Bona Fide Classification Dispute Cannot Establish Tax Evasion Intent For Penalty: Punjab & Haryana HC

The Punjab and Haryana High Court on 20 July held that a bona fide classification dispute cannot, by itself, establish an intention to evade tax for imposing penalty under the Punjab Value Added Tax (PVAT) Act.

A Division Bench comprising Acting Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor allowed the appeal filed by Intex Technologies (India) Ltd. and set aside the penalty of Rs. 94,500 imposed under the PVAT Act for allegedly attempting to evade tax on mobile phone accessories. It observed:

“Even otherwise, there was no intent found on part of the appellant to evade payment of tax since the accessories were clearly specified as being a part of the mobile phone. Had it been the intent of the appellant to evade payment of tax, it could have easily omitted to refer to the accessories in the Stock Transfer Invoices.”

The dispute arose after authorities intercepted a consignment of 900 mobile phones along with accessories at a check-post while it was being transported from Delhi to the company's godown in Ludhiana.

The authorities alleged that mobile phones attracted VAT at 5%, whereas the accessories were taxable at a higher rate. They imposed the penalty on the ground that the company had attempted to evade tax by not paying the applicable tax on the accessories.

Intex Technologies contended that there was a genuine uncertainty regarding the applicable rate of tax on mobile phone accessories at the relevant time. It submitted that the classification issue was settled only later by the Supreme Court in State of Punjab v. Nokia India Pvt. Ltd. It also pointed out that the stock transfer invoices expressly disclosed that the consignment contained accessories, which ruled out any concealment or misdeclaration.

The High Court observed that Section 51(7) of the PVAT Act permits imposition of penalty only when there is material to establish an attempt to evade tax. It held that the mere fact that the legal position on classification was subsequently settled against the company could not establish an intention to evade tax. The Bench observed:

“Ordinarily, matters of classification would have to fall within the jurisdiction of the assessing authority and would not be gone into by the check-post authorities when the position in law in that regard was yet to be settled...”

Accordingly, the High Court concluded that there was no evidence of concealment or deliberate misdeclaration and held that the statutory requirement of proving an attempt to evade tax had not been satisfied. Therefore, it set aside the penalty order and the Tribunal's order and allowed the appeal.

For Appellant: Chetan Jain, Advocate and Porush Jain, Advocate

For Respondent: Ramandeep Singh Pandher, Addl. A.G. Punjab