Imported Parts Alone Don't Justify Higher Sales Tax On Car Audio Systems: Madras High Court

The Madras High Court has ruled, in a dispute over the tax treatment of Kenwood-branded car audio systems, that the use of imported components does not by itself make the finished product an imported good, holding that “the parts do not, by themselves, constitute a complete car audio system”.

A bench of Justices Anita Sumanth and Mummineni Sudheer Kumar was deciding whether Nippon Audiotronix's car audio systems were taxable at 12.5 percent as domestic goods or at 20 percent as imported products under the Tamil Nadu General Sales Tax Act.

The case related to the assessment year 2003–04. Nippon Audiotronix had classified its sales of Kenwood-branded car audio systems as domestically manufactured goods and paid tax at 12.5 percent.

The returns were initially accepted. The department later revised the assessment, levying tax at 20 percent along with surcharge and penalty, on the ground that key components were imported from Japan.

The first appellate authority accepted the company's case that what was imported were only components and spares, which were thereafter assembled and manufactured in India along with locally sourced materials.

It also noted that the finished car audio systems were cleared on payment of central excise duty. The Sales Tax Appellate Tribunal reversed this finding, prompting the present revision before the High Court.

The court examined the licence agreement between Nippon Audiotronix and Kenwood Corporation, Japan, under which the petitioner was authorised to manufacture and assemble car audio systems in India using Kenwood's intellectual property, technical know-how, and certain specialized components. The agreement contemplated the use of both imported parts and locally procured materials in the manufacturing process.

Rejecting the revenue's contention that the imported components formed the “core” of the product, the Bench held that the imported parts were of little use unless integrated and assembled with other components to form a complete car audio system. The finished product, the Court noted, came into existence only after manufacturing operations carried out in India.

“There has been no allegation that the business arrangement that the petitioner is engaged in is opaque or is designed specifically to avoid or reduce tax liability. What has been imported by the petitioner constitute only components or parts of sound systems, that are distinct, commercially saleable goods in their own right. The parts do not, by themselves, constitute a complete car audio system,” the Bench observed.

Holding that what was ultimately sold was a complete car audio system manufactured in India, the Court set aside the order of the Sales Tax Appellate Tribunal and restored the decision of the first appellate authority. It ruled that the turnover was taxable at the lower rate applicable to domestic goods.

For Appellant: C.Rekha Kumari

For Respondent: C.Harsha Raj