the light of the aforesaid judgments, in order to construe a particular goods as machinery, it is not the requirement of the law that there should be a manufacturing activity conducted with the aid of the said goods. Even it is not necessary that such a machine should be operated with an electric energy or any other type of energy. Even natural force or human or animal energy could be used to perform the work for which the said machine is Invented. The essence of a machine is, it is a mechanical device consisting of a planned and an organised arrangement, to perform a work which otherwise a man would have performed. Such a work is done in a more convenient way and may be faster than what a human being could do. It is a case of substitution of manual work by a machine. Such work may result in a new product or may not result in a new product at all and therefore, the said finding recorded by the Appellate Authority is unsustainable and is contrary to the well-settled legal principles over a period.

Yet another test prescribed is, how the said goods are perceived in the market. The Apex Court in the case of Commissioner of Sales Tax, Madhya Pradesh Vs. Jaswant Singh Charan Singh, has held as under:

Now, there can be no dispute that while coal is technically understood as a mineral product, charcoal is manufactured by human agency from products like wood and other things. But it is now well-settled that while interpreting items in statutes like the Sales Tax Acts, resort should be had not to the scientific or the technical meaning of such terms but to their popular meaning or the meaning attached to them by those dealing in them, that is to say, to their commercial sense.

A sales tax statute, being one levying a tax on goods, must, in the absence of a technical term or a term of science or art, be presumed to have used an ordinary term as coal according to the meaning ascribed to it in common parlance. Viewed from that angle both a merchant dealing in coal and a consumer wanting to purchase it would regard coal not in its geological sense but in the sense as ordinarily understood and would include "charcoal" in the term "coal". It is only when the question of the kind or variety of coal would arise that a distinction would be made between coal and charcoal; otherwise, both of them would in ordinary parlance as also in their commercial sense be spoken as coal.

The said legal position has been reiterated by this Court in the aforesaid Diebold Systems Private Limited''s case as under:

It is also useful to refer to the meaning of the words "machinery" and "machine" given in Webster''s Third New International Dictionary, to the extent it is relevant, which reads:

Machine, engine, apparatus, appliance signify, in common, a device, often complex, for doing work beyond human hand or mind, machine applies to a construction or organisation whose parts are so connected and interrelated that it can be set in motion and perform work as a unit (those most practical machines of our modern life, the dynamo and the telephone - Havelock Ellis) (calculators, billers, duplicators, and other business machines). Machinery: machines as a functioning unit.

So, in this background, from the material on record, it is clear, the assessee has classified these goods as a currency counting machines. The customers of the assessee are financial institutions. One of the functions performed by all these financial institutions is counting of currency notes where currency notes are given to a customer or whether currency notes are received from a customer before it is taken into account, it has to be counted. It involves human labour. The role and function of a machine is to reduce or eliminate human labour or effort in doing certain thing as desired to perform that work more efficiently. The currency counting machine is invented and that is how, all these financial institutions have purchased these currency counting machines from the assessee and also entered into annual maintenance contract to see that these machines are operational throughout the year. One of the operations conducted by the machine is by way of an electronic device would not make that machine an electronic good.

In the notification dated 30-3-2002 setting out the goods in respect of which entry tax is leviable. Serial No. 7 in the Table reads as under:

Machinery (all kinds) and parts and accessories thereof but excluding agricultural machinery.

The language employed is simple and there is no ambiguity. Agricultural machinery are excluded. All other machineries are liable to entry tax at the rate of 2%. The goods in question is described by the assessee himself as currency counting machine and therefore, it falls within the said entry and the Assessing Authority was justified in levying entry tax on currency counting machine as it is not an electronic item as contended by the assessee.

It is true that if two views are possible and if the Appellate Authority or the Assessing Authority has adopted a particular view, it is not open to the Revisional Authority to substitute his reasoning and interfere with the said orders. In this case, in the light of the aforesaid material, when it cannot be said that it is an electronic good and the test prescribed by the Appellate Authority for coming to such conclusion is ex facie illegal, it cannot be said that two views are possible. As set out above, in the series of judgments, what a "machine" is? How it is to be understood is clearly explained. In none of the cases, no such finding of the Appellate Authority is found. In those circumstances, the finding recorded by the Assessing Authority is erroneous. It is not the case of two views being possible. Therefore, the Revisional Authority was justified in interfering with the order of the Appellate Authority and restoring the order of the Assessing Authority.

Point No. 2;

The Assessing Authority after noticing that the assessee has not reported to tax, the said turnover in respect of import of currency counting machines has levied tax at the rate of 2%. Therefore, he was of the view though he has proposed a penalty of Rs. 40,000/- after hearing the assessee, he came to the conclusion that it appears to be more in the present case. He was of the view that it is not a case of evasion of payment of tax. It is a case where the assessee was contending it was not liable to entry tax. In the facts of the case, he was of the view that it is a case for taking lenient view in the case of penalty was made out. Therefore, instead of levying tax of Rs. 40,000/-, at the time of levying it, he only levied Rs. 10,000/- u/s 5(5) of the KTEG Act. The Revisional Authority has set aside the order of the Appellate Authority and remanded the matter to the Assessing Authority for redoing. He was of the view that maximum penalty is to be imposed, which the Assessing Authority has not done and therefore, he wants the Assessing Authority to apply its mind and impose the penalty again. Section 5(5) of the Act deals with the payment of penalty, which reads as under: 5. (5) While making any assessment under sub-section (4), the Assessing Authority may also direct the dealer to pay in addition to the tax assessed a penalty not exceeding one and a half times the amount of tax due that was not disclosed by the dealer in his return or in the case of failure to submit a return one and a half times the tax assessed, as the case may be.

The language of the aforesaid provision makes it clear that the imposition of penalty is not automatic. This is not a case where the assessee has not filed his returns nor it was a case where returns had been filed but the turnover in respect of a particular good was not disclosed in the returns. Having regard to the dispute between the parties, the Assessing Authority was justified in not imposing the maximum penalty for non-disclosure of the said tax. He was justified in imposing Rs. 10,000/-. The Revisional Authority was not justified in interfering with the said order on the ground that maximum penalty is not imposed. As the suo motu powers can be exercised by the Revisional Authority only when the order sought to be revised is prejudicial to the interest of Revenue. As such, no case for interference with the said operation of the order was made out. Accordingly, the portion of the order of the Revisional Authority setting aside the penalty and remanding the matter to the Assessing Authority to reimpose the penalty is hereby set aside. In the result, we pass the following order: The Appeal is partly allowed.

The order imposing the penalty by the Revisional Authority is hereby set aside. The order of the Assessing Authority is restored in its entirety.

Parties to bear their own costs.