Products Manufactured in India Using Imported and Local Components Not ‘Imported Goods’ Merely Due to Foreign Parts or Know-How: Madras HC

The Madras High Court has ruled that car audio systems manufactured in India using a combination of imported and locally sourced components cannot be treated as “imported goods” merely because key parts or technical know-how originate from a foreign company. The bench of Justice Anita Sumanth and Justice Mummineni Sudheer Kumar observed that the products which are manufactured in India using a combination of imported and locally sourced components are liable to sales tax at the lower rate applicable to domestically manufactured goods under the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act), and not at the higher rate prescribed for imported items The case arose from a tax revision filed by M/s. Nippon Audiotronix Ltd., a manufacturer of car audio systems, challenging an order of the Tamil Nadu Sales Tax Appellate Tribunal (STAT). For the assessment year 2003–04, the company had paid sales tax at 12.5% on the sale of Kenwood-branded car audio systems, classifying them under Entry 14(vi) of Part D of the First Schedule to the TNGST Act, which applies to audio and sound-recording equipment. While the original assessment was accepted, the Commercial Tax Department later issued a revision notice proposing to levy tax at 20% plus surcharge, contending that the products were “imported goods” since several critical components were sourced from Kenwood Corporation, Japan. The revised assessment also imposed a penalty for alleged concealment of turnover. The first appellate authority ruled in favour of the assessee, noting that what was imported were only components and spare parts, which were subsequently assembled and manufactured into finished car audio systems at the company’s Noida unit. The authority also took note of the fact that the finished products were cleared on payment of central excise duty, reinforcing their status as goods manufactured in India. However, the Sales Tax Appellate Tribunal reversed this finding, holding that the imported components formed the “core” of the product and that the licence agreement with Kenwood Japan for use of technical know-how and intellectual property imparted the character of an imported product to the final goods. The High Court framed multiple substantial questions of law, centring on whether the Tribunal was justified in overturning the detailed factual findings of the first appellate authority; Products manufactured in India using imported components could still be treated as imported goods; A foreign licence agreement and use of overseas technical know-how could determine the applicable rate of sales tax. The court undertook a detailed examination of the licence agreement with Kenwood Japan, the bill of materials, and the relevant statutory entries. The Court noted that although certain key components—such as printed circuit boards, integrated circuits, chassis, and display units—were imported, a substantial number of parts, including casings, wiring, packing materials, manuals, and accessories, were procured domestically. These locally sourced items were integral to transforming the imported parts into a marketable, finished car audio system. The Bench emphasised that imported components, by themselves, did not constitute a complete car audio system; the manufacturing and assembly process carried out in India resulted in a new commercial product; and payment of central excise duty on the finished goods strongly indicated domestic manufacture. Rejecting the Revenue’s argument, the Court held that the mere use of foreign technical know-how, trademarks, or custom-designed parts does not automatically render the final product an “imported good” for sales tax purposes. The Court clarified that Entry 14(vi) of Part D of the First Schedule specifically covers car cassette players and audio equipment, attracting a lower tax rate. In contrast, the higher 20% rate under Schedule Eleven applies only where the goods themselves are imported as complete products, not where components are imported and subsequently manufactured into a finished product in India. The High Court set aside the Tribunal’s order dated 28 August 2012; restored the order of the first appellate authority and held that the car audio systems were domestically manufactured goods taxable at 12.5%. Case Details Case Title: M/s. Nippon Audiotronix Ltd. Versus State of Tamil Nadu Case No.: T.C.(R).No.5 of 2013 Date: 07.01.2026 Counsel For Petitioner: C.Rekha Kumari Counsel For Respondent: C.Harsha Raj Click Here To Read Order Read More: PMLA Provisional Attachment Lapses After 180 Days; COVID Limitation Orders Don’t Apply: Bombay HC

Products Manufactured in India Using Imported and Local Components Not ‘Imported Goods’ Merely Due to Foreign Parts or Know-How: Madras HC

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