This article
introduces case laws on VAT / GST developing in various parts of the world. After each decision, the
compiler has given in
a note stating ‘Principles applicable to Indian law’.
This note draws attention to specific
propositions and contextualises the decision in the Indian scenario. It goes without saying that the
legal provisions in India and abroad may not be identical and
therefore the decisions should be
read accordingly. These determinations intend
to give a perspective on global
developments, reading them in
juxtaposition with the
Indian GST law would add value to
local reader.
I.
EU VAT/UK VAT
1 Nexus – Inputs and output
supply – Whether University carrying on ‘economic activity’?
Revenue and
Customs Commissioners vs. The Chancellor, Masters and Scholars of the
University of Cambridge [Judgement dated 3rd July, 2019 in case
C-316/18]
EUROPEAN COURT OF
JUSTICE
The University of
Cambridge is a not-for-profit educational institution which provides
principally education (not taxable) as also taxable supplies like commercial
research, sale of publications, consultancy services, catering, accommodation
and the hiring of facilities and equipment. The activities are financed in part
through donations and endowments, which are placed into an investment fund for
producing income for the University. That fund is managed by a third party to
whom certain management fees are paid. The question is whether the tax charged
on management fees can be taken as input tax credit against the taxable
supplies.
HELD
The Court has held
that the activity of collecting donations and endowments is not ‘for
consideration’ and is in the nature of charitable activities and not an
‘economic activity’ as is required under EU VAT law. Furthermore, the act of
investing these donations and endowments is a mere extension of the activity of
collecting and the University acts much like a private individual who invests
his surplus wealth. All these activities are not taxable. The management fee is
incurred in relation to this investment and generation of income by the
University, and hence cannot be taken as input tax credit. Even the cost of the
management of fund is not really included in the price of the output supplies.
There is no direct and immediate link in the present case either between the
management fee and a particular output transaction or between the management
fee and the activities of the University of Cambridge as a whole. No input tax
credit is therefore available.
Principles applicable to Indian law:
The European
concept of ‘economic activity’ is similar to, though not identical to, our
concept of ‘business’ in section 7 of the Indian GST Act. This judgement turns
partly on the University being a charitable institution and thus not carrying
on ‘business’. In our law, an activity is considered a business even without
‘profit motive’. However, the Hon’ble Supreme Court has explained in CST
vs. Sai Publication Fund (2002) 126 STC 288 (SC) that even if profit
motive is irrelevant under the statute, the activity must still have an
underlying commercial nature. The Supreme Court has explained that even after
the ouster of the profit motive by statute, universities and educational
institutions continue to be outside the ‘business’ definition and has held that
the judgements of University of Delhi vs. Ram Nath AIR 1963 SC 1873 and
Indian Institute of Technology, Kanpur vs. State of UP (1976) 38 STC 428 (All)
continue to be good law despite amendment in the definition of ‘business’ in
sales tax law making the profit motive irrelevant.
The European judgement also says that collecting donations and
endowments is not an ‘economic activity’ since it is not ‘for consideration’.
The better analysis, suited for our GST law (which would not lead to a change
in the ultimate conclusion) would be that the collections of donations and
endowments are gifts of money and charity and not ‘consideration’ for any
supply made by the University. As such, that activity falls outside the remit
of our GST law.
The second prong of
the judgement, that of investment of fund created by the University being
comparable to investment activity of private individuals, is again an activity
which would otherwise fall outside the definition of ‘business’ under the
Indian law [Bengal and Assam Investors Ltd. vs. CIT (1966) 59 ITR 547
(SC)].
2 Whether a Diary is a ‘Book’?
Gardasson (t/a
Action Day aIslandi) vs. RCC [2019] UKFTT 0441
UK FIRST TIER TRIBUNAL
A diary which was
styled in such a manner as to teach time management to its buyers is a ‘book’
within the zero-rating provisions of the UK VAT Act. The fact that there is a
writing space and that the main function of a diary is not reading, does not
affect the conclusion, since writing spaces are provided even in students’
working books.
Principles applicable to Indian law:
This decision is
instructive about the rules of classification followed by other countries.
3 Whether a default on a loan changes the
character of the original supply? Whether litigation fees paid in connection
with such default can be claimed as input tax credit?
Newmafruit Farms Ltd. vs. RCC [2019] UKFTT 0440 (TC)
UK FIRST TIER TRIBUNAL
A loan of money
remains a loan even if there is a subsequent default in repayment. As such, the
exempt character of the original loan under the UK VAT Act does not change
merely because there is no repayment.
A loan of money being
exempt from UK VAT, any litigation fees paid in connection with the default of
such a loan is directly and immediately linked to the exempt supply of loan and
not eligible for input tax credit. Simply because the business of the appellant
is to give such loans does not mean that the input tax credit must be given in
respect of such transactions. Furthermore, even though there is a substantial
time gap between the making of the loan and the litigation fee, the direct and
immediate link is not affected by such passage of time. Such fees are also
indirectly factored into the cost of making the loan and thus the direct and
immediate link exists.
Principles applicable to Indian law:
Direct and
immediate link is a test evolved by European Courts to determine whether an
input supply has sufficient nexus with output supply. It is useful in the
Indian context where, though nexus is generally not required, it is still
needed where an output supply is ineligible for credit u/s 17 of the CGST Act.
4 Overpaid parking fees – Whether consideration
for ‘supply’?
National Car
Parks vs. HMRC [2019] EWCA Civ 854
UK COURT OF APPEAL
The appellant
operates, among others, ‘pay and display’ car parks in which there are ticket
machines which take cash. A board or boards will specify the amounts that must
be paid to park for different lengths of time. Someone wishing to leave his car
for a particular period has to insert coins to the value of at least the figure
given for that period in order to obtain a ticket which must be placed in his
vehicle’s windscreen. Once the requisite coins have been accepted by the
machine, the customer will be able to obtain his ticket by pressing a button.
Each machine indicates that no change is given and that ‘overpayments’ are
accepted.
The issue involved
in this appeal is whether such overpayments are subject to taxation under the
UK VAT Act.
HELD
Article 73 of
Council Directive 2006/112/EC on the common system of value-added tax (‘the
Principal VAT Directive’) reads as follows: ‘The taxable amount shall include
everything which constitutes consideration obtained or to be obtained by the
supplier, in return for the supply, from the customer or a third party…’
In the present
case, a contract between the appellant and the customer will have been
concluded no later than the point at which the customer chose to press the
green button to receive her ticket. The customer could have paid the exact
price, but chose to pay more. There was an explicit warning that no change
would be given and the tariff board indicated that ‘overpayments’ were
accepted.
Taken together, the
tariff board and the statement that overpayments were accepted and no change
given, indicated, looking at matters objectively, that the appellant could be
said to have set a minimum price for which the parking would be provided;
however, more was always welcome if the customer chose not to pay the exact
minimum price. The contract price in such case will always include the
overpayment.
Principles applicable to Indian law:
Under the Indian
GST law, every ‘supply’ must be made for a ‘consideration’. The definition of
‘consideration’ in section 2(31)(a) covers ‘any payment made… in respect of, in
response to, or for the inducement of’ a supply. This decision shows how an
overpayment which is made by the recipient despite due notice that it will be
appropriated by the supplier towards the contract, can be treated as
consideration under the UK VAT law. The same principle will apply in India.
5 Deceiving or cheating a person is not a supply
of ‘service’
Owen Francis
Saunders vs. HMRC [2019] TC 9922
UK FIRST TIER TRIBUNAL
(TAX)
The Appellant had
recovered excess consideration from his customers by way of deceit / fraud.
This excess consideration was confiscated by the Crown Court in the UK under
the Trading Standards law.
The appellant was
assessed to tax taking all the payments received from his customers into
account for calculating registration threshold, including the excess
consideration which was received by way of fraud and deception and which was
subsequently confiscated by the Court.
HELD
There was no
underlying ‘supply’ against which the excess consideration could be said to be
‘consideration’ under the Act. To deceive or to cheat is not a ‘service’ and
any amount received by deception or cheating cannot therefore be consideration
for any ‘supply’. The Tribunal considered that otherwise every fraudster and
scamster would become liable for UK VAT.
Principles applicable to Indian law:
Section 7 of the
CGST Act taxes not only a completed supply, but also a ‘supply… agreed to be
made’. Similarly, the definition of ‘consideration’ in section 2(31) does not
only take the consideration actually paid or given, but also a ‘payment… to be
made’. Even otherwise, the term ‘consideration’ in the Indian contract law is
understood as including not just a payment actually made, but also a promise to
pay in future.
Under the contract
law, consideration procured by fraud is void. Though the GST law does not
include all the legal principles relating to a contract, this UK judgement
throws light on how the general principles of contract can sometimes aid
in understanding the concept of ‘consideration’ in the GST / VAT law, for just
like the Indian definition, the UK definition does not expressly exclude
payments made under deception and it is only on general contract principles
that the UK Court has arrived at this view. Though this judgement takes a
reasonable view, readers must not derive a general principle that the entire
body of contract law principles applies to the GST concept of ‘supply for
consideration’.
6 Whether construction of one building and
furbishing of another in the same project amounts to a single supply?
Glasgow School
of Art vs. HMRC [2019] UKUT 0173
UK UPPER TRIBUNAL
The appellant is a
Higher Education Institution Art School. It carried out a redevelopment project
which consisted of the demolition of two buildings, the partial demolition,
reconstruction and refurbishment of a building known as the assembly building
and the construction of a new building called the Reid Building. The assembly
building was then let out to the student union for low rent.
Due to ITC
attribution rules between taxable and exempted supplies, the question which
arose was whether the construction works, etc. relating to the assembly
building can be treated as a separate supply from the other work and whether
the assembly building was used for taxable supply to the student union?
HELD
There was a single
supply in this case. The economic and commercial reality of the construction
contract was a single development of the site as a whole. There was a single
delivery strategy. Funding was required and obtained for the project as a
whole. The decision not to demolish the assembly building altogether, but rather
to retain its facades and roof, was taken for reasons of value for money.
Partial demolition and refurbishment of the building on its own was never
contemplated. Additional features supporting the single supply characterisation
are the fact that there was a single contract with payment being made during
the construction phase in accordance with invoices issued for the whole
project. While no particular weight can be attached to the existence per se
of a connecting doorway, the reason for its existence, i.e., that it was
considered necessary in order to meet the environmental assessment requirement
for external funding, reinforces the view that the project should be regarded
as a single supply from an economic point of view and that a split between the
two buildings would
be artificial.
Although the
appellant wanted and obtained two separate premises with different functions,
that cannot lead to an inference that there were two separate supplies. It was
always the appellant’s intention that the project should consist of both.
Principles applicable to Indian law:
The Indian law on
composite supplies is contained in section 2(30) of the CGST Act. This decision
is instructive of the principles which can be followed in India while
determining whether a supply is composite or not.
7 ‘Direct and
immediate link’ – Nexus between input / input services and output supplies for
purposes of ITC attribution
Royal Opera
House vs. HMRC [2019] TC 7157
UK FIRST TIER TRIBUNAL
The appellant is an
internationally-renowned producer of operas. Under the UK VAT law, admission to
opera or ballet is an exempt supply. However, the appellant also makes certain
supplies which are taxable and the question involved in this appeal was whether
there was a sufficient nexus, formulated as a ‘direct and immediate link’ test
by EU and UK Courts, between the production costs and these supplies for ITC
attribution mechanism under that law. These taxable supplies are:
(1) Catering income
(bars and restaurants);
(2) Shop income;
(3) Commercial
venue hire;
(4) Production work
for other companies; and
(5) Ice cream
sales.
HELD
Catering income
(bars and restaurants)
It is the opera or
ballet that is central to everything that the Opera House (the appellant) does.
It is these performances that bring the restaurants and bars of the Opera House
their clientele. Taking an economically realistic view, the performances at the
Opera House, and therefore the production costs, are essential for the
appellant to make its catering supplies. It therefore follows that the purpose
of the production costs, objectively ascertained, is not solely for the
productions of opera and ballet at the Opera House but also to enable the Opera
House to attract clientele to the restaurants and bars and to maintain its catering
income. Therefore, the production costs do have a direct and immediate link
with the catering supplies in the bars and restaurants of the Opera House.
Shop income
The shop in the
Opera House, at its premises and online, and the sale of tickets for performances
at the Opera House are ‘separate and “freestanding” supplies.’ It was not
disputed that the production costs do have a direct and immediate link to the
sale of recordings, both audio and visual, of the Opera House productions.
However, with respect
to the remaining supplies that the shop makes, which although there is a
connection to the repertoire of the Opera House and therefore the production
costs, there is no direct and immediate link.
Commercial venue
hire
There is a direct
and immediate link between the production costs and production-specific events,
such as a gala dinner in support of a production by a sponsor. However, that
cannot be the case for other commercial events which are unconnected with the
productions themselves.
Production work
for other companies
The reputation of
the Opera House and its productions play a significant part in it receiving
orders from other opera and ballet companies to construct scenery and make
costumes. However, this is not sufficient to enable a finding that a direct and
immediate link with the production costs exists. This is because this work is
undertaken by the Opera House at a fixed price, which includes material and
labour, and as such the production costs cannot be a cost component of these
supplies.
Ice cream sales
As with catering,
the Opera House productions, with their associated costs, are essential for the
sale of ice creams. Accordingly, the production costs do have a direct and
immediate link to the sale of ice creams.
Principles applicable to Indian law:
Direct and immediate link is a test evolved by European Courts to
determine whether an input supply has sufficient nexus with output supply. It
is useful in the Indian context where, though nexus is not required generally,
it is still required where an output supply is ineligible for credit u/s 17.
II. NEW ZEALAND GST
8 Provident
Insurance Corporation Ltd. vs. CIR [2019] NZHC 995
NEW ZEALAND HIGH
COURT
The overarching
purpose of GST is to tax consumption expenditure and to tax the widest range of
goods and services with as few exceptions as possible. An exemption in GST law
must therefore be strictly construed.
Principles applicable to Indian law:
This dicta appears in a case relating to interpretation of exemptions,
the factual details of which are not necessary for the present purposes.
The normal rule of taxation is that exemptions should be strictly
construed against the taxpayer on the basis of the theory that the charging
provisions in taxing laws should be strictly construed, and therefore any
exemption from the taxing law should also be strictly construed.
The New Zealand
High Court has, in this case, given an additional and novel justification for
strict interpretation of exemptions in GST law.
