In this, the second in the series, the compiler shares cases developing
throughout the world on VAT / GST as an aid in grasping the finer propositions
of the GST law in India. After each decision, the compiler has put in a note –
‘Principles applicable to Indian law’. This note is meant to draw the readers’
attention to particular propositions which are relevant. Readers are, however,
advised that provisions in India and abroad may not be similar and the
decisions should not be treated as automatically applicable to Indian law
EU
VAT / UK VAT
(1) Composite / mixed supply –
(a) Post-supply activities – Whether changes nature of supply; (b) Inter-linked
contracts – Supply of land subject to condition that the land be further
supplied to an identified third party – Whether both contracts are composite
Skatterministeriet vs. KPC Herning [Judgement dated 4th
September, 2019 in Case C-71/18]
European Court of Justice
KPC Herning
purchased from the port of Odense the land known as ‘Finlandkaj 12’ with a
warehouse built on it. The sale contract was subject to a number of conditions,
including that KPC Herning was to conclude a contract with Boligforeningen
Kristiansda for the purpose of carrying out, on the land in question, a
building project composed of social housing for young persons.
Neither KPC
Herning under the first contract, nor Boligforeningen Kristiansda under the
second contract, was formally tasked with the duty to demolish the existing
warehouse on the land under the second contract, though the overall intention
and purpose of both contracts necessarily required demolition of the warehouse
at some stage. In fact, Boligforeningen Kristiansda engaged a third party to
undertake the demolition after the second sale was completed. A question arose
during the VAT classification proceedings as to whether the covenant to
demolish in the second contract formed part of the first and / or the second
contract?
HELD
It was held
that both the contracts did not require the demolition of the warehouse which
was existing at the time the two contracts were performed. Demolition was
carried out after the second sale was completed and was an independent contract
between Boligforeningen Kristiansda and a third party. This fact of demolition
could not colour the nature of supply under either the first or the second
supply.
Furthermore,
the first and the second contracts were held to be independent of each other.
The mere fact that one contract required the conclusion of another contract
with a third party was held not to make the two contracts a single, indivisible
transaction.
Principles applicable to Indian law:
This
decision is relevant for similar controversies which may arise u/s 8 of the
CGST Act wherein a determination is required as to whether two transactions are
composite transactions and must be classified as a single transaction or
independent of each other.
(2) Whether making and reselling
hay is a ‘business’
Babylon Farm Limited vs. HMRC [2019] UKFTT 562 (TC)
UK First Tier Tribunal
The taxpayer
in this case was doing no activity except making hay for resale, sale of
outbuildings on the farm and undertaking preparatory steps for new ventures
which he wanted to launch. As such, the only income during the year under
question was from resale of hay. The question was whether making and reselling
hay can be said to be a ‘business’ under the UK VAT Act, since the Revenue had
denied input tax credit to the taxpayer on the basis that he was not engaged in
‘business’.
HELD
The
definition of ‘business’ is contained in section 94 of the UK VAT Act:
‘(1) In this
Act “business” includes any trade, profession or vocation.
(2) Without
prejudice to the generality of anything else in this Act, the following are
deemed to be the carrying on of a business:
(a) the provision by a club, association or organisation
(for a subscription or other consideration) of the facilities or advantages
available to its members; and
(b) the admission, for a consideration, of persons to any
premises.…
……
(4) Where a
person in the course or furtherance of a trade, profession or vocation, accepts
any office, (the) services supplied by him as the holder of that office are
treated as supplied in the course or furtherance of the trade, profession or
vocation;
(5) Anything
done in connection with the termination or intended termination of a business
is treated as being done in the course or furtherance of that business;
(6) The
disposition of a business, or part of a business, as a going concern, or of the
assets or liabilities of the business or part of the business (whether or not
in connection with its reorganisation or winding up), is a supply made in the
course or furtherance of the business.’
The Tribunal
recognised that there is no comprehensive definition of ‘business’ exhaustively
explaining its meaning under the UK VAT law. It therefore relied on the seminal
judgement in the case of Commissioners of Customs and Excise vs. Lord
Fisher [1981] STC 238 to derive the principles of what constitutes
‘business’ in ordinary parlance:
(a) a
serious undertaking earnestly pursued;
(b) has a
certain measure of substance;
(c) is an
occupation or function actively pursued with reasonable or recognisable
continuity;
(d) is
conducted in a regular manner and on sound and recognised business principles;
(e) is
predominantly concerned with the making of taxable supplies for consideration;
and
(f) the
supplies are of a kind that, subject to differences in detail, are commonly made
by those who seek to profit from them.
The Tribunal
reviewed all the evidence and the submissions in the appeal against these six
criteria and concluded that:
(i) The
hay-making activity was being seriously and earnestly pursued by the taxpayer.
The taxpayer organised this activity using the equipment and machinery that had
been in use for many years when he had a larger active farming business. The
taxpayer explained that he and his wife had wanted a farm and had carried on
farming for many years and remained committed to it. Hay-making was the last
part of that activity. There was a single customer of the business who was the
end-user for the hay and there was a clear purpose in producing
the hay.
(ii) For the same reasons the hay-making activity
had some substance. The supply of hay was zero-rated but was not VAT-exempt.
However, it was a very modest activity carried out on a casual basis.
(iii) The hay-making activity had been continuous
even though it was seasonal. The taxpayer undertook this activity regularly and
had done so for many years.
(iv) The
supply of hay for consideration was a common activity that was frequently
carried on for profit in agricultural businesses.
(v) The activity of hay-making was not being
conducted in a regular manner and on sound and recognised principles. The hay
was grown on land belonging to the taxpayer. There was no evidence of the
commercial basis on which the taxpayer was able to carry out the cutting of hay
or any other activity on the land. The hay was cut and baled by the taxpayer on
the machinery he owned and operated. The bales were then sold to a single
customer for his livery business. He fixed the price that he paid for the hay
and decided what costs were borne by the taxpayer and which he or another of
his businesses bore. The activities of the taxpayer did not appear to give rise
to any staff or other costs. It was only the taxpayer’s ownership of the baling
equipment and machinery that was used in the hay-making activity. The single
customer also had a significant say in the manner in which costs were accrued
and the profitability of the taxpayer’s hay-making activities was entirely
dependent on the single customer’s subjective judgement as to where costs and
revenue should be allocated between his various activities.
(vi) The
hay-making activity was not predominantly concerned with making taxable
supplies for consideration. The activity led to little revenue, under £500 per
year. No invoices had been raised by the taxpayer for payment by its only customer
and no payment had been made for the bales of hay for a number of years. The
taxpayer’s activity was not predominantly concerned with making a profit.
On this
basis, the activity of making and reselling hay was held not to be a
‘business’.
Principles applicable to Indian law:
The UK VAT
Tribunal has come to the conclusion that the stand-alone hay-making activity on
its own cannot be said to be ‘business’. This decision repays study inasmuch as
it carefully dissects the various elements of the ordinary meaning of
‘business’. Lord Fisher’s (Supra) judgement is a decision
rendered under the UK VAT Act and hence is relevant in the Indian context –
except that the UK Tribunal seems to give some weightage to the profit motive
element. In India, the definition of ‘business’ in the Indian GST law makes the
profit motive irrelevant.
However, the
Hon’ble Supreme Court has explained in the case of a similar definition in
sales tax statutes in CST vs. Sai Publication Fund (2002) 126 STC 288 (SC) that even if
the profit motive is irrelevant under the statute, the activity must still have an underlying commercial nature. The UK
VAT Tribunal’s observations as to lack of commercial nature are therefore
relevant in the Indian context.
NEW ZEALAND GST
(3) Collection of GST and
non-payment – Penalties – New GST regime – Principles
Hannigan vs. Inland Revenue Department [(1988) 10 NZTC 5162]
High Court, New Zealand
The taxpayer
had collected tax but not paid the same. Regarding the penalty levied on him,
the High Court of New Zealand held that the principle of proportionality will
apply and certain mitigating factors must be taken into account. In particular,
the observations on the GST law being a new law (at that time in New Zealand)
are relevant to our Indian circumstances today:
‘…I am
reluctant at this stage and on this particular appeal to lay down general
guidelines as to the quantum of fines.
In the first place,
I imagine that the circumstances will vary enormously. There will be single
traders who, simply from inability to cope with the requirements of present-day
society, have not complied with the law. There may not be substantial sums of
money involved. There may be larger organisations who appear wilfully to have
ignored their legal obligations. There may even, indeed, be offenders who
prefer to face the fine rather than make the payment which is a necessary
consequence of making the return on the due date. Obviously, the fine must be
tempered to the circumstance and in particular must be tempered to the fact
that there are advantages to traders in delaying paying over the GST which they
have recovered. On the other hand, this is new legislation. The stage may not
yet have been reached where it is appropriate to lay down an indication that
offences of this kind will always be treated seriously and by way of the
imposition of a substantial fine. I do not doubt that that day will be
appropriate (sic), but it may be that the Act should be given two or
three years of operation before such a step is taken.’
