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It is also provided that where registrations have already been obtained under the description ‘All Taxable Services’, the taxpayer is required to file amendment application online in ACES and opt for relevant description/s from the list of 120 descriptions of services given in the Annexure.
Limitation – No provision prescribing time limit – Provision of limitation act prescribing period of three years – Not applicable – However, such power to be exercised within reasonable period of time – Exercise of such power within period of three years or soon thereafter – On facts – Reasonable, Section 46 (2), (3), and (4) of The Bihar Finance Act, 1981 and Art. 137 of The Limitation Act, 1963.
Facts
The Deputy Commissioner of Commercial Taxes, Dhanbad Circle, on the basis of guidelines issued by Joint Commissioner (appeals) passed a revised assessment order. The dealer filed writ petition before the High Court of Jharkhand praying for a direction to quash the order passed by the Joint Commissioner by which he had set aside the revised assessment order. The High Court allowed the writ petition filed by the dealer against which the department filed appeal before the Supreme Court.
Held
In all these appeals the Joint Commissioner has exercised the Suo Motu power vested in him under the Act within a period of three years in some cases and in some cases soon thereafter. The revision order was passed by him by forming his own opinion and satisfaction on the basis of the material on the record. Therefore, the revision order by him is valid. When the language of the legislature is clear and unambiguous, nothing could be read or added to the language, the High Court wrongly read application of section 137 of the Limitation Act to section 46 (4 ) of the BFT Act. In absence of any specific provision in the act, the provision of the Limitation Act cannot apply to section 46(4) of the Act. However, such a power cannot be exercised by the authority indefinitely. Such power has to be exercised within a reasonable period of time and what is a reasonable period of time would depend on the facts and circumstances of each case. When such powers have been exercised within three years of time in some cases and in some cases soon after the expiry of three years period it cannot be said to be unreasonable.
Amendments are effected in Maharashtra Value Added Tax Act,
2002 and Maharashtra Value Added Tax Rules, 2005 to carryout Budget proposals
announced by the Finance Minister in his Budget Speech.
The gist of important changes can be given as under :
The amendments are effected by the Maharashtra Act No. XII of
2010, dated 29-4-2010. The amendments are in the Maharashtra State Tax on
Professions, Traders Callings and Employment Act, 1975, Maharashtra Tax on
Luxury Act, 1987 and Maharashtra Value Added Tax Act, 2002. The changes in
general are applicable from 1-5-2010, except for S. 42(3A) of the MVAT Act,
2002, which comes into operation from 1-4-2010.
Amendments in MVAT Act, 2002 :
(i) S. 18 of the MVAT Act enumerates various occurrences on
happening of which intimation is required to be given to the Sales Tax
Department. By amendment in S. 18 of the MVAT Act, 2002 it is now provided that
the dealer should also give intimation in the following two circumstance, (i) If
there is a change in the nature of business, and (ii) change in bank account.
Vide Circular No. 17T of 2010, dated 17-5-2010, it is
clarified that the change in nature of business means if the activity is shifted
from manufacture to trading or import or vice versa.
Similarly in relation to the bank account it is mentioned
that the details about closing or opening of the bank account should be
intimated.
(ii) S. 23(5) is about transactionwise assessment. Up till
today, only officers of Investigation Branch acting u/s.64 were entitled to
carry out transac-tionwise assessment. By amendment in S. 23(5) it is now
provided that the other sales tax authorities will also be entitled to carry out
transaction- wise assessment in case of tax evasion, etc.
(iii) By amendment in S. 29 the following changes are
effected :
(a) The quantum of penalty u/s.29(6), which relates to
offence about contravention of tax invoice, is enhanced from Rs.100 to
Rs.1,000.(b) The quantum of penalty u/s.29(7), which relates to
offence about non-compliance of notices, is enhanced from Rs.1,000 to
Rs.5,000.(c) U/s.29(11) it was provided that no penalty order should
be passed after 5 years from the end of the concerned year for which penalty
is to be levied. The period of 5 years is now extended to 8 years.
(iv) In Budget speech it was announced that a special 1%
composition scheme will be provided for builders/developers who transfer
immovable property also in the construction contract. An enabling provision is
inserted by way S. 42(3A) to give power to the Government to notify that
composition scheme. However the actual scheme will be known only upon issue of
Notification, which can be effective from 1-4-2010.
(v) Input Tax Credit and refund of excess credit is backbone
of successful VAT implication. Up till today, the position was that the
authorities were bound to grant refund as per amount shown in refund application
in Form 501. However now by amendment in S. 51, a proviso is inserted by which
powers are given to the sales tax authorities to reduce the refund from the
refund amount claimed in the refund application. Simultaneously Rule 55A is also
inserted to implement this proviso, which is discussed subsequently.
(vi) S. 61(3) is about VAT Audit. Till today, the turnover
limit is Rs.40 lakhs and a dealer having turnover of sale/purchase exceeding the
above limit is liable to VAT Audit. By amendment in S. 61(1) the following
changes are made :
(a) The turnover limits for attracting VAT Audit is
enhanced from Rs.40 lakhs to 60 lakhs. This will apply from the year
2010-2011.
(b) It is also provided that if the dealer holds
Entitlement Certificate under the Package Scheme of Incentives, then he
should get VAT Audit done irrespective of any monetary limits of turnovers.
(vii) S. 85 enumerates orders which are not appealable. By
amendment to S. 85, appeals in the following matters are debarred :
(a) Appeals against orders levying interest u/s.30(2)/30(4) :
U/s.30(2) interest is levied for delay in payment of tax as
per return. U/s.30(4) additional interest is levied when the dealer revises his
returns as per contingencies given in the said Section. Appeals against both the
orders are debarred. This will affect the dealers harshly. There are various
circumstances under which interest is not justified or justified at lower
amount. Now the dealers will not have any opportunity to get relief in interest,
though they may deserve the same.
(b) Appeals against Provisional attachment order
u/s.35(1)/(2) :
Provision attachment orders are passed u/s. 35(1)(2).
S. 35(5) provides special mode of appeal against such orders.
The dealer has to file application to the Commissioner of Sales Tax against the
attachment order and if such order is upheld by the Commissioner of Sales Tax,
then to file appeal before the Tribunal. This mode is untouched. However there
was no prohibition to file direct appeal before the Tribunal against attachment
order and in one of the matters the Tribunal held so. Now the specific
prohibition is brought in. Therefore, no direct appeal will be entertained
before the Tribunal and one has to go through the route of application to the
Commissioner of Sales Tax and then to the Tribunal.
(c) Appeals against intimation u/s.63(7) :
Intimation is in nature of proposal. It is issued to convey
findings of business audit with suggestive redressal action on part of
the dealer. Therefore appeal was otherwise also not maintainable, as such
intimation may not be an order. However, now the doubt, if any, is put to rest.
No appeal will be maintainable against such intimation issued u/s.63(7).
(viii) S. 86 — Tax invoice :
S. 86 enumerates requirements of Tax Invoice as well as other
than Tax Invoice. By amendment in S. 86 it is now provided that the selling
dealer while issuing Tax Invoice should also mention the TIN of the purchasing
dealer. Therefore, on the Tax Invoices issued from 1-5-2010 onwards, the selling
dealer should mention TIN of the purchasing dealer.
Accordingly, Tax Invoice can now be issued to registered dealers providing TIN. If no TIN of buyer is provided, Tax Invoice cannot be issued to him and if it is issued it can amount to wrong issue. In case Tax Invoice cannot be issued to buyer due to not having TIN, probably the seller will be required to issue other than Tax Invoice, like only invoice or retail invoice, bill, cash memo, etc. and may not be able to charge tax separately in the same. However in absence of specific prohibition, the seller may charge tax separately in other invoices also, though they are not tax invoices. It is better that the Department clarifies its stand on this issue to avoid future disputes.
For buyers it will be necessary to have Tax Invoice containing his TIN, otherwise set-off will not be eligible in respect of such purchase.
(ix) Changes in entries in the Schedules?:
|
Entry No. |
Brief description |
New rate/remarks |
Effective |
|
|
|
|
|
|
A-4(c) |
Sarki Pend |
Exempted form tax (consequently |
|
|
|
|
this item is excluded from entry C-30) |
1-5-2010 |
|
|
|
|
|
|
A-55(b)/(c) |
Camphor/Dhoop including Loban |
Exempted from tax |
1-5-2010 |
|
|
|
|
|
|
A-57 |
Katha (catechu) |
Exempted from tax (consequently |
|
|
|
|
this item is excluded from entry C-44) |
1-5-2010 |
|
|
|
|
|
|
|
|
|
|
|
Entry No. |
Brief description |
New rate/remarks |
Effective |
|||
|
|
|
|
|
|
|
|
|
A-58 |
Handmade laundry soap manufactured |
|
|
|
|
|
|
|
by ‘Khadi Units’ excluding detergent |
Exempted from tax |
1-5-2010 |
|||
|
|
|
|
|
|
|
|
|
B-4 |
Hair-pins |
Brought to tax at 1% from 4% |
|
|
|
|
|
|
|
(consequently entry C-51 is deleted) |
1-5-2010 |
|||
|
|
|
|
|
|
|
|
|
C-115 |
Vehicles operated on battery or solar |
|
|
|
|
|
|
|
power |
Brought to tax at 4% from 12.5% |
1-5-2010 |
|||
|
|
|
|
|
|
|
|
Profession Tax Act, 1975?:
S. 7A is inserted in the Act. By this Section the provisions of the Business Audit, as existing in S. 22 of the MVAT Act, 2002, are made applicable to P.T. Act, 1975. Accordingly, the Department can do Audit under Profession Tax Act, 1975 also.
Simultaneously, the provisions in the MVAT Rules, 2005 about Electronic Filing of Returns, Electronic Payment are made applicable to the Profession Tax?Act?also.?However?exact modalities are awaited by specific rules under P.T. Act and Circular.
Luxury Tax Act, 1987?:
|
|
Particulars |
Rate |
|
|
|
|
|
(a) |
Charges up to Rs.750 per residential |
|
|
|
accommodation. |
Nil |
|
|
|
|
|
(b) |
Where the charges are exceeding |
|
|
|
Rs.750 but are up to Rs.1200. |
4% |
|
|
|
|
|
(c) |
Charges exceeding Rs.1200. |
10% |
|
|
|
|
Under the Luxury Tax Act the change is about increase in threshold limit. The threshold limit for application of the Luxury Tax Act was Rs.200, it is now enhanced to Rs.750. The new slabs from 1-5-2010 and onwards are as under?:
The other change is that the provisions in the MVAT Rules, 2005 about Electronic Fil-ing of Returns, Electronic Payment are made applicable to the Luxury Tax Act also.
Maharashtra Valued Added Tax Rules, 2005?:
The Government has also issued Notification dated 30-4-2010, whereby the MVAT Rules are amended from 1-5-2010. The gist of amendment is as under?:
1) The due date for filing returns in the following categories is extended?:
a) In relation to six-monthly returns, to be filed by retailers under composition scheme, the due?date?is?extend?to?30?days?from?the?present 21 days. The same applies from 1-5-2010 onwards [Rule 17(4)(a)(i)].
b) In case of dealer whose periodicity to file returns is six months (due to tax liability below Rs.1 lakh or refund less than Rs.10 lakhs in previous year), the time limit for filing returns is extended to 30 days from the present 21 days. [Rule 17(4)(b)].
c) New dealers?:
The periodicity for filing returns in case of new dealers is revised. Now they will be liable to file quarterly returns instead of previous position of six-monthly returns.
(2) Conditions of grant of refund?:
Rule 55A has been newly inserted in the MVAT Rules from 1-5-2010. As per the said Rule, Refund will be curtailed in the following two situations?:
i) If tax has not been paid on earlier transactions of sale of goods on which set-off is claimed. The provision will affect innocent buyers harshly. By rule, it appears that simply on ground that tax is not paid earlier, the refund will be curtailed without due process of law. Against the refund order in Form 502, the dealer will be required to file appeal and contest the issue. This will involve long-drawn legal process. This rule is not desirable when general class of dealers is going to be affected.
ii)If C/F forms are not received. The process to claim the refund where forms are received afterwards is required to be clarified by the Department.
3) New Form 604 is inserted, which will be used for giving intimation u/s.63(7) i.e., to convey Business Audit findings.
Value Added Tax System (VAT) has been made applicable for levy of Sales Tax in India from 1.4.2005. Though one of the objects to introduce VAT was to have uniformity in the Taxation Provisions in all the States of India, it is a well known fact that this object has not been achieved and almost all the States have their own levy systems. In Maharashtra, the VAT is being levied under Maharashtra Value Added Tax Act, 2002 (MVAT Act).
Input Tax Credit (ITC, also referred to as set off) is the backbone of VAT system. Therefore the ITC mechanism should be as simple as possible. The VAT system is considered to be ideal for avoiding cascading effect. Therefore dealers should get set off on all the purchases connected with his business. However, as per the current provisions under the MVAT Act, there are many restrictions as well as negative list about set off. In other words, set off is not allowed on all the purchases. Several purchases relating to the business are outside the scope of set off, like: purchases used for erection of immovable properties, purchase of passenger motor car, etc. There are also provisions to restrict setoff under certain circumstances. The reference here is to Rule 53(6) of MVAT Rules, 2005.
Under MVAT Act, section 48 provides for grant of set off to dealers. It also authorises the State Government to draft necessary rules. The State Government, under its authority, made the Rules about grant of set off. The said rules are contained in Rules 52 to 55 of MVAT Rules, 2005. Rule 52 speaks about eligibility to set off, Rule 54 gives negative list on which set off is debarred and Rule 53 provides for reductions from set off. Sub-rule (6) of Rule 53 is one of the most complicated and frequently amended Sub-rules providing for reduction/restriction in set off. The said Sub-rule, which was on the statute book since 1.4.2005, was substituted on 8.9.2006. And it was substituted once again, on 23.10.2008. The second substitution has been made effective from 8.9.2006. Thus, Rule 53(6) is now to be seen in its new form with effect from 8.9.2006. The said rule is reproduced below for ready reference.
53. Reduction in set-off
(A) The set-off available under any rule shall be reduced and shall accordingly be disallowed in part or full in the event of any of the contingencies specified below and to the extent specified. (1) to (5) . . . .
(6) If out of the gross receipts of a dealer, in any year, receipts on account of sale are less than fifty per cent of the total receipts, —
(a) then to the extent that the dealer is a hotel or club, not being covered under composition scheme, the dealer shall be entitled to claim set-off only, —
(i) on the purchases corresponding to the food and drinks (whether alcoholic or not) which are served, supplied or, as the case may be, resold or sold, and
(ii) on the purchases of capital assets and consumables pertaining to the kitchens and sale, service or supply of the said food or drinks, and
(b) in so far as the dealer is not a hotel or restaurant, the dealer shall be entitled to claim set-off only on those purchases effected in that year where the corresponding goods are sold or resold within six months of the date of purchase or are consigned within the said period, not by way of sale to another State, to oneself or one’s agent or purchases of packing materials used for packing of such goods sold, resold or consigned :
Provided that for the purposes of clause (b), the dealer who is a manufacturer of goods, not being a dealer principally engaged in doing job work or labour work, shall be entitled to claim set-off on his purchases of plant and machinery which are treated as capital assets and purchases of parts, components and accessories of the said capital assets, and on purchases of consumables, stores and packing materials in respect of a period of three years starting from the end of the year containing the date of effect of the certificate of registration.
Some important implications of the above rule can be considered as under :
i) If out of the gross receipts, the receipts from the sale of goods are less than 50% of the gross receipts, then this rule will apply. Therefore finding out above ratio is important. The comparison is to be done on yearly basis. This concept of making yearly comparison itself is against the very system of ITC under VAT. The setoff system should have free flow. Normally on entering the purchase in the records, the dealer should be entitled to claim set off of the same. In other words, set off should be eligible as soon as the purchase is entered in the books of account. However, as per above rule, this is not so.
Though the dealer claims the set off on effecting the purchase, he will be required to find out the correctness of the said claim after the end of the year. If the receipts from the sales are less than 50% of gross receipts, then the set off will be restricted to the purchases, as indicated in above rule. Amongst others, in case of dealers other than hotels, the set off will get disallowed on the capital assets as well as expenditure items debited to P & L A/c. Thus the original claim of the dealer will be wrong and such a dealer will be required to recalculate and reduce the setoff already taken by him, after the end of the year. Thus the very purpose of allowing set off as per the date of purchase gets defeated.
An issue again arises that if the set off is to be reduced after the end of the year, due to above application of rule 53(6), then in which returns the reduction is to be made. As per set off Rules the dealer is entitled to claim set off as soon as the purchase is entered into the books of accounts. As per rule 53(8) the reduction in setoff, due to contingency contained in rule 53, is to be given effect in the return period in which such contingency arises. In relation to rule 53(6) the contingency arises after the end of the year. Therefore, at the most, the effect to reduction in light of rule 53(6) can be given in the last return only. Hence the last return of the year can be revised to give effect to the above rule 53(6).
ii) The other issue arises as to the meaning of gross receipts. In the earlier un-amended rule the meaning of gross receipts for the purpose of rule 53(6) was explained by way of Explanation under the Rule. However, the said Explanation is now not appearing in this substituted rule. Therefore, the meaning remains to be ascertained by the dealer. Several issues may arise in this respect.
a) Whether only the receipts of Maharashtra are to be considered or all the activities, including activities in other States, are also to be considered ?
It is an important issue as the receipts from sale will certainly be relating to Maharashtra. The word ‘sale’ is defined in the MYAT Act and as per the said definition ‘sale’ means sale within the state of Maharashtra. Therefore, so far as. the receipts from sales are concerned they will mean only receipts of sales effected in the State of Maharashtra. Though the meaning of ‘gross receipt’ is not given, it is an accepted principle that only comparables can be compared. Therefore, if in relation to sales, receipts from sales effected only in Maharashtra are to be considered, then for gross receipts also receipts only from Maharashtra should be considered. Though this can be a fair interpretation it is better that the law itself provides for the meaning to avoid litigation in future.
b) The other issue in this respect is, what is to be included in gross receipts. One view can be that items appearing on the credit side of Trading A/c. and P & L A/c. should be considered. The other view can be that all receipts, on whatever account, should be considered. As per this view receipts on account of dealing in assets like sale of assets etc. should also be considered for gross receipts. In this respect also a clarification from the department is most welcome to avoid un-necessary debate. Normally, gross receipts should be restricted to receipts appearing on credit side of Trading and P & L Accounts excluding dealings in assets, etc. Receipts from sale of assets forming part of turnover of sales may also be considered for gross receipts. However receipts from sale of assets not covered by MYAT Act like sale of immovable properties or sale of shares etc., cannot get covered in gross receipts. However clarification from the Department on above aspect is necessary.
iii) Another important issue is that if this rule applies then in relation to dealers, other than hotels, set off is eligible only on purchases which are sold within six months from the date of purchase. This will require identification of purchase and sale. This condition also is not as per the spirit of ITC under VAT. Although in case of reseller the issue may not bother much as identification in such a case will normally be available, but in case of manufacturers, this kind of identification may pose several difficulties. The dealer will be required to adopt the system as permissible on the facts and circumstances of the case.
iv) This sub-rule may hit hard, manufacturers. It provides that a manufacturer will be eligible to get set off on plant and machinery etc., even if the sales are less than 50% of the gross receipts. However, this concession is given only for three years from the end of the year in which the registration has been granted. It can be said that this exception is provided for new manufacturing dealers. However, in these initial years existing dealers can also avail the benefit. The MVAT Act has been brought into effect from 1.4.2005. The registration granted under the BST Act, 1959 is deemed to have come to an end on 31.3.2005 due to abolition of the said Act. The registration numbers granted under the BST Act, 1959 continued in the VAT period also because of specific provision to that effect in the MV ATAct, 2002. Reference can be made to section 96 (1) (b) of MVAT Act, 2002, which reads as under.
96. Savings
1) Notwithstanding the repeal by section 95 of any of the laws referred to therein, —
“(b) any registration certificate issued under the Bombay Sales Tax Act, 1959, being a registration certificate in force immediately before the appointed day shall, in so far as the liability to pay tax under sub-section (1) of section 3 of this Act exists, be deemed on the appointed day to be the certificate of registration issued under this Act, and accordingly the dealer holding such registration certificate immediately before the appointed day, shall, until the certificate is duly cancelled under this Act, be deemed to be a registered dealer liable to pay tax under
this Act and all the provisions of this Act shall apply to him as they apply to a dealer liable to pay tax under this Act.”
In light of above, it can be said that the continuation of registration granted under BST Act in the MVAT period is as good as grant of new registration under the MVAT Act, 2002. Therefore, in case of existing dealers the three years from the end of the year in which registration is granted, is to be considered from 2005-06. In other words, existing dealers will get the benefit of above exception for three years from 2005-06 i.e. upto 2008-09.
The real difficulty arises after the three years are over. In such cases, inspite of fact that there are purchases of machinery etc., the dealers will not be entitled for any set off of taxes paid on purchase of such machineries. This will certainly be against the very purpose and spirit of the MYAT Act and the scheme of ITC under VAT.
v) One more issue which arises in respect of this sub-rule, is due to retrospective effect to the amended rule. Though the rule is substituted in October 2008, the effect is given from 8.9.2006. For example, a dealer might have claimed set off for the year 2006-07/2007-08 etc. in light of earlier Rule and would have claimed the set off accordingly in the returns. A situation may arise for reducing set off for earlier years in light of substituted rule due to retrospective effect given to it. The issue is who is responsible to carry out such reduction. There can be different situations. If the returns were already filed before the amendment date and VAT Audit was also carried out, then is there a responsibility on the dealer to file revised returns etc. ? The statutory time limit for filing revised returns is only 9 months from the end of the year. Therefore the department cannot insist for revising returns to give effect to retrospective effect after the end of the period for revising returns. There is also no obligation on the dealer to revise the returns after the end of the period for revising the returns, to give effect to the adverse amendment. In the amended rules also, there is no obligation or direction to the dealer to file revised returns to give effect to the amended rule for prior period. Therefore, the dealer is not required to take any action. However, the department can take action and by making assessment, give the due effect.
In fact there are number of such ambiguities in relation to rule 53(6). All are not discussed here for sake of brevity. The above are a few important ones and readers may also come across further issues in relation to above rule. We expect that the Government will come out with proper clarification on various issues, in above rule, keeping into account the prime role of ITC in a successful VAT system.
The Government of Maharashtra has recently amended Rules 17,
18 and 81 of the Maharashtra Value Added Tax Rules, 2005. The forms, procedures
and periodicity in respect of filing of returns and payment of taxes have also
been modified. Certain dealers are now required to file e-returns and others may
find their periodicity changed from monthly to quarterly or from quarterly to
six-monthly. However, every dealer shall file his returns in the new format for
all the periods commencing from 1st April 2008
The amended periodicity, for filing returns may be summarised
as under :
| Sr. No. | Category |
Periodicity |
| 1. |
(a) Newly registered dealers (on or after 1st April 2008) (b) Retailers opted for Composition Scheme
(c) Tax liability in the previous year up to Rs.1 lakh or |
6 monthly |
| 2. |
(a) Dealers under Package Scheme of Incentive
(b) Tax liability in the previous year exceeds Rs.1 lakh, |
Quarterly |
| 3. | All other dealers whose tax liability in the previous |
Monthly |
The due date for filing return and for payment of taxes
continues to be the same i.e., within 21 days from the end of the
month, quarter or six months as the case may be.
The monthly returns are required to be filed for each
calendar month, quarterly returns for each quarter of three months (i.e.,
Apr-Jun, Jul-Sep, Oct-Dec and Jan-Mar) and six-monthly returns for the period of
six months (i.e., April to September and October to March).
The term ‘Tax liability’ has been defined in Explanation I to
Rule 17(4) of the MVAT Rules. Accordingly, it means the total of all taxes
payable by a dealer in respect of all of his places of business or as the case
may be, of all the constituents of his business in the State under the MVAT as
well as the CST Act after adjusting the amount of set-off or refund claimed by
him. Thus, for the purpose of calculating the tax liability, the tax payable at
all the places of business or all the constituents of business are to be
considered and the said amount shall be reduced by the amount of set-off or
refund actually claimed by the dealer.
Change in Return Forms and Electronic Filing of Returns :
(Refer : Government Notification dated 14-3-2008,
Commissioner’s Notification dated 14-3-2008, Trade Circular No. 8T/2008, dated
19-3-2008, 10T/2008, dated 3-4-2008, 16T/2008, dated 23-4-2008 and 17T/2008
dated 5-5-2008 :
Note: The Commissioner of SalesTax,vide Circular dated 23rd April 2008has clarified that in the initial period, it is possible that the dealers may face some difficulties in preparing and uploading the electronic return. Considering the difficulties likely to be faced by these dealers, a concession is provided by allowing the dealer to upload the e-return within 10days from the due date for the filing of respective return. This concession shall be only for the return/ s to be filed for month of May 2008 to that of September 2008. The e-return for these months uploaded within 10 days from their due date will not be treated as late, provided the payment of due tax is made on or before the due date for normal filing of paper returns.
The applicability of new return forms may be tabulated as under:
Separate v. Consolidated Filing of Returns:
The provisions for filing separate returns [Rule 17(2) (c)] have been deleted in the recent amendment to the MVAT Rules. As a result, now dealers can’t file separate returns. Thus dealers who are having more than one place of business or who is having more than one constituents of business is required to file only one consolidated return, as per the applicable periodicity, for all the places of business or constituents of business, subject to the following exceptions:
i) If a dealer is holding an Entitlement Certificate and also carrying on other business activity, then he is required to file more than one return in respect of his other activity,
ii) If a dealer is a PSI unit or a notified oil company and also in the business of execution of works contract, transfer of the right to use any goods for any purpose or has opted for composition for part of his business, then in addition to return in Form 234 or 235, he shall also I file a separate return in Form no. 233.
Revised Return :
The revised return can be filed before the expiry of the period of nine months from the end of the year containing the period of such return or before the issuance of notice for assessment for that period, whichever is earlier.
As per the provisions of S. 32(3) of the MVAT Act, read with Rule 17(2)(d) of the MVAT Rules, it is specifically provided that, in case of revised return, the dealer shall first pay tax (in Challan Form No. 210) in Government Treasury and attach a self-attested copy of the paid Challan with the revised return, which shall be filed with the appropriate registering authority.
Prescribed Authority:
As per Rule 17 of the MVAT Rules, the prescribed authority, with whom a dealer is required to file his return/ s are as follows:
i) When tax is payable for any period, the return for that period shall be filed in Government Treasury as defined in Rule 2(f) of the MVAT Rules 2005.
ii) When tax payable is NIL or REFUND, then return shall be furnished to the registering authority within whose jurisdiction the principal place of business is situated. (In Mumbai, all such returns are to be filed at specific counters provided for the purpose at Vikrikar Bhavan, Mazgaon.)
iii) In case of non-resident dealer, if tax payable is NIL or REFUND, then the return shall be filed with the registering authority, Non-Resident Registration Circle, Mumbai, if the dealer is registered by such authority.
iv) PSI dealer shall file returns with the registering authority having jurisdiction over respective place of business of the dealer, in respect of which he holds a certificate of Entitlement under any PSI covering all the sales and purchases relating to the eligible industrial unit. However, it is provided that if tho dealer is holding two or more Entitlement Certificates, then he must file the returns with the registering authority, which has jurisdiction over the place of business pertaining to the Entitlement Certificate whose period of entitlement ends later.
It may be noted that S. 20 of the MVAT Act requires every registered dealer to file a correct, complete and self-consistent return and Rule 20 of the MVAT Rules clarifies that return/ s shall be deemed to be complete and self-consistent, only if the returns are filed:
Defect Memo & Fresh Return :
In case of an incorrect/incomplete or inconsistent return, the Sales Tax authority can issue a defect memo, u/s.22 of the MVAT Act. Such defect memo is prescribed in Form No. 212 and it can be issued within four months from the date of filing of the return. On receiving a defect memo, the dealer is required to file a Fresh Return.
The Registered Dealer, to whom such defect memo is issued, shall file a fresh correct, complete and self-consistent return within one month of the service of such defect memo. If the dealer fails to file the fresh return within one month, then such a dealer may be treated as defaulter in filing of return and it will be presumed that the dealer has not filed the original return at all within the prescribed time and thus he may be liable to face penalty provisions. It may be noted that the defect memo issued in Form No. 212 is not challengeable in appeal.
Penalty for Non-filing or Late Filing of Return/s:
The Government of Maharashtra has recently amended S. 29(8) of MVAT Act, 2002, whereby the penalty for non-filing and late filing of return/ s has been enhanced. As per the amendment, (which shall come into force from a date to be notified), if the return is filed before the initiation of the proceedings for levy of penalty, then the penalty shall be levied at rupees five thousand, instead of rupees one thousand as provided earlier. In other cases, the amount of penalty imposable is increased from rupees two thousand to rupees ten thousand.
An important issue arose before the Maharashtra Sales Tax
Tribunal in respect of nature of interstate lease transaction in the case of
Thermax Babcock & Wilcox Ltd. (S.A. 1285 of 2003, dated 14-12-2009). The facts
are that M/s. RIL entered into a lease transaction for lease of boiler with M/s.
RUPL. Both parties are located in Gujarat. M/s. RUPL placed order on M/s. T of
Pune for supply of boiler component. The unloading place was RIL in Gujarat. The
period involved was 1997-98. M/s. T collected ‘C’ Form from RUPL. In the
assessment of T, tax at 4% was levied on the above supply value under the CST
Act, 1956. The appellant, M/s. T was agitating the levy of tax on the ground
that his supplies to RUPL are in the course of inter-state lease and the period
being prior to 11-5-2002, tax is not attracted. It was submitted that the lease
transactions are brought in the CST Act from 11-5-2002 and hence the levy of tax
in case of the appellant was argued to be illegal and unlawful.
Thus the issue before the Tribunal was whether the
transaction of M/s. T to supply boiler parts to M/s. RUPL, who has leased boiler
to M/s. RIL, amounts to inter-state lease transaction. The gist of arguments of
the appellant may be noted as under :
(b) There was a lease agreement between RUPL and RIL by which the lessor, RUPL, agreed to purchase the goods (auxiliary boiler) from the appellant (M/s. T) and lease it out to RIL (lessee). The lease agreement between RUPL and RIL has identified M/s. T as a manufacturer and supplier of required goods as per the specification and design agreed upon.
(c) RUPL has placed the purchase order pursuant to lease agreement between RUPL and RIL and accordingly the goods manufactured by the appellant (M/s. T) have been moved from Pune to Jamnagar (Gujarat). These goods were dispatched to RIL, Jamnagar A/c RUPL who was described as consignee.
(d) When the manufacturer dispatched the goods to the consignee ‘RIL A/c RUPL’ and handed over the goods to the common carrier, according to M/s. T, the right to use the goods got transferred to the consignee, RIL.
(e) Since these transactions involved inter-state movement from Maharashtra to Gujarat, it was an inter-state lease transaction, not liable to tax, being effected prior to the amendment in the Central Sales Tax Act, 1956 to this effect.
(f) According to M/s. T, the facts and the ratio laid down in the case of M/s. ITC Classic Finance & Services v. Commissioner of Commercial Tax, Andhra Pradesh, (97 STC 337) are similar to those present in the case of the appellant, and therefore, prayer was made to delete the tax levied on inter-state lease transactions @ 4% against declarations in Form ‘C’, which were issued as a matter of abundant caution.
The M.S.T. Tribunal examined the above arguments in light of
legal position about inter-state sales transactions, as well as nature of the
lease transaction. Citing the judgments in the case of M/s. Magnese Ore India
Ltd. (37 STC 489) & M/s. Mohmad Sirajuddin (36 STC 136) (SC), the Tribunal
observed as under in relation to the inter-state lease transaction :
“That the following conditions must be fulfilled before the
sale can be said to take place in the course of inter-state trade;
1. There is a contract of sale, which contains a
stipulation express or implied, regarding the movement of the goods from one
state to another.
2. In pursuance of that agreement, the goods in fact move
from one state to another.
3. Ultimately a concluded sale takes place in the state
where the goods are sent, which must be different from the state from which
the goods moved.
If these conditions are complied with, then by virtue of S. 9
of the Central Act, it is the state from which the goods moved which will be
competent to levy the tax under the provision of the Central Act.”
The M.S.T. Tribunal also referred to the judgments cited by
the appellant viz. M/s. ITC Classic Finance & Services (97 STC 330) and M/s.
Srei International Finance Ltd. (16 VST 193). In this respect, the M.S.T.
Tribunal observed that in these judgments the issue was about lease charges
charged by respective parties. The Tribunal observed that in the present case,
the amount charged by the appellant is for supply of goods and not for leasing
of goods. Therefore, the M.S.T. Tribunal held that these judgments are not
applicable to the present case.
The Tribunal noted the factual position as under :
The appellant is a
manufacturer and supplier of boilers and its parts.
It is an admitted fact
that RUPL entered into an agreement to lease out the goods required by RIL,
and this lease agreement was signed on 6-6-1997.
This lease agreement was
between RUPL and RIL and not with the appellant M/s. T.
As per this lease
agreement, the lessor (RUPL) agreed to give and the lessee (RIL) agreed to
take on lease diverse equipment, details and aggregated amount whereof was
specified in Schedule-I attached to that agreement on the terms and conditions
mentioned therein.
As per this lease
agreement the lessor (RUPL) agreed to transfer the right to use by way of
lease and RIL (lessee) agreed to take on lease the equipment to be operated
under the supervision and the technical assistance of RUPL.
The lease agreement has
identified M/s. T as a vendor who was to manufacture and supply auxiliary
boilers at particular value.
Based on the above facts, the Tribunal held that RUPL becomes owner of goods after supply by M/s. T. RUPL has leased the goods as his goods. Therefore, the transaction by M/s. T was pure and simple normal sale for supply of goods and not a lease transaction. Accordingly, the Tribunal rejected the arguments of the appellant holding as under :
1. The agreement between the appellant and RUPL was not a lease agreement which stipulated handing over the possession of goods for absolute use.
2. There was an agreement which is reflected in the purchase order placed by RUPL, which proves that the agreement was for transfer of property in the goods and not transfer of right to use the goods as contemplated under the Lease Act.
3. RUPL has to first acquire the property in goods by way of purchase from the appellant to become absolute owner of property and then only RUPL becomes legally competent to lease out this property and not otherwise. When RUPL acquired the property in goods, inter-state sale got concluded, which was effected by the appellant (M/s. T). The Tribunal observed that M/s. T has failed to establish inextricable link.
Accordingly, the M.S.T. Tribunal held that the leasing is between RUPL and RIL which is a separate transaction. The sale by M/s. T to RUPL is normal sale liable to tax and as such the Tribunal confirmed the levy of tax under the CST Act, 1956.
InterState sale transactions are covered by the Central Sales Tax Act, 1956 (CST Act). The nature of interState sale has been defined in Section 3 of the CST Act. In fact there are two sub-sections namely 3(a) and 3(b). Section 3(a) covers direct interState sale involving movement of goods from one State to another State. Section 3(b) covers interState sale transaction effected by transfer of documents of title to goods during the movement of goods from one State to another State. The discussion here is in respect of nature of sale covered by Section 3(a).
Section 3(a) is reproduced below for ready reference.
“S.3. When is a sale or purchase of goods said to take place in the course of interState trade of commerce — A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another; or …”
Thus a sale occasioning movement of goods from one State to another State is covered by above sub-Section. However whether there is movement of goods from one State to another State, so as to be covered by Section 3(a), is required to be ascertained from facts of the case. Where the vendor dispatches the goods to the buyer in other State there is not much difficulty. However when there is no direct dispatch proof the difficulty arises. For example, a buyer from another State has taken delivery from the vendor at his premises. Whether such transactions will be interState or intra State raises an issue. Such issue has to be decided based on relevant other documents/circumstances. There are certain decisions by various forums to ascertain the correct position. Reference can be made to following few judgments for looking further into the subject.
Nivea Time (108 STC 6) (Bom.) :
The observations of the Bombay High Court on nature of interState sale are as under :
“8. Section 3 of the Central Sales Tax Act, 1956 lays down when a sale or purchase of goods is said to take place in the course of interState trade or commerce. It says :
“A sale or purchase of goods shall be deemed to take place in the course of interState trade or commerce if the sale or purchase —
(a) occasions the movement of goods from one State to another; or
(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”
In this case, we are concerned with sale or purchase falling under clause (a).
9. It is well-settled by now by a catena of decisions of the Supreme Court that a sale can be said to have taken place in the course of interState trade under clause (a) of Section 3, if it can be shown that the sale has occasioned the movement of goods from one State to another. A sale in the course of interState trade has three essentials : (i) there must be a sale; (ii) the goods must actually be moved from one State to another; and (iii) the sale and movement of the goods must be part of the same transaction. The word ‘occasions’ is used as a verb and means to cause to be the immediate cause thereof. There has to be a direct nexus between the sale and the movement of the goods from one State to another. In other words, the movement should be an incident of and necessitated by the contract of sale and be interlinked with the sale of goods.”
In this case there was no direct dispatch proof. However the buyer was from other State and goods purchased were meant for factory in other State. The Hon’ble High Court held transaction as interState sale.
English Electric Company of India Ltd. vs. Deputy Commercial Tax Officer [1976] (38 STC 475) (SC)
In this case, the Supreme Court observed as under :
‘…. – If there is a conceivable link between the movement of the goods and the buyer’s contract, and if in the course of interState movement the goods move only to reach the buyer, in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific or ascertained goods ought to be deemed to have taken place in the course of interState trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another ….”
From the above judgments it becomes clear that unless a link between dispatch and pre-existing sale is established, no interState sale can take place. The movement is to be cause and effect of such sale. In light of the above judgments for practical purposes following aspects of a transaction are looked into;
(a) There must be pre existing sale from a buyer from other State.
(b) The goods should be ascertained qua such pre existing sale to fulfil the requirement of such sale.
(c) The said goods should be moved to other State. It is necessary that same goods in the same quality and the same quantity are moved to other State.
(d) The same goods should be delivered to buyer so as to complete the interState sale.
(e) Once the above criteria are fulfilled, then even if delivery is local, the transaction will be interState sale.
Who moves the goods ? It is not very much important. Link between sale and movement is relevant. Therefore, even if local delivery is given but if goods are to be taken to other State by buyer it will be interState sale. However to comply with the conditions of Section 3(a), following proof should be preserved :
a) Purchase order from the buyer stating that the goods are meant for his place in other State and he will move the goods to such place.
b) Confirmation from the buyer that the goods are taken to such place.
If the above evidence is available it will be interState sale. However, if such evidence is lacking, then the transaction will be a local sale transaction.
Saraswathi Agencies (21 VST 200) Mad.
In this case the link between the sale and movement was missing, though buyer was from other State. The transaction was held to be local sale. The gist of the said judgment is as under.
“In order to come under the category of interState sale, the sale should be to a purchaser outside the State and there should be movement of goods from one State to another. In case the movement of goods from one State to another was occasioned on account of the agreement entered into between the seller and the purchaser, the sale is a sale in the course of interState trade attracting the provisions of the Central Sales Tax Act, 1956. But when the actual movement of goods was at the instance of the purchaser and the part played by the dealer was: only delivery of the articles at the place of business of the dealer, it cannot be said that there was an interState sale warranting payment of Central sales tax. The dealer should have undertaken the task of supplying the articles in the business place of the purchaser in different States for the purpose of the, Central Sales Tax Act. Therefore the paramount consideration in the matter of interState sale is the contract as well as the movement of goods.
The petitioner, a dealer in electrical goods, wet grinders, pumpsets, etc., for the assessment year 1994 – 95 reported nil total and taxable turnover under the CST Act. The Assessing Officer fourtd that the sale in favour of purchasers from Kerala; Karnataka and Andhra Pradesh were not shown in the accounts. Accordingly, the assessing authority considered those sales as interState sales. The petitioner appealed before the Appellate Assistant Commissioner who confirmed the assessment. THe Appellate Tribunal was also of the opinion that the bills having been raised in the name of tli.”e consumers from other States, the transactions were interState sales liable for payment of tax under the Central Sales Tax Act. On writ petition, the Madras High Court held;
If purchasers from neighbouring States came to Chennai and made purchases from the dealer in Chennai and took articles to their home State on their own, it could not be said that there was an element of interState sale in the transaction. There was no evidence to show that the petitioner itself had dispatched the goods through lorry service to the Sta tes of Karna taka, Kerala and And hra Pradesh. No evidence was found in the assessment order to show such dispatch by the dealer. It was the consistent case of the dealer that the goods were delivered at Chennai only, though the purchasers were from the neighbouring States. There was no obligation on the part of the petitioner to transport those articles to the actual place of the purchasers. Unless and until it was proved that the products were actually delivered by the dealer in the respective States as shown in the bills, it could not be said that the transaction was an interState trade.
In the absence of any such positive material evidencing interState sale, the sales as found in the assessment order could not be termed to be sales in the course of interState trade warranting payment of tax under the Central Sales Tax Act.
Burden of Proof:
Commissioner of Sales Tax, V.P., Lucknow vs. Suresh Chand Jain (70 STC 45)(SC) :
In this case the Hon’ble Supreme Court dealing with the facts given below, also dealt with issue of burden of proof. The Honble Supreme Court observed as under:
“The respondent, a dealer carrying on business in tendu leaves in U.P., had claimed from the very beginning that he had effected only local sales of the tendu leaves, that he had not effected any sales of tendu leaves in the course of inter-State trade, that he had never applied to the Forest Department for issue of form T.P. IV and no such forms were issued to him, and that the tendu leaves were never booked by him through railway or trucks for places outside U.P. The Appellate Tribunal found nothing to discredit the version of the dealer. The Tribunal had also taken notice of T.P. form IV which did not relate to sale but was a permit or certificate regarding the validity of nikasi of tendu leaves from the forest. The Tribunal accepted the claim of the dealer and held that the sales in question were not inter-State sales. On revision, the High Court found no material to interfere. On a petition for special leave filed by the Department:
The Supreme Court dismissing the petition held that the Tribunal applied the correct principle of law, viz., that the condition precedent for imposing sales tax under the Central Sales Tax Act, 1956,was that the goods must move out of the State in pursuance of some contract entered into between the seller and the purchaser.
A sale can be said to be in the course of inter-State trade only if two conditions concur, uiz., (i) a sale of goods and (ii) a transport of those goods from one State to another. Unless both these conditions were satisfied, there could be no sale in the course of inter-State trade. There must be evidence that the transportation was occasioned by the contract and as a result goods moved out of the bargain between the parties, from one State to another.
The onus lies on the Revenue to disprove the contention of the dealer that a sale is a local sale and to show that it is an inter-State sale.”
Thus burden to prove a particular fact lies on the party who alleges otherwise. In fact there are number of rulings in relation to this issue. The above are indicative to look a little more into the subject.
Introduction :
Normally all fiscal laws
contain penalty provisions. The intention of such provisions is to have
deterrent effect on the defaulting dealers. However, in what circumstances
penalty can be levied is an issue to be appreciated by authority empowered to
levy the penalty. There are number of judgments where it is held that for levy
of penalty mens rea is a condition precedent. There are also judgments where it
is observed that mens rea may not be necessary to be proved for levy of penalty
under fiscal laws. Normally in relation to fiscal laws reference is made to the
landmark judgment of the Supreme Court in case of Hindustan Steel Ltd. (25 STC
211) (SC) wherein the Supreme Court has observed about nature and incidence of
penalty under fiscal laws. The relevant para is reproduced below:
“Under the Act penalty may
be imposed for failure to register as a dealer : S. 9(1) r/w S. 25(1)(a) of the
Act. But the liability to pay penalty does not arise merely upon proof of
default in registering as a dealer. An order imposing penalty for failure to
carry out a statutory obligation is the result of a quasi-criminal proceeding,
and penalty will not ordinarily be imposed unless the party obliged either acted
deliberately in defiance of law or was guilty of conduct contumacious or
dishonest, or acted in conscious disregard of its obligation. Penalty will not
also be imposed merely because it is lawful to do so. Whether penalty should be
imposed for failure to perform a statutory obligation is a matter of discretion
of the authority to be exercised judicially and on a consideration of all the
relevant circumstances. Even if a minimum penalty is prescribed, the authority
competent to impose the penalty will be justified in refusing to impose penalty,
when there is a technical or venial breach of the provisions of the Act or where
the breach flows from a bona fide belief that the offender is not liable
to the act in the manner prescribed by the statute. Those in charge of the
affairs of the company in failing to register the company as a dealer acted in
the honest and genuine belief that the company was not a dealer. Granting that
they erred, no case for imposing penalty was made out.”
Recently, the Supreme Court
had an occasion to decide one such penalty matter under the CST Act, 1956 in
case of M/s. Commissioner of Sales Tax, U.P. v. Sanjiv Fabrics, (35 VST 1) (SC).
The facts are that, as per
Registration Certificate under the CST Act, 1956 the dealer was authorised to
purchase cotton/cotton yarn on C Form. However the dealer had purchased cotton
waste, polythene, sutli and tat against C Form. The lower authority considered
the said purchases as unauthorised and levied penalty u/s.10(b) read with S. 10A
of the CST Act, 1956.
The further fact is that
when the issue of penalty came up, the dealer applied for amendment of
registration certificate. Against the penalty order an appeal was filed but the
dealer failed. The Tribunal also upheld the penalty on the ground that cotton
and cotton wastes are two different commodities, hence, there was sufficient
cause for penalty. The argument of the dealer was that he has acted under
bona fide belief that cotton includes cotton waste. The matter was carried
further to the High Court by the dealer. The Allahabad High Court allowed the
appeal by observing as under :
‘Cotton’ and ‘Cotton Waste’
are two different commodities known to Sales Tax Laws. However, there is not
much distinction from the point of view of ordinary people. The applicant is a
registered dealer since the A.Y. 1977-78 and has been making purchases of
‘Cotton waste’ and issuing Form C thereof since then. The department earlier
than October 15, 1985 raised no objection. This as was submitted by the learned
counsel for the applicant is very relevant
circumstance for determination of the question ‘false representation’ occurring
in S. 10(b) of the Act . . . . When Tax Laws are so complex the administration
should proceed specially in the penalty matter from the view of ordinary citizen
who is always willing to comply with the conditions of law. The assessee as soon
as it came to know about its (sic) fault filed application for amendment of
registration certificate. Some fault was on the part of the Department also for
maintaining silence over the period of about eight years.”
The Sales Tax Department
preferred SLP before the Supreme Court contending that mens rea is not an
essential ingredient of the offence u/s.10(b) of the CST Act, 1956 and it is in
the nature of civil liability. It was further argued that if prosecution is
launched, only then mens rea assumes importance.
The argument of the dealer
was that the penalty u/s.10(b) is in lieu of prosecution and mens rea would be
sine qua non for attracting the said penalty.
The Supreme Court referred
to relevant provisions of the CST Act, 1956 i.e., S. 10(b) and S. 10A which are
reproduced below :
“10. Penalties
If any person —
“(b) being a registered
dealer, falsely represents when purchasing any class of goods that goods of
such a class are covered by his certificate of registration, or . . . .”
“10A.
Imposition of penalty in lieu of prosecution
(1) If any person purchasing goods is guilty of an offence under clause (b) or clause (c) or clause
(d) of S. 10, the authority who granted to him or, as the case may be, is competent to grant to him a certificate of registration under this Act may, after giving him a reasonable opportunity of being heard, by order in writing, impose upon him by way of penalty a sum not exceeding one and a half times the tax which would have been levied under Ss.(2) of S. 8 in respect of the sale to him of the goods, if the sale had been a sale falling within that sub-section. Provided that no prosecution for an offence u/s.10 shall be instituted in respect of the same facts on which a penalty has been imposed under this Section.”
The Supreme Court observed that the real issue is to see what is the significance of using the words ‘falsely represents’. In light of the above, the Supreme Court wanted to find out whether the above term contemplates concept of mens rea. Supreme Court referred to earlier judgment in the case of Nathulal v. State of Madhya Pradesh, (AIR 1966 SC 43) and referred to the following observations:
“Mens rea is an essential ingredient of a criminal offence. Doubtless a statute may exclude the element of mens rea, but it is a sound rule of con-struction adopted in England and also accepted in India to construe a statutory provision creating an offence in conformity with the common law rather than against it unless the statute expressly or by necessary implication excluded mens rea. The mere fact that the object of the statute is to promote welfare activities or to eradicate a grave social evil is by itself not decisive of the question whether the element of guilty mind is excluded from the ingredients of an offence. Mens rea by necessary implication may be excluded from a statute only where it is absolutely clear that the implementation of the object of the statute would otherwise be defeated. The nature of the mens rea that would be implied in a statute creating an offence depends on the object of the Act and the provisions thereof ….”
The Supreme Court referred to the judgment in the case of Union of India v. Dharamendra Textile Processors, (2008) 13 SCC 369 and simultaneously also referred to the judgment in the case of Union of India v. Rajasthan Spinning & Weaving Mills, (2009) (13 SCC 448) and observed that “in examining whether mens rea is an essential element of an offence created under a taxing statute, regard must be had to the following factors:
(i) the object and scheme of the statute;
(ii) the language of the Section; and
(iii) the nature of penalty.”
On overall appreciation of S. 10(b) and legal position about mens rea, the Supreme Court held as under:
“In view of the above, we are of the considered opinion that the use of the expression ‘falsely represents’ is indicative of the fact that the offence u/s.10(b) of the Act comes into existence only where a dealer acts deliberately in defiance of law or is guilty of contumacious or dishon-est conduct. Therefore, in proceedings for levy of penalty u/s.10A of the Act, burden would be on the Revenue to prove the existence of circumstances constituting the said offence. Furthermore, it is evident from the heading of S. 10A of the Act that for breach of any provision of the Act, constituting an offence u/s.10 of the Act, ordinary remedy is prosecution which may entail a sentence of imprisonment and the penalty u/s.10A of the Act is only in lieu of prosecution. In light of the language employed in the Section and the nature of penalty con-templated therein, we find it difficult to hold that all types of omissions or commissions in the use of Form ‘C’ will be embraced in the expression ‘false representation’. In our opinion, therefore, a finding of mens rea is a condition precedent for levying penalty u/s.10(b) read with S. 10A of the Act.”
Accordingly the Supreme Court held that mens rea was required to be satisfied before levy of penalty. The Supreme Court remitted the matters back to the adjudicating authority for fresh consideration of the issue, in light of the findings of the mens rea on part of the dealer.
The views presented by the Empowered Committee, through its First Discussion Paper on GST, may be summarised as follows :
1. It would be dual GST i.e., Central GST and State GST.
2. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute separate for each State).
3. Central GST shall be administered by the Central Government and State GST by respective State Government.
4. The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.
5. Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilised only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilisation or refund of credit.
6. Cross-utilisation of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services, which shall be liable for IGST.
7. The inter-State transactions of goods as well as services shall be liable for IGST (i.e., CGST plus SGST) with full credit in the State of destination.
8. Although CGST and SGST would be applicable to all transactions of goods and services made for a consideration, except on exempted goods and services, there would also be a list of items which shall remain out of the purview of GST.
9. The State Governments shall continue to levy excise duty and sales tax (VAT) on production/sale/purchase of goods, which are outside the purview of GST.
10. The imports shall be liable for CGST as well as SGST to be levied by Central and State Governments, respectively.
11. The Empowered Committee has recommended that certain taxes and levies, presently levied by the Central Government and the States, should be subsumed in GST, however whether to include or not certain other taxes and levies, the matter is still under consideration.
12. Although, rates of tax are yet to be decided, the Discussion Paper indicates that there may be more than two rates of tax. The rate of CGST and the rate of SGST on various goods and services may be different. The rate of tax on goods and the rate of tax on services may also differ.
13. While the threshold limit of gross annual turnover for SGST is proposed to be Rupees 10 lacs (both for goods as well as services), the threshold for CGST may be Rupees 150 lacs and a separate threshold of CGST may be worked out in respect of annual turnover of services.
14. The exemptions, remissions, etc. in relation to Special Industrial Area Schemes are proposed to be continued till legitimate expiry time both for the Centre and the States.
15. Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for income-tax, facilitating data exchange and taxpayer compliance.
16. The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.
The Empowered Committee has recommended that, to begin with, the following taxes and levies may be subsumed in the proposed Goods and Services Tax :
A. Central Taxes :
(i) Central Excise Duty
(ii) Additional Excise Duties
(iii) Excise Duty levied under the Medicinal and Toiletries Preparation Act
(iv) Service Tax
(v) Additional Customs Duty, commonly known as Countervailing Duty (CVD)
(vi) Special Additional Duty of Customs — 4% (SAD)
(vii) Surcharges, and
(viii) Cesses
B. State Taxes :
(i) VAT/Sales tax.
(ii) Entertainment tax (unless it is levied by the local bodies).
(iii) Luxury tax.
(iv) Taxes on lottery, betting and gambling.
(v) State Cesses and Surcharges insofar as they relate to supply of goods and services.
(vi) Entry tax not in lieu of Octroi.
There are several other taxes and levies on which a consensus is yet to be arrived.
It is further clarified that for a transaction to be regarded as “transfer of right to use goods”, the transfer has to be coupled with possession. Court rulings have upheld that when the effective control and possession is with the supplier, there is no transfer of right to use. It is a service of preparation of a place to hold a function or event & effective possession and control over the pandal or shamiana remains with the service provider, even after the erection is complete. Accordingly, services provided by way of erection of pandal or shamiana would attract the levy of service tax.
Facts
The dealer was assessed for the period 1991-92 under The Tamil Nadu General Sales Tax act, 1959 wherein the assessing authority levied tax on estimation of turnover of sales based on quotations raised against which no sale bills were issued. The Tribunal in appeal, observing that there was no material to prove that the assesse had sold any goods to any individual or contractor, passed the order deleting the levy of tax on estimated turnover of sales. The Department filed appeal petition before the Madras High Court against the impugned order of the Tribunal.
Held
As observed by the Tribunal, there was no material for treating the quotations as sale bills and estimating turnover on the basis of the quotation. As rightly held by the Tribunal, the assessing authority had not probed the matter beyond treating quotation book as sale bill. Accordingly, the High Court confirmed the order of the Tribunal and dismissed the appeal filed by the Department.
Facts
In the assessment for the period 2004-05, the claim of the dealer for concessional rate of tax against form ‘C’ was disallowed for want of required ‘C’ forms but the Tribunal permitted production of ‘C’ forms received subsequently and the matter was remanded back to the assessing authority for verification of the forms. Subsequently, the dealer received four more ‘C’ forms and produced before the assessing authority with a request to consider those forms also. This prayer was rejected by the assessing authority on the ground that there was no evidence of those forms having been produced before the Tribunal at the time of hearing of the appeal. The dealer filed writ petition before the Punjab and Haryana High Court, against the refusal by the assessing authority to consider the claim of concessional rate of tax for production of additional ‘C’ Forms before him on the ground that forms can be produced at any stage.
Held
The explanation of the dealer was that the forms were issued by the purchasing dealers in question after the decision of the appellate authority and on that ground the same could not be produced earlier. As noted in the quoted part of the order of the Tribunal, during the hearing, the forms were sought to be produced, which was not allowed. In view of explanation given by the petitioner that the forms were received late, it could be held that there was sufficient cause for the petitioner for not producing the same before the assessing and appellate authority which was no bar to the same being produced before the Tribunal. Accordingly, the writ petition filed by the dealer was allowed by the High Court to allow the petitioner to produce the Forms in accordance with law.
Facts
Dealer engaged in selling motor cycles collected service charges or handling charges from customer for registration of motor cycles under Motor Vehicles Act, 1988. The vat authorities levied vat on such amount which was contested before The Maharashtra Sales Tax Tribunal. The Tribunal held that such charges did not constitute a part of sale price within the meaning of ‘sale price’ defined in section 2 (25) of the MVAT Act, 2002. The Vat Department filed appeal before the Bombay High Court against the decision of the Tribunal setting aside the levy of vat on such handling charges collected by the dealer from the customer at the time of sale of motor cycles.
Held
The High Court held that the transfer of property in the goods in pursuance of the sale contract took place against the payment of price of the goods. Delivery of the goods was effected by the seller to the buyer. The obligation under the law to obtain registration of the motor vehicle was cast upon the buyer. The service of facilitating the registration of the vehicles which was rendered by the selling dealer was to the buyer and in rendering that service, the seller acted as an agent of the buyer. Therefore, the handling charges which were recovered by the respondent could not be regarded as forming part of the consideration paid or payableto the dealer for the sale. Those charges cannot fall within the extended meaning of the expression “ sale price”, since they did not constitute sum charged for anything anything done by the seller in respect of the goods at the time of or before the delivery thereof. The High Court accordingly dismissed the appeal filed by the Department and confirmed the order of the Tribunal.
Facts:
Appellant was described as consignment Agent by M/s. SAIL as per the Agreement dated 30-03- 2001. The appellant registered and paid service tax under the category of “Storage and warehousing services” for the year 2001-2002 and part of 2002-2003. But, later they discontinued payment of service tax. A show cause notice was issued to them alleging that they were the consignment agents of M/s. SAIL and were liable for service tax as “Clearing & Forwarding Agent”. As per the agreement, the appellants were required to render the services of ‘unloading of materials at Danapur/Fatuha or any other nearest operating Public siding, transportation of materials and unloading at consignment yard in the appointed place, stacking (including marking/painting) of materials as per stacking plan/storage guidelines and loading into customers vehicles for delivery. As per the agreement, the appellants provided services of transportation of iron and steel products from Fatuha Rail Goods to Banka Ghat Stockyard, wherefrom, importers of such goods from Nepal could collect the said goods. Appellants raised invoices for unloading, transportation and loading of the export consignment. Appellants were neither clearing the goods from the factory of M/s. SAIL nor forwarded the goods to anybody else. They carried out the activity of transhipment of goods meant for export. Appellant was of the view that his activities were covered under the category of cargo handling service. Appellant also contended that, mere mentioning the appellant as consignment Agent in the Agreement, ipso facto, cannot be the criterion for classifying the activities under the heading C & F Agents for the purpose of service tax. The intention, purpose, and activities rendered by the appellants, were alone relevant. Appellant further contended that, activity of Consignment Agent did not come under the purview of Clearing and Forwarding Agents. Penalty on director was also levied.
Held:
The activities were not limited to just loading and unloading of cargo but also involved stacking, which included marking/painting, loading, into customers’ vehicles for delivery with weighment and necessary documentation, carrying out stock verification during storage at the stock yard clearly indicated that the services fall under the scope of “Clearing and Forwarding Agent Services” as per section 65(25) and 65(105)(j) of the Finance Act, 1994. Service of consignment agent is specifically included in the scope of Clearing and Forwarding Services. Section 65(25) and 65(105)(j) of the Act. As per section 65A of the Act, the sub-clause providing most specific description is to be preferred to sub-clause providing a general description. After reading the Agreement between M/s. SAIL And the appellant, it is clear that appellant was appointed as Consignment Agent, which is specifically included in the definition of Clearing & Forwarding Agent services. In contrast, claim of the appellant that they are rendering cargo handling service to M/s. SAIL and accordingly classifiable under the Heading Cargo Handling service, is more general in nature than the specific service of a consignment agent included in the definition of C & F service. Accordingly, they were C&F Agents. Since the authorities did not record specific involvement of the director in short/non payment of service tax warranting a personal penalty on him, except holding that he was overall in charge of the affairs of the appellant company, the penalty was set aside.
Facts:
Appellant filed appeal against the order levying service tax along with interest and penalty on the receipts of stamp duty, BSE charges and SEBI fees, which were deposited by the appellant with the authority under different statutes. Limitation ground was also pleaded.
Held:
Clause (a) of explanation to section 67 of Finance Act,1994 stipulates that aggregate of commission or brokerage charged by broker on sale or purchase of securities including commission or brokerage paid by the stock broker to any sub broker is liable to service tax. It cannot be expanded to levy tax on a receipt by implication or inference. It is an unambiguous charging section, which is to be construed strictly. No receipt other than commission or brokerage made by a stock broker, that being the consideration for taxable service, is intended to be brought to ambit of assessable value of service provided by stock broker, charge on such other items is arbitrary taxation and cannot be taxed in disguise – section 65(101) and 65(105) (a). Scope of section 67 cannot be expanded to have artificial measure for levy bringing a receipt by implication and not in accordance with the charging provision. It is intrinsic value of service provided which is taxed without any hypothetical rule of computation of value of taxable service. Bonafide belief was clear as there was no levy on receipts other than brokerage received by stock broker from investors. In such a case, suppression cannot be charged. Hence, extended period was not invokable. No subject can be made liable without authority of law and based on presumption or assumption. Provisions cannot be imported in statute so as to supply any deficiency. Appeal was thus allowed.
Facts
The petitioner purchased the immovable property in a public auction conducted by the Tamil Nadu Industrial Investment Corporation, which had taken possession of the said property u/s. 29 of the State Financial Corporation Act, 1951 from the defaulter. The petitioner lodged the sale deed executed by the Corporation before the sub-registrar for registration. The sub-registrar refused to register the document on the ground that the property is attached by the Commercial Tax Officer to recover sales tax arrears of the defaulter dealer. The petitioner filed a writ petition before the Madras High Court against the refusal of registration of sale deed by the sub-registrar.
Held
It is trite that when the assets are secured assets and in case by invoking section 29 of the State Financial Corporation Act, 1951, the secured creditor takes possession of the property, the principle of first charge/priority of State over the property will not be applicable. Since possession of the property was already taken over by the Corporation by invoking section 29 of the State Financial Corporations Act, 1951, thereafter, there is no question of the attachment of it by the Commercial Tax Officer. Accordingly the High Court allowed the writ petition and directed the sub-registrar to register the sale deed disregarding the order of attachment made by the Commercial Tax Officer.
Facts:
The Appellant, a manufacturer, had two units in Bangalore. The credit on input services received by both the units was shown in CENVAT account maintained in UNIT-I. On account of an audit objection, the Appellant reversed the said availment of credit. An SCN was issued demanding interest and proposing penalty on the said reversal. The Original Authority dropped the demands, the order was reviewed and the Commissioner (Appeals) in addition to interest and penalty also disallowed the CENVAT and appropriated the same on which equal penalty was also levied.
The Appellant contended that no issue other than one pertaining to interest on reversal could be examined by the lower appellate authority and further relying on the decision of the Hon. Karnataka High Court in CCE, Bang. vs. Gokaldas Images (P) Ltd. 2012 (28) 214 (Kar) stated that no interest ought to have been levied since no amount was utilised for payment of duty.
The revenue relying on the decision of the Hon. Supreme Court in Ind-Swift Laboratories contended that the term taken ‘or’ utilised cannot be construed to mean ‘and’, and thus interest was liable to be paid.
Held:
The Tribunal while relying on the decision of Gokaldas Images (P) Ltd. (supra) allowed the appeal and observed that duty to pay interest for delayed payment would not arise unless the credit of duty entered into the account books is duly taken to discharge the duty payable. The said credit was not actually utilised for payment of duty as the Appellant only availed the credit and not utilised.
Rule 12. (5) The declaration referred to in s/s. (1) of section 6-A shall be in Form ‘F’:
Provided that a single declaration may cover transfer of goods by a dealer, to any other place of his business or to his agent or principal, as the case may be, effected during a period of one calendar month;
Provided further that if the space provided in Form ‘F’ is not sufficient for making the entries, the particulars specified in Form ‘F’ may be given in separate annexures attached to that form so long as it is indicated in the form that the annexures form part thereof and every such annexure is also signed by the person signing the declaration in Form ‘F’;
Provided also that Form ‘F’ in force before the commencement of the Central Sales Tax (Registration and Turnover) (Second Amendment) Rules, 1973, may continue to be used upto 31st day of December, 1980 with suitable modifications.”
Controversy
As can be seen from the above rule, one single ‘F’ form can cover transfers effected during one calendar month. In other words, if there are transactions of more than one month in one ‘F’ form than the said ‘F’ form may not be effective for transactions exceeding the month.
In most of the judgments, given by Hon’ble Maharashtra Sales Tax Tribunal, the above position is accepted. Reference can be made to the judgment of Hon’ble Tribunal in case of Akay Cosmetics Pvt. Ltd. (A.No.33 of 2008 & SA No.255 of 2009, SA No.610 of 2009 dt. 3.5.2010). In this case, Hon’ble Tribunal has held that if the ‘F’ form is for transactions exceeding one month then it should be allowed only for one month. It is also observed that the dealer can take benefit of month for which there is highest amount. However, it cannot be effective for transactions exceeding one particular month.
In this respect, generally reference is made to the judgment of Hon’ble Supreme Court in case of India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes, Bangalore (139 STC 329)(SC). In this case the issue was about admissibility of ‘C’ form. The Supreme Court has observed that the ‘C’ form should be submitted as per rules. Taking note of this judgment, it is generally interpreted that the declaration forms should be as per rules.
Recent judgment of Calcutta High Court
Recently, the Hon’ble Calcutta High Court had an occasion to deal with the said situation. The ‘F’ form was covering transactions for more than one month and hence, it was disallowed. The assessee, i.e. Cipla Ltd., filed a Writ Petition in the Hon’ble High Court. The Calcutta High Court has delivered judgment in case of Cipla Ltd. vs. Deputy Commissioner, Commercial Tax, Corporate Division & Others which is reported in (61 VST 445)(Cal). In this judgment, Hon’ble High Court has held as under:
“The order has apparently been passed ex parte. Three F forms have been disallowed on the purported ground that the three F forms bearing nos. 37514, 37518 and 37521 covered transactions exceeding a period of one month. It appears that the Additional Commissioner, Commercial Taxes, West Bengal has misconstrued rule 12(5) of the Central Sales Tax (Registration and Turnover) Rules,1957 which provides that the declaration referred to in s/s. (1) of section 6A of the Central Sales Tax Act,1956 shall be in Form F. The proviso to rule 12(5) provides that a single declaration might cover transfer of goods, by a dealer, to any other place of business, or agent, or principal, as the case may be, effected during a period of one calendar month. There is nothing in the rules which can be constructed to vitiate a declaration form only on the ground that it covers transactions exceeding a period of over a month. The assessment has apparently been revised suo motu and ex parte on a misconception of rule 12(5) of the Rules. The impugned order is, thus, set aside and quashed.”
In light of the above, it can safely be inferred that even if the ‘F’ form is for transactions exceeding one month, it still will be valid for all the transactions. In this case, the judgment of Supreme Court in India Agencies is not cited or considered. However, since the High Court judgment is in relation to specific rule 12(5), it will be applicable, so far as ‘F’ forms are concerned.
Situation in other states
An issue can arise, as to whether the above judgment will be effective in other States also. In this respect, reference can be made to the judgment of Hon’ble Bombay High Court in case of Maniklal Chunnilal & Sons Ltd. vs. C.I.T. (24 ITR 375), wherein it is held that the judgment of any High Court under Central Act is binding in other States also except in a case where contrary judgment of the jurisdictional High Court of the respective state is available. The relevant portion of judgment is as under:
“A Special Bench of the Madras High Court has taken the view favourable to the Commissioner and contrary to the view suggested by Mr. Palkhiwala and in conformity with the uniform policy which we have laid down in income-tax matters, whatever our own view may be, we must accept the view taken by another High Court on the interpretation of the section of a statute which is an all-India statute.”
In light of the above, the judgment of the Calcutta High Court will be binding on other States also. It will be binding on Maharashtra also as there is no contrary judgment of the Hon‘ble Bombay High Court on the above issue.
Conclusion
It is a practical experience that getting declaration forms from the department is very difficult, more particularly, when substantial time has elapsed. It is also time consuming. Under the above circumstances, disallowance of claims on technical grounds cannot be justified. The judgment of the Calcutta High Court as such is very positive and practical and will give the much required relief to the dealers.
Facts
The dealers filed writ petition before the AP High Court challenging constitutional validity of section 13(4) of the APVAT Act and Rule 20(2)(h) of the APVAT Rules. The effect of this rule is that all petitioners availing input tax credit in respect of coal, naphtha or natural gas u/s.13(1) of the APVAT Act is denied from retrospective effect.
Held
(1) The replacement of sales tax by VAT is mainly intended to improve revenue collections and to prevent cascading effect on sale price, besides plugging gaps in tax collection. It also becomes clear that though the Legislature permits the dealers to avail input tax credit (ITC) in respect of most items of common consumption, it was never intended that all taxable goods and business should invariables be allowed ITC.
(2) Under the Act, the tax payable by the VAT dealer shall be X-Y, where X is the total of VAT payable in respect all taxable sales made by a dealer and Y is the total ITC, which he is eligible to claim set-off. The ITC is allowed in respect of purchases of taxable goods except tax paid on purchase of goods specified in the sixth Schedule, subject to conditions that may be prescribed by the VAT Rules. S.s (4) of section 13 of the Act bars a VAT dealer claiming ITC in respect of the purchase of taxable goods as may be prescribed by the rule-making authority to that extent position is not denied. The petitioners urged that under the Act, ITC can be denied only in respect of those goods which are exempt from tax or attracts special rate of tax as provided in the sixth Schedule.
(3) The Government can prescribe any or all purchase of taxable goods in respect of which ITC should not be allowed, whether or not those taxable goods are included in the first or sixth Schedule. Section 13(4) r.w.s. 78(1) of the Act confers widest power on the State to prescribe the taxable goods in respect of which ITC cannot be allowed.
(4) The Legislature has retained prior legislative control on the rule-making authority. The VAT Rules, so laid before the legislative assembly for a period of 14 days can be modified or annulled and they shall be enforced only subject to such modification or annulment. Therefore section 13(4) of the VAT Act does not suffer from excessive delegation.
(5) The Rule 20(2)(h) which disqualifies natural gas, naphtha and coal from claiming ITC is valid and does not suffer from any defect of being ultra vires and is also not unreasonable. Since under Rule 20(2) when goods mentioned in negative list are sold subsequently without availing ITC, no tax shall be levied or recoverable from a dealer on sale of such goods. This brings out the rationale in classifying the traders and non-traders. Traders and non-traders do not stand on the same footing when it comes to use of such goods. The purpose or the use to which goods are put to use can be basis for a valid classification. The impugned rule is not discriminatory.
(6) In absence of any reasons, the retrospective effect given to rule is inequitable and arbitrary. Accordingly, it shall apply prospectively from notified date i.e., 31-12-2005.
Trade Cir. No 1T of 2013 dated 4-1-2013 It has been clarified that the developers who have obtained registrations up to 15th October 2012, filed returns and paid taxes due up to 31st October 2012 and who file the audit reports in Form 704 on or before 15th January 2013 for all the past periods i.e. from 2006-07 to 31-3-2012 shall not be subjected to penalty u/s 61(2) of MVAT Act, 2002. It has also been clarified that the audit report u/s. 61 in Form no. 704 for all periods up to 2011-12 is to be filed electronically.
Circular No.166/1 /2013 –
ST It is clarified that reminder letters/notices being issued to the life insurance policyholders to pay renewal premiums are not invoices within the meaning of Rule 4A of the Service Tax Rules, 1994 and consequently, no tax point arises on account of issuance of such reminders and hence, it would not invite levy of Service Tax.
Appellants were offering plots of land for sale with assurance of layout approvals of development of infrastructure/amenities, etc. as a package. The question for consideration before the Apex Court was, can such activities be regarded as a ‘service’ within the meaning of clause (o) of section 2(1) of the Consumer Protection Act, 1986 (the Act) and, therefore, can the buyer of such plots be regarded as a “consumer of service” and consequently be eligible for relief/s under the Act?
Held
The Honourable Supreme Court, relying upon its own decisions viz. Lucknow Development Authority (1994) 1 SCC 243 and Bangalore Development Authority (2007) 6 SCC 711, held that activities of offering plots of land for sale with assurance of layout approvals of development of infrastructure/ amenities etc. as a package would be regarded as a ‘service’ within the meaning of clause (o) of section 2(1) of the Consumer Protection Act, 1986 and consequently buyers of such plot would be eligible for relief/s under the said Act.
Appellant was engaged in the maintenance and repairing of roads and runways and was registered under the category of “management, maintenance or repairs”. SCN was issued proposing to levy service tax on repairs and maintenance of roads and runways. The adjudicating authority as well as CCE Appeals confirmed the levy. The Honourable Tribunal, while partly dispensing with the pre-deposit requirement, held that maintenance and repairs of roads are exempt and not runways and hence ordered proportionate pre-deposit of Rs. 3 crore.
Held
The Honourable High Court observed that runways at the airport are species of the genus ‘road’ and hence, should receive the same treatment as roads for service tax purpose and hence, directed the Tribunal to hear the appeal afresh on the merits of the case at the earliest, without insisting on pre-deposit, and the Tribu
As per the scheme of Central Sales Tax Act (CST) when subsequent sale is effected in the course of the same movement, then it is exempted from tax as per section 6(2) of the CST Act, subject to production of C form and E1/E-II form as the case may be. There are a number of judgments throwing light on the various aspects of exempted sale u/s. 6(2). Reference can be made from important judgments like, State of Gujarat vs. Haridas Mulji Thakker (84 STC 317)(Guj), M/s.Fatechand Chaturbhujdas vs. State of Maharashtra (S.A.894 of 1990 dated.12-8-1991) (M.S.T. Tribunal), M/s.Duvent Fans P. Ltd. vs. State of Tamil Nadu (113 STC 431)(Mad.) and M/s. G. A. Galiakotwala & Co. (37 STC 536) (SC).
However, a controversy developed after the judgment of Hon. Supreme Court in case of A & G Projects & Technologies (19 VST 239)(SC).
Issue in A & G Projects & Technologies (19 VST 239) (SC)
The issue before the Supreme Court was from the judgment of Karnataka High Court. The accepted position in the Karnataka High Court judgment was that the Karnataka Sales Tax Assessing Authority considered the sale of A & G Projects as effected under section 3(a) of the CST Act in Tamil Nadu. Inspite of holding so, the tax was levied in Karnataka under CST Act. Before the Supreme Court the issue was whether tax can be levied in Karnataka inspite of holding the transaction as covered by section 3(a) in Tamil Nadu? In effect, the Supreme Court considered the application of section 9(1) of the CST Act. There was no issue about interpretation of section 6(2) of CST Act which is about “sale by transfer of documents of title to goods”, also popularly known as “in transit sale”. However, Hon. Supreme Court has made certain observations in the above judgment regarding “In transit sale”, because of which there was confusion. The relevant observations can be reproduced as under for ready reference:
“Within section 3(b) fall sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto whereas section 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale and property in the goods passes in either States [SEE: Tata Iron & Steel Co. Ltd. vs. S.R. Sarkar – (1960) 11 STC 655 (SC) at page 667]. The dividing line between sales or purchases u/s. 3(a) and those falling u/s. 3(b) is that in the former case the movement is under the contract whereas in the latter case the contract comes into existence only after the commencement and before termination of the inter-State movement of the goods.” (Underlining ours)
Due to the above observations the sales tax authorities were taking a view that if the customer to whom sale by transfer of documents is to be effected was known prior to movement then it will be a pre determined sale and will not fall in the exempted category of section 6(2) of CST Act. This created a number of difficulties for the trading community.
Recent judgment of Hon. M. S. T. Tribunal in case of Ajay Trading Company (S A No.111 of 2010 dated12- 12-2012).
Facts of this case
The appellant is a trader and reseller of machinery in Maharashtra. The outside state buyers, herein after referred to as ‘ultimate buyers’ placed an order for purchase of machinery from the appellant. The ultimate buyers were from the state of Gujarat and Rajasthan. The appellant, in turn placed order on local manufacturers in Maharashtra for manufacture of those machineries. The appellant has instructed the manufacturers to dispatch the goods to the ultimate buyers. As per the instructions of the appellant, the manufacturers manufactured the machineries and dispatched them to the ultimate buyers in respective states. The invoices, delivery Challan and the lorry receipts i.e. dispatch proof was sent to the appellant. The appellant signed the lorry receipts and delivered the same to the ultimate buyers. In invoice, the local manufacturer levied CST @ 4%. The appellant raised invoice on the ultimate buyers without levying CST. Turnover of such sales to the tune of Rs. 58,26,750/- was claimed by the appellant in his returns for the period 2005-06 as a subsequent sale u/s. 6(2) of CST Act, as such exempted from central sales tax.
The appellant issued C form to the local manufacturers, who in turn issued an E1 form to the appellant. The ultimate buyers, on receiving the machinery, issued ‘C’ form to the appellant
The assessing officer assessed the appellant for the year 2005-06 and disallowed the claim of subsequent sale u/s. 6(2) holding that both the sales were interstate sales u/s. 3(a) of the CST Act. According to him, property in the machineries was transferred to the outside buyers before the movement of machineries outside the state. As such there is no subsequent sale u/s 6(2) by transfer of documents of the title. Hence, the turnover of the subsequent sale claimed by the appellant was held as not exempt. He levied sales tax on the same, considering it as sales u/s 3(a), on the basis of the decision of the Karnataka High Court in case of State of Karnataka vs. M/s A & G Projects and Technologies Ltd (13 VST 177) and Supreme Court in case of A & G Projects & Technologies vs. State of Karnataka (19 VST 239)(SC).
Arguments
The appellant contended that the local manufacturers have moved the machinery outside the state of Maharashtra as per the instructions of the appellant and sent the dispatch proof i.e. lorry receipt along with the invoice to the appellant. He submitted that the appellant signed the lorry receipts and delivered it to the ultimate buyers. He submitted that the first sale is an interstate sale u/s. 3(a) of the CST Act, and the sale by the appellant to the ultimate buyer is effected by the transfer of documents of title to goods during interstate movement and it is a subsequent sale u/s 3(b) r.w.s 6(2) of CST Act and as such it is exempted from central sales tax. It was submitted that both the authorities below committed an error in relying on the decision of Karnataka High Court and Supreme Court in case of M/s A & G Projects and Technologies Ltd. (cited supra).
Judgment
The Tribunal held that the facts of the present case are similar to the cases of Bayyana Bhimayya & Sukhdevi Rathi vs. Govt. of A.P. (12 STC 147), Onkaral Nandlal vs. State of Rajasthan (60 STC 314) and Haridas Mulji Thakker vs. State of Gujarat (84 STC 319).
The Tribunal observed that the appellant agreed to supply future goods to ultimate buyers outside the state. Delivery to them was on a future date. The appellant in turn placed an order on local manufacturers to manufacture those goods as required by the ultimate buyers and incorporated the term of delivery in the contract to deliver the goods to its ultimate purchasers on its behalf. The local manufacturer manufactured the goods and delivered the goods to the transporter for delivery to ultimate buyers. The local manufacturers moved the goods outside the state of Maharashtra. The contract of sale among them and appellant occasioned the movement of goods outside the state of Maharashtra. It fulfills the requirement of section 3(a) of CST Act and section 3(a) is attracted.
The Tribunal further observed that the law permits two sales simultaneously. Referring to Omkarlal Nandlal’s case Tribunal observed that the same sale may be both a sale in course of inter-state trade or commerce u/s. 3 of CST Act as also a sale inside state. Applying these observations to the facts of the present case, the sale among the local manufacturer and appellant was held as first inter state sale u/s. 3(a) of CST Act, and not a local sale. The subsequent sale by appellant to the ultimate buyer was held as exempt u/s.6(2) r.w.s. 3(b) of CST Act, 1956.
Conclusion
From above judgment the theory of subsequent exempted sale gets reiterated and also shows that A & G Projects judgment has not made any difference in interpretation of section 6(2) of CST Act. It is also expected that the assumed theory of predetermined sale will also get settled now and the trade community will have sigh of relief.
The Central Board of Excise and Customs (“CBEC”) in supersession of seven previous circulars on the same subject issued Circular No. 967/01/2013 CX on 1st January, 2013, directing the departmental officers to initiate recovery actions in cases where 30 days have expired after the filing of appeal by an assessee before an appellate authority. This action by CBEC is most unprecedented and totally unjust and unfair inasmuch as it has resulted in penal consequences for reasons beyond the control of an assessee and has rendered the statutory right of appeal nugatory. The said CBEC Circular is unjust and unfair for various reasons and in particular due to the fact that in large number of cases, stay applications are not disposed of due to inaction at the end of the concerned appellate authority and for no fault of the assessee.
In this regard, significant observations made by the Honourable Supreme Court of India (reproduced hereafter) in Commissioner of Cus & CE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC), have been totally ignored by CBEC:
“Para 6
The sub-section which was introduced in terrorem cannot be construed as punishing the assessees for matters which may be completely beyond their control For example, many of the Tribunals are not constituted and it is not possible for such Tribunals to dispose of matters. Occasionally by reason of other administrative exigencies for which the assessee cannot be held liable, the stay applications are not disposed within the time specified. ….”
Bombay High Court Ruling in Larsen & Toubro Ltd. vs. UOI (2013) 288 ELT 481 (Bom) – Automatic Stay of recovery after filing of Stay Application – No coercive actions unless assessee resorts to dilatory tactics.
A Writ Petition was filed under Article 226 of the Constitution challenging the CBEC Circular dated 1-1-2013. The Petitioners pleaded that when the stay application remains to be disposed of due to inability of the appellate authority to take up the application for hearing and disposal without any default on the part of the assessee, it would be arbitrary to penalise the assessee by enforcing the recovery, despite the pendency of the application for stay. The Honourable High Court noted the ruling in Collector vs. Krishna Sales (P) Ltd. (1994) 73 ELT 519 (SC) and relied on the rulings in CCE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC); Mark Auto Industries Ltd. vs. UOI (1998) 102 ELT 542 (DEL) and Nedumparambil P George vs. UOI (2009) 242 ELT 523 (BOM), while making important observations set out hereafter. As regards CBEC’s directive that even though stay application was filed before Commissioner (Appeals)/CESTAT which is pending, recovery could be initiated upon completion of 30 days after filing of appeal if no stay is granted, the following was observed:
• If on failure of Appellate Authority to dispose of appeal or stay is not due to default of assessee or their dilatory tactics, to initiate recovery by coercive measures in the meantime, is unjustified, arbitrary, travesty of justice and violative of Article 14 of Constitution of India.
• It is unjust to penalise the assessee for inability of judicial/quasi judicial authority to dispose stay application within thirty days. The fact that a period of thirty days is allowed to lapse after filing of appeal is immaterial as Commissioner (Appeals)/CESTAT may not have heard the stay application within these thirty days.
• Lack of adequate infrastructure, unavailability of officer before whom stay application had been filed, absence of bench of CESTAT or sheer volume of work, are some causes due to which applications for stay remain pending, which are beyond control of assessee.
• Protection of revenue has to be balanced with fairness to assessee. That is why even though Section 35C(2A) of Central Excise Act, 1944 prescribes that stay order stands vacated where appeal before Tribunal is not disposed of within 180 days, it is not applicable where appeal remains pending for reasons not attributable to assessee. In such a scenario, Revenue’s plea that when there is no stay and thus there is no prohibition of recovery of confirmed demand immediately, and it is a matter of government policy to how long it should wait before initiating recovery is rejected.
• The fact that Revenue officers initiating recovery are independent of adjudicating/appellate forum, and have no means of verifying status of stay application and it is for assessee to inform them when recovery action is initiated, is not a valid justification for penalising assessee whose conduct is otherwise free from blame with modern technology, this can be overcome. However, if a stay application remains pending for more than reasonable period, due to default/improper conduct of assessee, recovery proceedings can be initiated. As regards CBEC’s directive that in cases where Commissioner (Appeals)/CESTAT or the High Court confirms the demand, recovery has to be initiated immediately, the Court observed as under:
• This directive ‘deprives’ the assessee even a reasonable time to exercise the remedy provided to them under the law of filing an appeal with CESTAT, High Court or Supreme Court as the case may be along with an application of stay.
• Further, there is no justification to commence recovery immediately following the order–in– appeal where period of limitation has been laid down for challenging it under the law. As regards adoption of modern information technology in regard to appeal and adjudication processes, the following important observations, were made by the Court at Para 16:
• Union Ministry of Finance should take steps to ensure that proceedings before the adjudicating authorities as well as the Appellate Authorities including the Commissioner (Appeals) and the CESTAT are recorded in the electronic form.
• Once an appeal is filed before the Commissioner (Appeals), the filing of the appeal must be recorded through an entry made in the electronic form. Every appellant, including the assessee, must indicate, when an appeal is filed, an email ID for service of summons and intimation of dates of hearing.
• We would also recommend to the Union Ministry of Finance the urgent need to introduce electronic software that would ensure that the orders and proceedings of the CESTAT are duly compiled, collated and published in the electronic form.
• Matters involving Revenue have large financial implications for the Union Government. The incorporation of electronic technology in the functioning of judicial and quasi-judicial authorities constituted under the Central Excise Act, 1944, the Customs Act, 1962 and cognate legislation would provide a measure of transparency and accountability in the functioning of the adjudicating officers, the appellate Commissioners as well as the Tribunal. But equally significant is the need to protect the interest of the Revenue which the adoption of electronic technology would also achieve.
• The fact that an application for stay may be kept pending for an indefinitely long period of time at the behest of an unscrupulous assessee and a willing administrative or quasi judicial authority. This would be obviated by incorporating the requirement of disseminating and uploading the proceedings of judicial and quasi-judicial authorities under the Central Excise Act 1944 as well as the Customs Act 1962 in an electronic form. This would ensure that a measure of administrative control can be retained with a view to safeguarding the position of the Revenue as well as in ensuring fairness to the assessees.
The Court finally at Para 17 held as follows:
“For these reasons, we have come to the conclusion that the provisions contained in the impugned circular dated 1st January, 2013 mandating the initiation of recovery proceedings thirty days after the filing of an appeal, if no stay is granted, cannot be applied to an assessee who has filed an application for stay, which has remained pending for reasons beyond the control of the assessee. Where however, an application for stay has remained pending for more than a reasonable period, for reasons having a bearing on the default or the improper conduct of an assessee, recovery proceedings can well be initiated as explained in the earlier part of the judgment”
Stay by other Courts
In addition to Bombay High Court, interim stay has been granted against operation of CBEC Circular dated 1-1-2013 by the High Courts of Andhra Pradesh, Delhi, Karnataka and Rajasthan. [Reference can be made to Bharat Hotels Ltd. vs. UOI (2013) 288 ELT 509 (DEL); Texonic Instruments vs. UOI (2013) 288 ELT 510 (KAR) and R.S.W. M Ltd vs. UOI (2013) 288 ELT 511 (RAJ)
Directions given by the Bombay High Court in Patel Engineering Limited 2013-TIOL-150-HC -MUM-ST The assessee had filed a writ petition in the Bombay High Court against the Circular dated 1-0-2013. The assessee’s facts are similar to those of Larsen & Toubro case (supra). The Honourable High Court after considering the decision in Larsen & Toubro (supra ) held that recovery proceedings be stalled and further issued directions for the authorities to issue a circular to follow the directions as stated in the Larsen & Toubro case (supra) before initiating recovery proceedings. Further, the Honourable High Court also held that the law laid by the Court is applicable to all the authorities under the jurisdiction of this Court.
Conclusion
The above assumes greater importance for the simple reason that despite the Court Rulings of Larsen & Toubro (supra), it is understood that at practical level, field formations are initiating recovery actions based on CBEC Circular insisting that Court Ruling is applicable to the concerned petitioner only. It is high time that the Supreme Court intervenes in the matter and issues appropriate directions or alternatively, the Union Ministry of Finance urgently acts upon the directions given by the Honourable High Court and move towards establishing accountability and reforming tax administration in the country.
Facts
As per the requirement of foreign buyers and in terms of the export orders, the company purchased tags and labels from printing presses and attached to each and every coir product exported giving product description in terms of buyer’s norms. The assessing authorities held that the purchase of tags and labels by the company were consumed in manufacturing of coir products as such liable to purchase tax u/s. 5A of the Kerala General Sales Tax Act, 1963, which was confirmed by the Tribunal. The company filed revision petition before the Kerala High Court against the levy of purchase tax by the assessing authorities.
Held
The High court, allowing the revision petition filed by the company, held that admittedly tags and labels were printed by the supplier printing press in terms of the company’s orders, which were in conformity with export orders. So much so, the commodity, even at the time of printing or manufacture, was earmarked for export, after purchase and they were attached to the products exported. Therefore the commodity purchased was for export by attachment to the coir products without any change and exempt from payment of purchase tax being deemed export u/s. 5(3) of the CST Act.
Facts
The Pondicherry General Sales Tax Rules provides that if the assesse claimed any concessional rate of tax based on any declaration in form C or D, as the case may be and fails to furnish the declaration with returns then the dealer shall be assessed at the higher rate of tax on the turnover declared in the returns filed by him. However, if the dealer filed required declaration within a period of 90 days from the date of receipt of the assessment order, the assessment order stands suitably modified under the Act to the extent of the declaration filed. Since in the case of a dealer, necessary declaration in F form was not filed at the time of filing of the return, the assessment was made at higher rate of tax. The dealer filed application u/s. 16 of the Act with the production of necessary F form which was rejected on the ground that the application was not made within the prescribed period of 90 days. The dealer filed writ petition before the High Court against the order.
Held
It may be noted that the furnishing of the statutory forms is not within the control of the petitioner and is dependent on the other State dealer’s co-operation. If on a sufficient cause the petitioner satisfies the requirements of law, the claim cannot be rejected unjustifiably merely on the score of time limit prescribed under the Act. The High Court accordingly allowed the writ petition filed by the dealer with a direction to the department to accept Form F filed by the dealer and grant necessary relief.
Facts:
The appellants were engaged in promoting, marketing and distributing (installation and warranty) of various medical equipments for M/s. Viasys International Corporation, Pennsylvania, USA. The appellants discharged the service tax liability in respect of the installation and warranty services but did not pay service tax on advertising, promoting and marketing services under the category of business auxiliary as it was export of services. The appellants submitted that all the conditions as stipulated from time to time in relation to export of services were satisfied. The appellants relied on the CBEC Circular No. 111/5/2009-ST dated 24th February, 2009 which stated that in respect of service recipient based services, the relevant factor is the location of the service recipient and not the place of performance. The appellants also relied on a) Em Jay Engineers vs. CCE, Mumbai 2010 (20) STR 821 (Tri – Mum), (b) Lenovo (India) Pvt. Ltd. vs. CCE, Bangalore 2010 (20) STR 66 (Tri – Bang) and (c) SGS India Pvt. Ltd. vs. CST, Mumbai 2011 (24) STR 60 (Tri – Mumbai).
Held:
The Tribunal held that the appellants satisfied the conditions laid down for export of services for the period 1st July, 2003 to 19th November, 2003 as service tax is a destination based tax and the service recipient being located outside India, no service tax was leviable. For the period 15th March, 2005 till 18th April 2006, the Export of Services Rules, 2005 inserted the conditions that (a) service should be delivered outside India and (b) there should be receipt in foreign exchange. The condition of delivery outside India was not satisfied as the services were rendered in India and thus consumed in India. For the period from 19th April, 2006 to 5th December, 2007, the condition in relation to export of services was amended stating that (a) the services should be provided from India and used outside India; and (b) there should be receipt in foreign exchange. During the said period also, the services were not used outside India as the sales took place in India and thus, the services were provided and consumed without reverting to foreign principals for consumption abroad meant to have exhausted in India and hence not exported. The Tribunal also observed that since the appellants discharged the liability on installation and warranty services, they were aware of the levy of service tax. Moreover, the relevant clause of the agreement also stipulated the condition of reimbursement of tax from the foreign principal. Hence, plea of limitation was also disallowed and pre-deposit of Rs. 25 lakh was ordered.
Note: in the above case, the Tribunal distinguished the following cases:
• Em Jay Engineers vs. CCE, Mumbai 2010 (20) STR 821 (Tri – Mum)
• Lenovo (India) Pvt. Ltd. vs. CCE, Bangalore 2010 (20) STR 66 (Tri – Bang)
• SGS India Pvt. Ltd. vs. CST, Mumbai 2011 (24) STR 60 (Tri – Mumbai) and relied on:
• Microsoft Corporation (India) Pvt. Ltd. vs. CST, Delhi 2009-TIOL-601-HC-DEL-ST
• All India Federation of Tax practitioners 2007-TIOL-149-SC-ST
Facts:
The appellants, a manufacturer of motor vehicles also rendered technical assistance, training with respect to supply, assembly, manufacture, testing and quality assurance of products and to use their trademark, to Skoda Auto A. S. The appellants paid service tax with interest during the pendency of SCN. In view of decision of Indian National Ship Owners Association vs. Union of India 2009 (13) STR 235 (Bom.), the appellants filed refund claim of interest for delayed payment of Service tax paid in pursuance of the SCN. The authorities rejected the refund claim on the grounds of limitation and that the order-in-original was not challenged. However, the appellants contested that the issue was well settled in view of judgment of Indian National Ship Owners Association (Supra) which was confirmed by the Supreme Court that import of services were not taxable prior to 18/04/2006 and therefore they were eligible for refund of service tax with interest from 11/12/2008 when the Hon’ble High Court decided the issue. Further, since the appellants took CENVAT credit of service tax paid, the refund claim was with respect to interest paid which was filed within 1 year from the date of decision of the Hon’ble High Court.
Held:
The appellants paid service tax with interest in the year 2006 which was appropriated by way of adjudication and the appellants took CENVAT Credit of Service tax paid and filed refund claim of interest paid. Though in view of the decision in the case of Indian National Ship Owners Association (Supra) Service tax was not leviable, the appellants did not claim refund of Service tax which implied that the appellants had admitted their Service tax liability. Since the liability was admitted, it should be paid with interest as held by Hon’ble Supreme Court in case of CCE vs. SKF India Ltd. 2009 (239) ELT 385 (SC) and therefore, the appeal was rejected.
Facts:
The appellants, a manufacturer of transmission towers also provides erection, commissioning and installation, management, maintenance or repairs, testing, inspection of these towers services. For discharging Central Excise Duty and Service tax liability, the appellants utilised CENVAT Credit. The department denied utilisation of CENVAT Credit for payment of Central Excise Duty on the dutiable final product and output services on the grounds that the appellants did not maintain separate books of accounts for inputs and input services utilised in the manufacture of final products and used in providing output services.
Held:
Following Tribunal’s decision in case of Forbes Marshall Pvt. Ltd. vs. Commissioner of Central Excise, Pune 2010 (258) ELT 571 (Tri.), the Tribunal held that there was no provision under CENVAT Credit Rules, 2004 for segregation of CENVAT Credit for payment of Central Excise Duty and Service tax liability.
Facts:
The respondents constructed residential complexes on their land and made agreements for sale of flats and received advance from prospective buyers. As per CBEC Circular, the builders provided no service to any prospective buyers. The activity was covered only after introduction of Explanation to section 65 (105) (zzzh) of the Finance Act, 1994 i.e. with effect from 01/07/2010. The said explanation was prospective and such activity was not chargeable to service tax prior to 01/07/2010 as depicted in the case of Skynet Builders Developers Colonizers and others 2012 (27) STR 388 (Tri.-Del.) The revenue relying on Punjab & Haryana High Court in case of G. S. Promoters vs. UOI 2011 (21) STR 100 (P & H) contended the activities as chargeable to service tax even prior to 01/07/2010 and considered the explanation to be clarificatory.
Held:
The G. S. Promoter’s case (Supra) dealt with the issue of constitutional validity of the Explanation inserted u/s. 65(105)(zzzh) of the Finance Act, 1994 with effect from 01/07/2010 and the case did not examine whether the explanation could have retrospective effect. Following the decision of Skynet Builders (Supra), revenue’s appeal was dismissed.
Facts:
The appellant, a clearing and forwarding agent for M/s. Chambal Fertilisers & Chemicals Ltd. (‘CFCL’) also had separate contract with CFCL for giving their godown on rent for the goods for which they acted as clearing and forwarding agent. Service tax was demanded on godown rent under “storage and warehousing services”. According to the appellant, the godown rent was in the form of reimbursements and as per CBEC clarification, it was not leviable to service tax. Further, the nature of services of the appellants was “clearing and forwarding agent” as against “storage and warehousing services” and that the department issued SCN under the category of storage and warehousing services and the demand was confirmed under “clearing and forwarding agent” and therefore, the order travelled beyond the scope of SCN. According to revenue, the services of clearing and forwarding could not have been performed without storage space and the cost of storage space was integral part of value of services provided. Further, the separate contract for rent was for the purpose of reduction of tax incidence. Since the contract was hidden, there was suppression of facts and therefore, extended period was invoked.
Held:
There was a legal infirmity that tax was demanded under a different category from the one mentioned in SCN. Viewing the case as one of tax planning rather than tax evasion, extended period of limitation was held not justified and appeal was dismissed.
Facts:
The department denied CENVAT Credit on input services; viz. tour operator’s services, garden maintenance services, waste management services and repair of fan services on the grounds that these services were not integrally connected to the manufacture of final product and therefore, these were not eligible input services under Rule 2(l) of the CENVAT Credit Rules, 2004.
The respondents contended these to be eligible for the manufacturing process as the tour operator’s services were used for transporting their staff from residence to factory and back. Waste management services were a statutory requirement. So also garden maintenance was essential to keep the factory premises neat and clean and fans were installed in the factory and therefore, their maintenance was integral to manufacturing. Further, CENVAT Credit on waste management services and tour operator services was allowed by Tribunal in their own case.
Held
Relying on Ultratech Cement Ltd. 2010 (20) STR 577 (Bom.) and various other relevant decisions, CENVAT credit in respect of above services as well as in respect of services of photography, dry cleaning of uniforms of staff, construction for premises of manufacture, brokerage paid for selling products were held as input services eligible for credit.
Facts:
The respondents were engaged in the execution of interior, civil, electrical and various other miscellaneous work. The Commissioner (Appeals) passed an order in favour of the respondents stating that the definition of construction services was provided u/s. 65(30a) of the Finance Act, 1994 till 15/06/2005 and thereafter, the definition of commercial or industrial construction services was introduced u/s. 65(25b) of the Finance Act, 1994 which expanded the scope of the services to include completion and finishing services. Further, even renovation services were inserted under service tax levy with effect from 16/06/2005. The revenue contested that the amendment with effect from 16/06/2005 was only to define the scope of services specifically and that the completion and finishing services were taxable even prior to 16/06/2005.
Held:
Relying on the Tribunal’s judgment in the case of Spandrel vs. CCE, Hyderabad 2010 (20) STR 129 (Tri.-Bang.), it was held that the completion and finishing services were taxable only with effect from 16/06/2005.
Facts:
The appellants engaged in providing vehicles on hire were not paying service tax and were not filing service tax returns. Therefore, the department issued a Show Cause Notice (SCN) considering the said services to be “rent-a-cab services” for the period from February, 2004 to March 2005 demanding service tax with interest and penalty u/s. 76, 77 and 78 of the Finance Act, 1994. Relying on the Hon’ble Apex Court’s decision in case of Nizam Sugar Factory vs. CCE, A.P. 2008 (9) STR 314 (SC), the appellants argued that the SCN was time barred since on the same grounds, the department had issued SCN previously for the period from 01/04/2002 to 31/12/2003.
Therefore, the department was aware of the facts and accordingly, there cannot be any allegation with respect to suppression of facts from the department and thereby, invoking extended period of limitation was not justified. Further, relying on Tribunal’s decision in the case of P. Sugumar vs. CCE, Pondicherry 2010 (17) STR 524 (Tri.-Chennai), the activity of the appellants, being transportation of employees at a pre-determined rate, were not covered under “rent-a-cab services”. The department argued that the said activity was taxable in view of Punjab & Harayana High Court’s decision in the case of CCE, Chandigarh vs. Kuldeep Singh Gill 2010 (18) STR 708 (P & H). Further, since the appellants did not submit ST-3 returns, it amounted to suppression of facts and therefore, invoking of extended period was justified.
Held:
Though the appellants wilfully ignored the payment of service tax and submission of returns even after issuance of SCN for the previous period, the activities of the appellants were fully known to the department. The department could have further searched the premises of the appellants in such a case to obtain any requisite information. Accordingly, following the ratio laid down by the Hon’ble Apex Court in case of Nizam Sugar Factory vs. CCE, A. P. (Supra), the demand was not sustainable on the grounds of limitation and therefore, the issue was not discussed with respect to its merits.
Facts:
The respondents were engaged in storage and retrieval of records of banks and corporate houses and the records consisted of discharged cheques, vouchers, agreements, books of accounts etc. not intended for sale, but to comply with a statutory requirement. The department contended that the services were classifiable under storage and warehousing and therefore, leviable to service tax. The respondents contested that storage and warehousing of goods were leviable to service tax. As per Finance Act, 1994, the definition of ‘goods’ is adopted from the Sale of Goods Act, 1930. In case of R. D. Saxena vs. Balram Prasad Sharma (AIR 2000 SC 912), the Hon’ble Supreme Court has held that to constitute goods, the same should be marketable. Since files, records etc. were not saleable, it could not be considered as goods. However, the adepartment pleaded that in view of express definition of “goods” under Sale of Goods Act, 1930, every movable property is considered to be goods. Since files, records etc. were movable property, the same should essentially be considered as ‘goods’ and condition of sale was not necessary for levy of service tax.
Held:
As per section 2(7) of the Sale of Goods Act, 1930, to constitute goods, saleability was an essential criteria. If the intention was not to consider the saleability, the service tax laws would not have referred to the definition of goods under the Sale of Goods Act, 1930. Further, the Hon’ble Supreme Court has passed numerous judgments holding that the goods are something which can come into the market for being bought and sold. Therefore, following the judgment delivered in case of R. D. Saxena vs. Balram Prasad Sharma (Supra), it was held that the files, records etc. cannot be considered as goods in the absence of its feature of saleability and therefore, the activity cannot be covered under the storage and warehousing services leviable to service tax.
Facts:
The department rejected refund claim of CENVAT credit in respect of input services; viz. inland haulage charges, terminal handling charges, bill of lading charges, processing fee, terminal services, movement charges in port etc. used for export of goods vide Notification No.41/2007-ST dated 06/10/2007. The appellants contended that the service recipient cannot change the classification of the service provided by the service provider. Further, as long as the description of service is covered within the said notification, refund should be available. Further, the appellants referred to the Larger Bench decision in case of Western Agencies 2011 (22) STR 305 (Tri.-LB) and contended that all services rendered within the port area would be considered as port services. The department contested that though the opening paragraph expressly did not mention about classification under the Finance Act, 1994, it is obvious that the description should match with classification of service and that in the present case, the services were not port services since prior to amendment made by the Finance Act, 2010, only services which were performed in the port area by a person authorised by port authorities, were classifiable as port services. Further, the decision of the Larger Bench in case of Western Agencies (supra) is stayed by the Madras High Court and therefore, the judgment could not be relied upon.
Held:
The classification of services cannot be changed by service recipient. There is a serious lacuna in the said notification and missing words cannot be supplied by anyone interpreting the provisions.
The expression “port services”, though was available, the draftman did not insert such expression in the notification and therefore, the expression actually used should be interpreted. The Government intended to include all services rendered in port area as “port services” as is evident from amendment through the Finance Act, 2010. Though the amendment was prospective, the Notification No.41/2007-ST dated 06/10/2007 being beneficial notification for granting refund of tax when the goods are exported, liberal interpretation should be given. Revenue advanced arguments with respect to interpretation of “port services” prior to the introduction of the Finance Act, 2010, which were exactly opposite to the arguments canvassed in case of Western Agencies Pvt. Ltd. which cannot be allowed and therefore, the appeals were allowed.
Facts:
Wrong classification was made by department which the assessee did not challenge. The department issued Show Cause Notice demanding tax under wrong classification. The assessee contested such classification in the reply to the Show Cause Notice. The Commissioner (Appeals) held in favour of assessee. The revenue’s contention revolved only around non-challenge at the time of approval by the Assistant Commissioner.
Held:
The Tribunal dismissed the appeal stating that, only because the jurisdictional Assistant Commissioner classified and approved some goods under wrong heading without any challenge by the assessee, it would not mean that for future also, wrong classification shall continue in respect of such goods. Also, on the receipt of demand of duty vide Show Cause Notice, the assessee challenged the erroneous classification. Therefore, it cannot be said that the assessee had accepted the classification and that the approval attained finality.
With reference to a complex where air -onditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, it is clarified that services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non-centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned /non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.
With reference to a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, it is clarified that services provided by specified (i.e. only which are covered as taxable) restaurant in other areas of the hotel are liable to service tax.
With reference to whether service tax is leviable on goods sold on MRP basis across the counter as part of the bill/invoice, it is clarified that if goods are sold on MRP basis (fixed under the Legal Metrology Act), they have to be excluded from total amount for the determination of value of service portion.
Tax Research Unit of CBEC has issued clarification circular in respect of taxability of services provided to educational institutions. The Circular is broadly based on the clause (I) of section 66D of the Finance Act and the Mega Exemption Notification No.25/2012-ST dated 20th June, 2012. Circular notes that there are many services provided to an educational institution which are described as auxiliary education services and they have been defined in the exemption itself. It is clarified that such services provided to an educational institution are exempt from service tax. For example, if a school or a college hires a bus from a transport operator in order to ferry students to and from school or college, the transport services provided by the transport operator to the school are exempt by virtue of the specific notification. Similarly, services in relation to hostels, house–keeping, security services, canteen etc shall be exempt from levy of service tax.
Exemption for Uttarakhand Viewing recent natural calamities occurred in the State of Uttarakhand, the Central Govt. vide this Exemption Order has exempted the taxable services namely (a) Renting of a rooms in a hotel, inn, guest house, club, camp site or other commercial place meant for residential or lodging purposes ; and (b) Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess from the whole of the Service Tax leviable thereon during the period from 17th September, 2013 to 31st March, 2014.
Facts:
The Appellant manufactured drills/tools and claimed CENVAT credit on job-work charges for grooving on which the service provider charged service tax which was eligible for exemption under Notification No.8/2005-ST dated 01-03-2005. The department denied the credit on the ground that the service provider should not have charged service tax and consequently the Appellant was not eligible for any credit
Held:
The Hon. Tribunal held that, whether the service provider was entitled for exemption and not required to pay duty at all, cannot be a consideration for the jurisdictional officers at the end of service receiver. Once service tax was paid and service used in or in relation to the manufacture of the final products, the Appellant was rightly entitled to avail CENVAT credit.
The Appellant provided motor cabs/maxi cabs (with drivers) to GAIL on monthly basis and entered into an agreement of monthly rates for specified vehicles subject to specified usage in kilometres on 24 hours basis, additional amount for excess usage, separate charges for night halts etc. Other expenses towards fuel, salary of drivers and maintenance of vehicles were the responsibility of service provider.
The department contended that the Appellant provided rent-a-cab service and demanded service tax on the same. The Appellant contended that the said activity amounted to merely “hiring of motor” vehicle and there was no ‘renting’ involved since the recipient of service had no domain or control over the vehicle and the vehicle was placed at his disposal only for temporary usage, for the duration, either in point of time or in point of distance. It was also contended that, the domain of vehicle was always with the operator i.e. Appellant who also bears the expenses and maintenance charges.
Held:
Relying upon the decision of the Hon. High Court in CCE vs. Kuldeep Singh Gill [2010] 27 STT 224, the Hon. Tribunal decided in favour of the revenue by holding that there was no fundamental normative distinction between “hiring of cab” and “renting of cab” and that the Appellant provided rent-cabservices to GAIL leviable to service tax.
Facts:
The department issued two Show Cause Notices for the period April 2008 to March 2011. The department just reproduced the provisions of section 65(19) relating to definition of “Business Auxiliary Services” and demanded tax along with interest and penalty without stating any reasons and on a prima facie assumption.
The appellant, apart from impeaching the adjudication order on merits, urged a preliminary ground of challenge that the Show Cause Notices were incoherent and since it did not spell out what relevant ingredients of the relevant statutory provision applied to the service so provided to warrant attribution of the liability, the initial step for initiation of proceedings leading to adjudication failed for violation of due process and transgression of principles of natural justice. Reliance was placed on United Telecom Ltd. vs. CST, Hyderabad 2011 (22) STR 571 (Tri.-Bang), Kaur & Singh vs. CCE 1997 (4) ELT 289 (SC) and M L Capoor & Others AIR 1974 SC 87 (para 10).
Held:
On analysis of the Show Cause Notices issued by the department, the Hon. Tribunal observed that since the said notices were issued on the basis of unspecified reasons and a prima facie assumption that the assessee was assessable to levy of service tax for providing Business Auxiliary Services and that mere extraction of the entire provisions of section 65(19) of the Act did not fulfill the requirement, they were invalid and that the infirmity was incurable. The Hon. Tribunal, further, quashed the adjudication orders being the consequence of the invalid Show Cause Notices and granted liberty to the revenue to act in accordance with law.
Three issues were involved in the matter:
• The appellant availed benefit of exemption Notification No. 4/2004-ST dated 31-3-2004 in respect of professional services of internal audit and indirect support services, rendered to SEZ units. Department denied the exemption on the ground that the services were not consumed within SEZ. However, the appellant submitted that service receivers were granted a letter of approval by the Government of India, Ministry of Commerce to act as developer/unit and these entities were operating in SEZ and did not have other place of business. Therefore, the services were consumed exclusively for SEZ operations and within SEZ and the exemption was available to them.
• The appellants also rendered professional services in relation to ERP implementation and had purchased the software, the price of which was subsequently reimbursed by the service receiver. The department demanded service tax on such software considering it part of the value of taxable service essential for implementation of ERP system. According to the appellants, the supply of software was transaction of sale whereon CST was paid on it as there was a transfer of property in goods.
• The appellants rendered professional services for the infrastructure project in India of Indian Government for & on behalf of PricewaterhouseCoopers (PWC) Lanka (Pvt.) Ltd., Sri Lanka. The department demanded service tax on the ground that one of the pertinent conditions for export of services is that the services are delivered outside India and used outside India and this is not satisfactory in the present case. The appellants submitted that they did not have any privity of contract with the Indian Government and the beneficiary of services was PWC Lanka (Pvt.) Ltd., Sri Lanka outside India who was ultimately responsible for deliverables and even though the work was carried out in India, the same was delivered outside India.
Held:
• SEZs are deemed to be foreign territory for trade operations. SEZs are formed to promote exports and earn foreign exchange and for the overall economic development of India. In the present case, it was not disputed that the services were utilised by SEZ and therefore, were ultimately consumed within SEZ. The said notification used wordings consumption of services within SEZ, which were inconsistent with section 51 of the SEZ Act, 2005. Since Section 51 of SEZ Act has an overriding effect on all other laws and also having regard to the intention of the Government, the benefit of exemption was available to the appellants.
• Since the software was sold, there was no service involved and the same would not form part of the taxable value of services and as such, not leviable to service tax.
• As per the contractual arrangement, entity at Sri Lanka was beneficiary of the assignment and the services were delivered from India and used outside India. Therefore, the present case was covered under export of services not leviable to Service tax.
Facts: The appellant purchased tickets directly from airlines and sold the same for a margin to its passengers which the department adjudicated as indirect commission and confirmed tax with interest and penalties under the category of “Business Auxiliary Service”.
Held: Considering a prima facie view that the activity of the appellant was nothing but trading activity, the Hon. Tribunal granted full waiver of pre-deposit.
Facts:
The Appellant was engaged in management of cars/ scooter parking facilities at an airport under the license obtained from the airports authority on which the department confirmed the tax under “Airport Services”. The commissioner upheld the liability but dropped the penalties u/s.s 76, 77 and 78. It was contended that the demand was time-barred for the reason that the Airports Authority of India (AAI) did not authorise them to collect service tax until 01-03-2006 and as they were working on behalf of AAI, they were not a service provider. The revenuein its appeal contended that the order of the Commissioner was bad in law inasmuch as even after finding that the appellant collected service tax for the period 10-09-2004 till 31-03-2006, there was suppression of facts and demanded tax for the longer period. Therefore the penalties u/s.s 76, 77 and 78 were dropped wrongly by granting the benefit of section 80.
Held:
Perusing the Commissioner’s order, the Hon. Tribunal, rejecting the appellant’s appeal, observed that since the Commissioner upheld extended period and confirmed the whole of the demand affirming suppression of facts by the assessee, penalty u/s. 78 was leviable.
“98. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c. The transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz. a “transfer of the right to use” and not merely a licence to use the goods;
e. Having transferred the right to use the goods, during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”
Thus the nature of lease transaction is required to be decided in light of above parameters.
Smokin Joe’s Pizza Pvt. Ltd. (A.25 of 2004 dt. 25-11-2008)
The facts in this case were that the dealer was holding registered Trade mark “Smokin Joes” and allowed its use to its franchisees. The franchise agreement provided for non exclusive right to use the registered Trade mark. The agreement also provided for providing various services to Franchisee. Lower authorities held the transaction as taxable lease transaction. Tribunal made reference to judgments in case of Gujarat Bottling Co. Ltd. (AIR 1995 Supreme Court 2372) and Bharat Sanchar Nigam Ltd. (145 STC 91) and came to the conclusion that in the given circumstances the transaction of franchise of trademark is not lease transaction but amounts to licensing transaction. At a time more than one franchise agreement can be entered into in respect of same trademark. Hence, it is a licence transaction and not lease. Therefore, Tribunal has held that no tax is payable on above transaction under Sales Tax Law. In this case Hon. Tribunal, though it referred to the Bombay High Court’s judgment in case of Dukes and Sons, in light of judgment of Hon. Supreme Court in BSNL held that the transaction is not lease transaction.
Subsequent to the above judgment there is also a judgment of Hon. Andhra Pradesh High Court in case of Nutrine Confectionery Co. Pvt. Ltd. vs. State of Andhra Pradesh (40 VST 327)(A.P). In this case, the transaction was for allowing use of trade mark. The said use was also on non exclusive basis. Still Hon. High Court has held that the transaction is lease transaction. Hon. High Court felt that the judgment of BSNL about exclusive use could not apply in relation to intangible goods like trade mark.
Malabar Gold Pvt. Ltd. vs. Commercial Tax Officer, Kozhikode (2013-VIL-49-KER-ST dt.24.6.2013).
This is the latest judgment of Kerala High Court. In this case, the transaction was about granting of franchise right on non exclusive basis. Hon. High Court has held that when the grant of franchise is non exclusive it is not lease transaction and not liable to VAT. In this judgment Hon. Kerala High Court has distinguished the judgment of Hon. Andhra Pradesh High Court in above case of Nutrine Confectionery Co. Pvt. Ltd. on the ground of difference in terms of agreement. Hon. Kerala High Court has also referred to Supreme Court judgments about non attraction of Service tax and VAT on same transaction. The observations of the Hon. High Court are as under:
“44. The issue therefore can be considered in the light of the dictum laid down in BSNL’s case (supra). Herein, the term ‘franchise is included in Section 65(105)(zze) of the Finance Act. The same is a taxable service and the taxable event is the service rendered by the Company. Thus, any service provided or to be provided to a franchisee will come within the purview of the said provision. The meaning of the terms franchise and franchisor u/s. 65(47) and (48) are also important. Going by the definition of franchise, it is an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved. The terms of the agreement herein will show that Clause II of the Preamble has specifically given under items (i) to (v) the activities to be carried out by the franchisee which are as follows:
“i. Retailing of gold ornaments
ii. Retailing of diamond and other precious stone ornaments.
iii. Retailing of premium watches.
iv. Retailing of platinum and other premium fashion accessories.
v. Any other items introduced by MALABAR GOLD in future.”
Clause 2 under the heading “Products” will show that the franchisee cannot stock, exhibit or sell any products in the authorised showroom during the period of the agreement except the products authorised by Malabar Gold, which may include products manufactured or sourced by Malabar Gold. Therefore, the same will definitely satisfy the meaning of ‘franchise’ as contained in section 65(47) of the Finance Act, 1994. The learned Special Government Pleader for Taxes referred to the agreement herein and said that no service is referred to in the clauses therein.
We do not agree, in the light of clauses 3, 4 and 5 of the model agreement as already noticed.
Since what is termed as ‘taxable service’ is any service to be provided to a franchisee by a franchisor in relation to a franchise, the terms of the agreement will have to be understood in that context.
45. In the light of the principles stated in para 98 of the judgment in BSNL’s case (supra), the provisions of the agreement, especially clauses (3) and (5) will show that the franchisor retains the right, effective control and possession and it is not a case of transfer of possession to the exclusion of the transferor. We notice that under clause (12) the franchisee has no right to sub-let or sub-lease or in any way sell, transfer, discharge or distribute or delegate or assign the rights under the agreement in favour of any third party, which is also significant. On termination of the agreement also, going by clause 25.3, the franchisee shall forfeit all rights and privileges conferred on them by the agreement and the franchisee will not be entitled to use the trade name or materi-als of “Malabar Gold”. Merely because, going by clause 18, the franchisee is not an agent, it will not get any other exclusive right.
46. Since this Court in the two judgments relied upon by the learned Special Government Pleader, viz. Jojo Frozen Foods (P) Ltd.’s case {(2009) 24 VST 327} and Kreem Foods (Pvt.) Ltd.’s case {(2009) 24 VST 333} had no occasion to consider Entry 97 and the provisions u/s. 65(105)(zze) of the Finance Act and the definition of franchise and franchisor u/s. 65(47) (48) of the Finance Act, and those judgments related to transactions of pre 2003 period, we are of the view that the same are distinguishable on the facts of this case.
The judgment in Mechanical Assembly Systems (India) Pvt. Ltd.’s case (supra), as we have already explained, is a case of exclusive transfer of know-how.
47. One of the judgments relied upon by the learned Special Government Pleader for Taxes is that of the Andhra Pradesh High Court in Nutrine Confectionary Co. Pvt. Ltd. vs. State of Andhra Pradesh {(2012) 20 KTR 38}. Therein, the transaction involved is by way of an agreement between the petitioner company and the assignee companies and a royalty of Rs.500/- per ton of production by the assignee, has been granted to the petitioner company for the use of trademark and logo for the goods. The matter was considered u/s. 2(h) of the Andhra Pradesh General Sales Tax Act, 1957. The Bench was of the view, after going through the terms of the agreement, that “the assignee is free to make use of the trademark and logo. The petitioner does not in any manner regulate the use of trademark or logo although, “keeping in view the facilities available with the assignee, the petitioner undertook to suggest suitable terms provide formulas and recipes and suggest locations for marketing.” After analysing the agreement therein, it was held that the consideration received as royalty, is taxable u/s. 5E of the Andhra Pradesh General Sales Tax Act. We have already analysed the terms of the agreement herein. Even though learned Special Government Pleader for Taxes placed heavy reliance on the judgment in Nutrine Confectionery Co. Pvt. Ltd.’s case (supra), we are of the view that the same is distinguishable on the facts of the said case and in the light of the provision u/s. 5E of the Andhra Pradesh General Sales Tax Act also.
48. Therefore, even though both sides relied upon the provisions of Articles 246 and 254 of the Constitution of India, we need not enter into a finding on the said question, as we are of the view that the tests laid down in BSNL’s case (supra) are squarely applicable here. Herein, it cannot be said that there are goods deliverable at any stage which is the test laid down by the Apex Court in paragraphs 78 and 79 of BSNL’s case (supra) and for that reason also, there is no transfer of right to user at all. Coupled with the same, is the fact that during the period in question the franchisee is having the right, it is not to the exclusion of the franchisor and as it is seen that even during the period during which the transaction is going on, the franchisor can again transfer the right to others, the tests laid down in sub paragraphs (d) and (e) under para 97 of BSNL’s case (supra) are not satisfied.”
Thus the position about nature of lease transaction vis-à -vis intangible goods can be said to be fluid and more light needs to be thrown by the Bombay High Court so far as Maharashtra State is concerned. However, from overall discussion it can be said that the latest judgment of Kerala High Court in Malabar Gold Pvt. Ltd. has interpreted the legal position from various angles which can be considered as guiding judgment.
Long before intellectual property service was introduced on the statute of service tax in the Finance Act, 1994 (the Act) with effect from 10th September, 2004, intellectual property right including trademark has been considered intangible goods. As such, its assignment or transfer has been exigible to sales tax. The issue for discussion however relates not to transfer or assignment of trademark but transfer of right to use trademark. In Commissioner of Sales Tax vs. Duke & Sons Pvt. Ltd. 1999 (112) STC 371 (Bom), Hon. Bombay High Court observed, “For transferring the right to use the trademark, it is not necessary to handover the trademark to the transferee or give control or possession of trademark to him. It can be done merely by authorizing the transferee to use the same in the manner required by the law as has been done in the present case. The right to use the trademark can be transferred simultaneously to any number of persons.” It is further observed, “In the instant case, there is no dispute about the fact that trademark is specifically included in the schedule of goods to the 1985 Act in entry no.7, the amount received by the assessee on the transfer of the right to use the same is therefore liable to be taxed under the said Act.” In Vikas Sales vs. Commissioner of Commercial Taxes (1996) 102 STC 106, the Supreme Court held that, even incorporeal rights like trademarks, copyrights, patent and right in persona capable of transfer or transmission such as debts are also included in the ambit of the term ‘goods’. The Court further held that patents, copyrights and other rights which are not rights over land related matters are included within the ambit of movable property. In another case, viz. SPS Jayam & Co. vs. Registrar Tamilnadu Taxation Special Tribunal and Others (2004) 137 STC 117 (MAD), it was held that trademark is intangible good which is subject matter of transfer and was further observed that simply because the assessee retained the right for himself to use the trademark and reserved the right to grant permission to others to use the trademark, it would not take away the character of the transaction as one of transfer of a right to use.
It is a known fact that vide 46th Constitutional Amendment in 1982 in the Article 366, a new clause (29A) was inserted. The said Article 366(29A) of the Constitution of India in sub-clause (d) reads as follows:
“ “tax on the sale or purchase of goods” includes:
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.”
In this frame of reference, it is also interesting to note that in case of 20th Century Finance Corporation Ltd. vs. State of Maharashtra 2000 (119) STC 182, it was held, “the States in exercise of power under entry 54 of List II read with Article 366(29A)(d) are not competent to levy sales tax on the transfer of right to use goods, which is a deemed sale, if such sale takes place outside the state or is a sale in the course of inter-state trade or commerce or is a sale in the course of import or export.” Consequently, the Finance Act, 2002 with effect from 11-05-2002 amended the Central Sales Tax Act, 1956 whereby the definition of sales was enlarged by incorporating transactions included in clause (29A) of Article 366 for the purpose of levy of tax on sale or purchase of goods which take place in the course of inter-state trade or commerce. Thus, for the purpose of sale, deemed sale under Article 366(29A) is included and in turn, intangible property includes a trademark and thus is always treated as ‘goods’. The Supreme Court in Tata Consultancy Service vs. State of Andhra Pradesh (2004) 178 ELT 22 (SC) held that intangibility is not something which should determine whether a property is goods for the purpose of sales tax. The test is whether the property is capable of abstraction, consumption and use and whether the same can be transmitted, transferred, delivered, stored, possessed etc. The transfer of the right to use goods is distinct from mere transfer of goods but also an activity considered as liable for tax as sale of goods. The Andhra Pradesh High Court in G.S. Lamba & Sons vs. State of A.P. 2012-TIOL-49-HC-AP-CT held “The levy of tax under Article 366(29A)(d) is not on the use of goods. It is on the transfer of the right to use goods which occurs only on account of the transfer of the right.” [emphasis supplied].
Sale vs. Service:
In terms of the judicial pronouncements cited above, it can be inferred that there is a marked distinction between transfer of right to use a trademark or a similar intellectual property and assignment of trademark. By way of assignment, the owner of the trademark/intellectual property divests his right, title or interest but while transferring the right to use the same, he does not give up his right, title or interest. However, sale or deemed sale both are exigible to VAT. Having so determined, the fact is that the transaction other than those of mere sale or transfer of intellectual property i.e. temporary transfer or permitting the use or enjoyment of any intellectual property is declared as ‘service’ u/s. 66E of the Act with effect from 01-07-2012 and under the earlier dispensation of service tax law as well, intellectual property service was defined in section 65(55b) as ““intellectual property service” means, — (a) transferring, temporarily; or (b) permitting the use or enjoyment of, any intellectual property right” and was considered “taxable service” with effect from 10th September, 2004 as stated hereinabove.
While the intent of legislation in principle is to exclude both ‘sale’ and “deemed sale” from the purview of service tax is clear in many forms, the implementation has not matched the intention always. To illustrate, the definition of ‘service’ as introduced in section 65B(44) with effect from 01- 07-2012 specifically excludes transfer, delivery and supply of goods which is deemed to be sale for the purpose of Article 366(29A) of the Constitution. However, there is a contradiction made in the law itself by defining temporary transfer or permitting the use of enjoyment of any intellectual property as declared service as stated above. Earlier, judiciary also made pronouncement on this subject matter when in Imagic Creative (P) Ltd. vs. Commissioner of Commercial Taxes & Others 2008 (9) STR 337 (SC) wherein it was held by the Supreme Court that VAT and service tax are mutually exclusive. Thus, even though there is a settled law that a transaction cannot be simultaneously ‘sale’ and ‘service’ and therefore not exigible to both VAT and service tax, it is quite a matter of challenge to correctly determine the nature of a transaction whether of sale of goods or provision of service and consequently, should be exigible to only one of the levies. Like the declared services of development of information technology software and transfer of goods by way of hiring, leasing or licensing etc. (discussed in May, 2013 and November, 2012 issues of BCAJ respectively under this column), this is one more controversial declared service which is extremely prone to litigation on account of overlap of VAT and service tax. The law in this regard is still under evolution and hence there is no finality.
In a landmark decision of Bharat Sanchar Nigam Ltd. vs. UOI 2006 (2) STR 161 (SC), the Supreme Court observed, “……. If there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A), (Note: The reference here was to works contract and catering contract) unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service and impose tax on sale. The test therefore for composite contracts other than those mentioned in Article 366(29A) continues to be – did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention, there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the “dominant nature test”. In para 97, the Court dealt with the question as to what would constitute a transaction for the transfer of the right to use the goods exigible to VAT and held that such transactions must have the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c. The transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor this is the necessary concomitant of the plain language of the statute – viz. a “transfer of the right to use” and not merely a license to use the goods;
e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.
[emphasis supplied].
All the aforesaid attributes vis-à-vis “transfer of right to use goods” certainly would hold good in case of tangible goods. This aspect was also observed in G.S. Lamba & Sons (supra). However, transfer of right to use incorporeal property such as trademark would not be able to fulfill the last two tests out of the above 5 tests viz.
• The transferee cannot use the right to use the goods to the exclusion to the transferor as the transferor of the right to use intangible can himself continue to use the said intangible goods as physical transfer is not required for intangibles.
• Right to use intellectual property can be transferred to others simultaneously.
[This characteristic was observed in the decisions of Duke & Sons P. Ltd. (supra) and SPS Jayam & Co. (supra)].
Both the above tests are not fulfilled because of the inherent characteristic of “intangible goods” being intangible in nature as physical dispossession or transfer does not happen in this case. Heavily relying on the above, the Kerala High Court reversed its own ruling of the earlier cases in a recent judgment analyzed below:
Malabar Gold Pvt. Ltd. vs. Commercial Tax Officer 2013-TIOL-512-HC-Kerala-ST.
In this recent decision, the Division Bench of Kerala High Court was approached challenging the levy of VAT under KVAT Act on royalty received from franchisee companies. The petitioner company engaged in marketing/trading export and import of jewellery under the name “Malabar Gold” paid VAT on the sale of jewellery without any dispute. However, the appellant had entered into franchise agreements with various franchisees which sold the jewellery under the name “Malabar Gold” and interalia displayed such board with design approved by the Appellant and paid royalty to the Appellant under the franchise agreement. Admittedly, franchise service is a notified category of service taxable under the service tax law vide section 65(105)(zze) read with section 65(47) & (48) of the Finance Act, 1994 from 1st July, 2003 and the company paid service tax on royalty received in terms of the franchise agreement. The Commercial Tax Officer initiated proceedings for recovery of VAT contending that royalty received by the Appellant from its franchisees for the use of trademark was exigible to VAT as transfer of right to use any of the goods would be taxable. Relying on the decision of the Apex Court in BSNL (supra) and Imagic Creative P. Ltd. (supra), the petitioner’s stand was that the transaction being of franchise service attracted service tax alone which they had already paid. In turn, the VAT authority interalia relied on Tata Consultancy Service (supra) and Division Bench decision of Kerala High Court in Mechanical Assembly Systems (India) Pvt. Ltd. vs. State of Kerala 2006 (144) STC 546.
Earlier, the single Judge in this case rejected the Appellant’s appeal reported at 2012-TIOL-1032-HC. Kerala- VAT wherein it was held that royalty received by the dealer was exigible to KVAT Act. Hence this writ petition was filed. It was pleaded for the appellant that royalty fee was paid under the franchise agreement. The concept of franchise agreement was explained and as ruled in Imagic Creative P. Ltd. (supra) by the Supreme Court, once the transaction was clearly covered under the relevant provisions for payment of service tax, then it was not liable for VAT simultaneously. As regards “right to use”, it was pleaded that in Tata Consultancy Service’s case (supra), it was clearly laid down that the item concerned should be capable of abstraction, consumption and use which can be transmitted, transferred, delivered, stored, possessed etc. and referring to various paras from the decision in BSNL (supra), it was contended that considering the peculiarities of the franchise arrangement and the concept of “right to use the goods”, the test laid down in BSNL’s case was not satisfied as the franchise was not provided to the exclusion of the franchisor. It was also submitted interalia that assuming there was a conflict between the entries in Lists I & II under the Seventh Schedule to the Constitution, the Finance Act, 1994 would prevail.
Next in line, the facts in the case of Mechanical Assembly Systems P. Ltd. vs. State of Kerala (supra) were distinguishable as in that case, transfer of know- how on permanent basis was involved and it was totally different from the franchise arrangement. It was further submitted that the subsequent decisions of the Kerala High Court in Jojo Frozen Foods P. Ltd. vs. State of Kerala (2009) 24 VST 327 and Kreem Foods P. Ltd. vs. State of Kerala (2009) 24 VST 333 on the identical issue even though considered liable for sales tax, they were under the GST Act and in all the 3 decisions of the same Kerala High Court, the period prior to 2003 was involved i.e. prior to introduction of franchise service from 01/07/2003 in the service tax law and the Division Bench had no occasion to examine the effect of the provisions of the Finance Act, 1994. Further that in those cases, transfer from one dealer to another was involved whereas in the instant case license alone is involved and that the findings of those cases could not be supported in the light of pronouncement of law by the Supreme Court in BSNL’s case (supra). It was strongly pleaded that the learned Single Judge did not go into the question whether service tax alone is payable by the Appellant and did not consider the other related legal issues. Discussing the decision of the Bombay High Court in Duke and Sons Pvt. Ltd. (supra) relied upon in Jojo Foods (P) Ltd.’s case (supra) also, it was submitted that this decision based on special facts was distinguishable.
The VAT authority on the contrary contended that the 3 decisions of the Kerala High Court (referred above) would show that transactions by way of transfer of know-how as well as right to use the trademark were found covered by KVAT Act. The instant case not being different from those 3 cases, Article 366(29A)(d) would have relevance.
Considering the contentious issue, the Court ex-amined in detail provisions of franchise service in the Finance Act, 1994 and also those in relation to intellectual property service viz. section 65(55a) and 65(55b) alongside the provisions of KVAT Act as regards definition of ‘sale’ and relevant Explanation (v) thereof dealing with “transfer of right to use any goods for any purpose” and section 6 providing for levy of tax on sale or purchase of goods. All the important terms of model franchise agreement entered into by the Appellant with its franchisees were considered to examine the crux of the arrangement. In a nutshell, the franchisee was granted license to pursue retailing of gold and diamond ornaments, watches etc. at the showroom authorized by the Appellant under their trade name and logo Malabar Gold. At its own discretion, Malabar Gold provided support right from project plan to selection of product mix, implementation of system, raising of funds, specification & guidance on showroom operations etc. Franchisees were not allowed to use the showroom for any other products in their name. The relationship was defined as that of products in their name. The relationship was defined as that of principal to principal and franchisee was allowed not to act as their agent and all other responsibilities and compliances had to be solely of franchisee. Lastly on termination, interalia included non-compete clause for a 2 year period. It was noted by the Court that franchise service was introduced with effect from 01-07-2003 and KVAT was introduced from 01-04-2005. In the light of the said franchise arrangement, principles stated by the very Court in Mechanical Assembly System’s case (supra), Jojo Frozen Foods (supra) and Kreem Foods (supra) were discussed. The case of Mechanical Assembly System was distinguishable as although consideration was termed as ‘royalty’, in that case, there was an outright transfer of know-how involved and not a case of transfer of use of know-how. Therefore, question was whether dictum in the other two cases whether was distinguishable in the light of peculiar facts of the franchise arrangement in the appellant’s case and the question that whether the principles laid down in BSNL’s case would support the appellant’s case.
The Court noticed that both appellant and revenue relied upon relevant principles explaining the meaning of ‘goods’ in case of Tata Consultancy’s case (supra). On examining the said judgment, the Court formed the view that ‘goods’ used in Article 366(12) of the Constitution and as defined in the KVAT Act is very wide and includes all types of movable properties, tangible or intangible. Then, in juxtaposition, BSNL’s judgment was examined. On analysing relevant paras viz. 50, 56 & 57, 73, 75 of BSNL’s case (supra) as regards ‘goods’ in a sales transaction and delivery thereof, the Court observed that in the light of principles stated therein, actual delivery of the goods is not necessary for effecting transfer of right to use the goods but the goods must be deliverable and delivered at some stage and if what is claimed as goods are not deliverable at all, the question of right to use those goods would not arise. Thus if there is no deliverable, there is no transfer of user and this is true for both tangible and intangible goods. Finally the Court noted the 5 attributes contained in para 97 of BSNL’s case (supra) to constitute a transaction for transfer of the right to use the goods (provided above under sale vs. service). In terms of this test, the appellant’s case involved only a license to use trademark. The transfer of its use was not to the exclusion of the transferor i.e. the appellant retained the right to transfer it to others also. The Court also noted that BSNL’s case (supra) was also considered in Imagic Creative P. Ltd. (supra) while examining a case of composite contract. Further, referring to interalia the decision of the Bombay High Court in Rolta Computer & Industries P. Ltd. (2009) 25 VST 322 it was observed that the Bombay High Court followed the above dictum laid down in BSNL’s case (supra). In this case, an amount was paid on hourly basis for the use of CPU to process accounting applications. The sales tax authorities held that as soon as the terminal was allowed to be used, transfer of right to use took place and therefore sales tax was attracted. Following the above dictum of BSNL’s case (supra), it was held in this case that the possession of computers & terminals was never parted with. Merely when a person agrees to provide a particular customer the service during a particular period to the exclusion of other customers, it would not mean goods are delivered to the exclusion of owner himself. It was nothing more than a service contract and no sales tax was attracted.
The Court found that this judgment supported the appellant’s case besides the case of State of Andhra Pradesh vs. Rashtriya Ispat Nigam (2002) 3 SCC 314 (SC) wherein the crucial relevant factor was that there was no transfer of right to use machinery in favour of contractors to the exclusion of owner was made. The contractor was appointed to only operate the machinery for owner’s own project work in owner’s premises and therefore the effective control and possession over the machinery other than for owner’s use was never transferred to the contractor to attract sales tax. In the light of this, through appellant’s franchise agreement, franchisee did not get effective control of the trademark but got only limited rights and even during subsistence of the agreement, the appellant could use the trademark for itself and for other parties, the dictum laid down in BSNL’s case (supra) was found applicable and the Court found the transaction to be not of “deemed sale” but of “franchise service” in terms of section 65(105) (zze) read with 65(47) & 65(48) of the Finance Act, 1994 although it was strongly pleaded on behalf of the respondent that no service was referred to in the model agreement. The Court accordingly stated that Jojo Frozen Foods Ltd.’s case (supra) and Kreem Foods Pvt. Ltd.’s case (supra) had no occasion to consider entry 97 and provisions of the Finance Act, 1994. Further, the Court found that the definitions of ‘franchise’ & ‘franchisor’ were important to consider, as in terms of these definitions, granting of representational right to sell or manufacture goods or to provide service or undertake any process identified with the franchisor was covered whether or not any trademark, service mark, trade name or logo or symbol was involved. Based on this, these judgments were found distinguishable. Accordingly, the single judge’s decision that the transaction was of “deemed sale” as defined in KVAT Act was not agreed upon as in the instant case, the Court did not have to deal with a case involving transfer of intellectual property right like trademark but the matter involved was of franchise agreement and accordingly the judgment was reversed by concluding that it did not attract the provisions of KVAT Act.
Conclusion:
The above case is of a typical franchise arrangement and based on this specific arrangement, the Division Bench reached the decision as above reversing the stand taken in the two earlier cases on identical issue. However, many situations or transactions of supply of tangible goods for hire, transfer of right to use intellectual property, electronic transfer/downloads of standard software, transactions involving providing customised software etc. suffer a hanging sword of the other levy even if in good faith one of the taxes is paid with bonafide intentions. An honest tax payer is pushed to the wall to undergo strenuous, lengthy and expensive litigation deterring him to under-take business venture in India on account of the existing complex legal system. Trial and error in judiciary for interpretation of different provisions contained in both the legislations is done at the cost of an assessee – business enterprise whose interests and conveniences are considered of least importance in the gamut of tax collection and administration. Is the issue of interpretation on account of overlap between the two legislations and tug of war between the two administrations on account of revenue a simple affair for us to wrap up as professional opportunity or does it require a serious consideration for drawing attention of lawmakers to address the issue irrespective of implementation of GST?
A big controversy had arisen about maintainability of appeal
against revision order u/s.55 of the Bombay Sales Tax Act, 1959.
S. 55 of the BST Act, which contains provisions about
appeals, reads as under :
“(1) An appeal, from every original order, not being an
order mentioned in S. 56 passed under this Act or the rules made thereunder,
shall lie :
(a) if the order is made by the Sales Tax Officer, or any
other officer subordinate thereto, to the Assistant Commissioner;
(b) if the order is made by an Assistant Commissioner, to
the Commissioner;”
The revision order is passed by a superior authority u/s.57
of the BST Act, 1959. The said revision power is in the nature of supervision
power and the superior authority is entitled to call for records of order passed
by his subordinate authority and then to pass revision order as he may think
just and proper. Since commencement of the BST Act, 1959, such revision orders
were considered to be original orders for the purposes of S. 55 and appeal was
used to be maintained against the same, without any dispute.
However on 6-6-2006, the Bombay High Court, Nagpur Bench,
passed judgment in the case of Shiv Shyam Sales Enterprise. The said judgment
was in writ petition filed by the petitioner against the revision order passed
in his case. The argument of the Department was that the writ petition is not
maintainable as there is alternative remedy by way of appeal against the
revision order as per S. 55 of the BST Act, 1959. The High Court rejected this
prayer by making observations in para 6 as under :
“6. Perusal of S. 55 of the Bombay Sales Tax Act reveals
that it provides remedy of appeal from every original order. The orders
impugned in the present petition by the petitioner are passed in exercise of
revisional jurisdiction u/s.57 of the said Act, and therefore are not the
Original orders. It is therefore apparent that remedy of filing an appeal
u/s.55 is not available to the present petitioner. In such circumstances the
argument of alternative remedy holds no water. In any case the point as sought
to be raised ought to have been taken at the time of initial hearing when the
writ petition was entertained in the year 1989. In view of the law settled on
the point, such an argument cannot be allowed to be raised at the stage of
final hearing after expiry of long period. We therefore, find no merits in the
preliminary objection raised by the respondents.”
Based on the above observations, the authorities at the Sales
Tax Department felt that no appeal is maintainable against the revision order.
Thus, all the appeals against revision orders are kept pending by the Department
appellate authorities as well as by the Tribunal. The dealer community expected
that the Government would amend the law suitably on its own to mitigate the
hardships to dealers due to the above judgment. However, finding that no such
amendment is forthcoming, the matter was argued on the point of maintainability
before the Tribunal. The M.S.T. Tribunal has now decided this issue vide its
judgment in the case of Schenectady Beck (India) Ltd. (A. No. 98 & 99 of 2007)
and Others, dated 6-11-2009.
The Tribunal considered the issue from various angles.
Tribunal referred to the background of appeal provisions. The Tribunal also
referred to various judicial pronouncements about the binding nature of judgment
of jurisdictional Court as well as cases of mere observations, without binding
nature.
In particular, the Tribunal referred to judgments of the
Bombay High Court in cases of Swastik Oil Mills v. Mr. H. B. Munshi, (21
STC 383) and Mr. H. B. Munshi v. The Oriental Rubber Industries Pvt. Ltd.
(34 STC 113), wherein it is observed that the revision is fresh proceedings and
this judgment is confirmed by the Hon. Supreme Court as reported in 21 STC 394.
The Department tried to counter the situation relying upon the above
observations by the Bombay High Court in para 6 (reproduce above) and further
emphasised that the judgment being of the Bombay High Court cannot be brushed
aside, but has to be followed.
The Tribunal, however, after elaborate discussion and giving
sound reasoning, held that the above judgment of the Bombay High Court in Shiv
Shyam Sales Enterprise does not decide anything contrary to settled scheme of
the BST Act. The Tribunal summed up its observations in para 32, as under :
“32. To sum up, the two-line observation in the case of
M/s. Shiv Shyam Sales Enterprises (supra), which has given rise to the
present dispute is made without being apprised of the well-settled legal
position as laid down by the past judicial authorities including the Hon’ble
Bombay High Court’s judgments in the cases like M/s. Swastik Oil Mills (supra).
In these circumstances, we respectfully prefer to be bound by these past
authorities rather than by the said two-line observation in the case of M/s.
Shiv Shyam Sales Enterprises (supra). We have also traced the origin of
the words ‘original orders’ in S. 55(1). The origin thereof is found in the
departure on 1-1-1960 from a ‘single appeal’ as obtaining in the 1953 Act to
‘two appeals’ as introduced in the Bombay Act. While providing the ‘two
appeals’ the Legislature has described all the orders other than the appeal
orders to be ‘original orders’ and has provided appeals thereagainst
u/s.55(1), if they are not specified as ‘non-appealable orders’ in S. 56. The
suo motu revision orders u/s.57 are neither specified in the list of
non-appealable order u/s.56, nor are they orders passed in appeals. In view of
this position, the revision orders are ‘original orders’ for the purposes of
S. 55 and hence appeals thereagainst lie u/s. 55(1).”
Accordingly, the Tribunal held that the revision in the
original order for S. 55 and appeal is maintainable against the same. The
judgment has given a much required relief to dealers/litigants in Maharashtra
and will go a long way to preserve one of the fundamental rights of dealer.
[Schenectady Beck (India) Ltd. (S.A. No. 98 & 99 of
2007) & Others, dated 6-11-2009]
Date of effect for registration in case of Amalgamation of Companies :
An interesting issue arose before the Bombay High Court in relation to the date of effect of registration. The facts are that transferor company amalgamated with transferee company vide an order of the Bombay High Court, dated 24-7-2003, under the Companies Act, 1956, in which the scheme of amalgamation was approved. As per the amalgamation scheme, the amalgamation was to be effective from 1-4-2002. The transferee company was not registered under BST Act, 1959, hence, applied for new registration on 19-8-2003. The transferee company requested to grant Registration Certificate effective from 1-4-2002. However, the registration authority considered the change in the Constitution from 1-4-2002 and finding that there is delay in making application (in case of change in the Constitution the application for new registration is required to be made within sixty days), granted R’C. effective from 19-8-2003 i.e., the date of application. The mean period from 1-4-2002 to 18-8-2003 became unregistered period. The prayer of the petitioner to grant administrative relief for giving retrospective effect to R. C. from 1-4-2002 was also rejected.
Hence the writ petition was filed in the Bombay High Court, The High Court analysed the situation and amongst others, observed that in case of retrspective effect to amalgamation, the party cannot be expected to apply within sixty days from such retrospective date. The 60 days’ time should be considered from the date of order of amalgamation by the High Court and if so applied within 60 days, then the registration should be granted from the effective date of amalgamation i.e., in this case from 1-4-2002. The High Court observed as under about this aspect :
“12. It is in these circumstances that this Court must consider the date for the purpose of moving an application and the starting point of limitation under Rule 7(1)(a-1). As earlier noted insofar as amalgamating company Floatglass India Limited, is concerned, considering the provisions, its certificate of registration was cancelled from 1-4-2002. In other words, M/s. Floatglass India Limited ceases to be company from that date and that must be the date to give effect to S. 19(6) and Rule 7(1)(a-1). There is therefore, an omission on account of the failure by the delegates to provide a corresponding rule to Rule 7(1)(a-1). In the absence of the Legislature providing and taking note of the fact that in such cases, the amalgamating company is not at fault, it will have to be construed that the time for making an application for registration will be 60 days from the date of the Court passing the order. On such application being made, the certificate of registration will have to be made effective from the anterior date given by the Company Court. This is only a procedural requirement. This would avoid hardship and give true effect to the mandate of the Legislature both under the BST and CST Act. No order of a Court should visit a party with liabilities and or undesirable conse-quences in the matter of tax. The rule must be so read to give effect to the legislative mandate. The date for applying for registration u/s.19(6) for a company, can only be the date of the Company Court’s order. If within 60 days of such order an application is made, then the expression succession to business in Rule 7(1)(1a)will also be so read. Under Rule 8(8)(a)(iii) then it will be the date the Company Court has ordered or the date provided in the scheme which will be the date of succession to business. This would obviate any difficulty to a party till such time the delegate makes a specific provision in Rule 8.”
[Asahi India Glass Ltd. v. State of Maharashtra, (25 VST 31)(Bom.)]
The Finance Minister of Maharashtra, in his budget speech,
stated that he proposes to announce a Composition Scheme for Builders/Developers
for discharging their tax liability under the MVAT Act, 2002.
U/s.42 of the MVAT Act, 2002 the State Government has power
to prescribe compositions scheme/s for different classes of dealers or for
different types of transactions. There are several schemes for discharge of tax
liability on works contracts, like 5% Composition Scheme, 8% Composition Scheme,
etc. Now, this is a special scheme announced for builders/developers.
Accordingly, the enabling provision is made in the MVAT Act, 2002 by insertion
of S. 42(3A) vide amendment effected in April, 2010. Under the said enabling
power, the State Government has notified a Composition Scheme vide Gazette
Notification dated 9-7-2010.
Before we discuss certain aspects of the said new Composition
Scheme, it may be useful to discuss relevant legal background briefly.
In case of builders, whether there is works contract sale or
sale of immovable property has become a debatable issue. When the builder sells
ready flat i.e., after the flats are constructed, it will amount to sale
of immovable property and there is no question of VAT liability.
The other possibility is that the builder enters into an
agreement for sale of flat with the prospective buyer when the construction is
under progress. Such agreements are referred to as ‘Under Construction
Contracts/Agreements’. Till the judgment of the Supreme Court in the case of
K. Raheja Construction (141 STC 298) (SC), such contracts were considered to
be for sale of immovable property and the Sales Tax Department did not
contemplate any levy on the same. However, after the above judgment a debatable
position arose, which continues as on this day. A view prevails that such under
construction contracts are a works contract transaction. However, the other view
is that such a transaction is basically a transaction for sale of immovable
property, thus, there is no question of works contract and sales tax (VAT)
thereon.
But, the Government of Maharashtra and Sales Tax Department
hold a view that the above mentioned judgment is applicable in all cases, hence,
will cover all ‘under construction agreements’ for flats/premises. Under the
said impression the Commissioner of Sales Tax issued Trade Circular, viz.
Circular No. 12T of 2007, dated 7-2-2007. Similarly, the Government has
also introduced definition of ‘Works Contract’ in the MVAT Act so as to bring
the position of the said definition at par with the definition as was under
consideration before the Supreme Court in the abovestated judgment.
However, in spite of the abovementioned changes and judgment
of the Supreme Court, in most of the cases, it is possible to contend that
‘under construction contracts’ are not covered under the Sales Tax Laws and they
are not liable to tax under the MVAT Act, 2002 as works contract.
Amongst others, the facts of K. Raheja are required to be
seen carefully. In that case the value for undivided share in land was shown
separately and cost of construction was shown separately. However, when such is
not the position i.e., when the cost of land and construction is not
shown separately, then such contract cannot be made liable. There is no enabling
power with the State Government to bifurcate the composite value into land and
construction. Accordingly, if such under construction agreements are considered
to be for sale of immoveable property, they cannot be taxed under Sales Tax
Laws.
Be as it may, the Government of Maharashtra, in its wisdom
continues with its understanding that ‘under construction contracts’ are liable
to tax, and therefore, the Government has provided for one more Composition
Scheme specifically for builders/developers. The salient features of this new
scheme are as under :
(a) The scheme applies to builders/developers who undertake
the construction of flats, etc., wherein they also transfer land or interest
underlying the land.
Normally, builders/developers commence construction on their
own land as per their own project planning. The land is to be transferred to the
society or association which may be formed by the buyers of the premises
collectively, after possession is given. An issue may arise that there will not
be transfer of land or interest in land to any individual purchaser with whom
agreements are entered into. In case of flats/premises, each sale agreement can
be considered to be construction contract. Therefore, if one reads the
Notification literally, then it may be said that when the land or interest in
land is not transferred to the very individual purchaser, the Notification
cannot apply. Therefore, to avoid any dispute in future, it would be necessary
for the Department to clarify about the nature of transfer of land or interest
in land.
(b) The scheme shall apply to registered dealers only.
It is possible that in view of debatable position, the
builders/developers are not registered under the MVAT Act, 2002. However, if
they wish to take benefit of this scheme at this moment or any time in future,
it is necessary that they remain registered dealer. However, being registered
doesn’t mean that the builder is accepting the liability. He can be registered
dealer but can still show no turnover in the returns, considering his contracts
as contracts for immovable property. In future, if the liability accrues because
of clarity in the legal position, he can opt for this scheme. Though one of the
conditions mentions that the dealer should include the contract price in the
return in which the agreement is registered and pay the tax on it by declaring
such contract price as turnover, this can be done even by revising the return at
appropriate time. Therefore, at present, awaiting clarity of the law, the
builders may opt to file return without declaring turnover of such contracts.
It may also be noted that if the builder applies today for
registration, his earlier transactions from
20-6-2006 onwards may also be scrutinised for levy of liability, if any. This
new Composition Scheme does not bring new tax but it only provides one more
method for discharging liability effective from 1-4-2010. Assuming that a
builder opts for this Composition Scheme from 1-4-2010, he can contest the
liability for past period, if the issue arises.
(c) The scheme is applicable to agreements registered on or
after 1-4-2010. Therefore, even if the agreement is executed earlier, but
registered on or after 1-4-2010, it will be eligible for composition scheme.
(d) The composition money is 1% of the agreement amount,
specified in the agreement or value adopted for the purpose of stamp duty,
whichever is higher.
(e) The dealer/s opting for this Composition Scheme shall not be eligible to claim set-off of taxes paid on purchases.
(f) The dealer/s opting for this Composition Scheme shall not be eligible to effect any purchases against ‘C’ Forms.
(g) The dealer/s opting for this Composition Scheme shall not issue Form No. 409 to the sub-contractors in respect of the works contract/s in respect of which composition is opted.
(h) A further condition is that the dealer will not be entitled to change the method of computation of tax liability. (From a plain reading, it appears that this condition is to be seen qua each contract and not the project as a whole.)
(i) The last condition mentioned is that the dealer under this Composition Scheme should not issue tax invoice. (The issue may arise as to whether the builder can collect 1% composition separately. Though, the provisions relating to tax invoice are not worded happily, from the clarification issued by the Commissioner of Sales Tax, it can be said that though tax invoice cannot be issued, still in the normal invoice or bill, etc., the builder can charge composition amount separately. Otherwise he has to include the same in the agreement price.)
From the overall scenario, it appears that though there is uncertainty about attraction of sales tax liability on ‘under construction contracts’, the builders/developers may consider the risk factor and decide accordingly. The passing on the burden to the prospective purchasers will result in burden upon the common person. The issue will be more aggravating if ultimately the liability is not upheld by the judicial forum. There will be a number of difficulties in getting back the tax which was not due to the Government.
The earliest clarification of legal position is the need of the day.
Interstate sales — Dispatch Proof
Swastik Plastics, S.A. 257 and 258 of 2005
dated 29-3-2006 :
The issue in this case was about disallowance of claim of
interstate sale, as dispatch proof was not available. Before the Maharashtra
Sales Tax Tribunal the appellant produced copy of orders, delivery challans,
sales bills, etc. and ‘C’ forms received from purchasers. It was then contended
that it is not the requirement of law that the goods must be dispatched by
public transport. They can even be transported in own vehicle, etc. The
appellant in this respect relied upon judgments in the case of Nivea Times, (108
STC 6) and Pure Beverages Ltd., (142 STC 522). The Revenue Department submitted
that since no dispatch proof was produced, it is to be held as local sale.
The Tribunal held that the averment made by the Revenue
Department that there is no interstate movement is to be proved by the
Department. Except lack of dispatch proof, the Department has not proved
anything contrary to say that it is not an interstate sale. The Tribunal held
that the burden is on the Department to prove the same. The Tribunal also
considered the evidence produced by the appellant including ‘C’ forms. The
Tribunal also held that passing of property in any particular State is not
decisive. The Tribunal allowed claim of interstate sale.
Commissioner of Sales Tax v. Pure Beverages Ltd., (142 STC 522)
(Guj.) :
In this case, no dispatch proof for interstate movement was
available, and hence, claim of interstate sale was disallowed. However,
circumstantial evidence was available. The Gujarat High Court held that the
claim is allowable and observed as under :
“19. In the present case, therefore, the assessee had
claimed that the transactions in question were governed by S. 3(a) of the
Central Act, that it was liable to be charged with tax under the said
provision, but the Department disputed the said averment. The contention of
the Department that the assessee ought to have procured evidence in the form
of endorsement of the authorities at the check-post or delivery memo issued by
the transporter or octroi receipts showing payment of octroi by the purchaser
at the destination, etc., proceeds on the presumption that there is no
movement of goods and discards the version of the assessee that both the sale
and the movement of goods are part of the same transaction and there is a
conceivable link between the sale and the movement of goods. In other words,
the Revenue would like the Court to raise a presumption that the purchaser
must have diverted the goods after having taken delivery of the same at the
factory gate. Not only does the Revenue fail in discharging the onus which is
on it, but the presumption that it wants to draw is far-fetched in absence of
any evidence to show that such an exercise had been undertaken by the
purchaser. The assessee herein, namely, the selling dealer had submitted ‘C’
forms. It was open to the Department to verify the genuineness of the
transaction; call upon the purchasers, who are registered dealers, and seek
evidence to satisfy itself as to whether the goods had in fact moved or not
from this State to State of Rajasthan. The Department does not undertake the
requisite exercise, ignores the evidence produced by the assessee and merely
presumes a state of affairs not warranted in law or on facts. “Before the
Department rejects such evidence, it must either show an inherent weakness in
the explanation or rebut it by putting to the assessee some information or
evidence which it has in its possession. The Department cannot by merely
rejecting unreasonably a good explanation, convert good proof into a no
proof.”
In the light of above legal position, it can be said that
even if direct dispatch proof like receipt from public transport is not
available, still if other circumstances are brought before the sales tax
authorities, the claim has to be allowed.
Sale price — Free supplies
Ghatge Patil Ind. Ltd. & Others, S.A. 320 to 327 of 2002 dated 30-3-2007
The facts of the case, relating to year 1994-95 and others,
are that the appellant received an order for supply of certain manufactured
parts. The buyer gave certain parts as free issue to be incorporated in the
manufactured goods. In purchase order, there was no term about and particular
price to be considered for the said free issues. In his sale bill the appellant
added the cost of such free issues in his price to calculate excise duty. The
cost so added was then given deduction. On the above facts, the lower
authorities considered the cost of such supplies as part of sale price and
levied tax on the same. Before the Tribunal, appellant explained the facts. The
Tribunal observed that in this case the supplies are not made with any
particular consideration. There was no intention on the part of buyer or seller
to sale/purchase above goods nor agreed for any consideration. Therefore there
cannot be sale from the appellant to the buyer. The addition in price was with
sole purpose of calculating duty, as it was attracted even on free supply cost,
as per Excise laws. The Tribunal distinguished the judgment in the case of N. M.
Goyal (72 STC 368) on the above facts. The Tribunal made reference to judgment
in the cases of Gannon Dunkerley & Co. (9 STC 353), Indian Coffee & Tea
Distributors Co. (6 STC 47), Indian Alluminium Cables (115 STC 161), Hindustan
Aeronautics Ltd. (55 STC 314) and Auto Comp Corpn. (S.A. 1083 of 99, dated
26-9-2003). The Tribunal directed to delete the addition.
Binding effect of Tribunal judgment
Trinity Engineers Ltd., Misc. Appl. 218 and 219 of 2007
Vide S.A. 359 and 360 of 2000, dated 5-4-2006, the
Maharashtra Sales Tax Tribunal directed that the turnover in respect of forgings
is to be taxed @ 4% under Entry B-6. The First Appellate Authority did not pass
consequential order on the ground that the Commissioner of Sales Tax has
preferred reference application. Therefore, this miscellaneous application was
filed before the Tribunal by the appellant. The Tribunal held that action of the
said authority in not passing order for long time in direct judgment of the
Tribunal is unjustified and showed its displeasure. The Tribunal observed as
under :
The assessing officer is directed to give effect, of the judgment of the Tribunal in Second Appeal Nos. 359 and 360 of 2000 immediately without fail.”
It is felt that the above observations of the Tribunal will be seriously followed by the lower authorities in other cases also.
Profession Tax – Extent of liability
Kamataka Bank Ltd. v. State of A.P. and Others CR. Yegnaiah & Sons. v. Profession Tax Officer and Another (12 VST 459) (SC):
The issue in this case was about levy of Profession-Tax. The AP. Profession Tax Act sought to levy Profession Tax on each branch of the same person (entity). This was resisted on the ground that as per the Constitution, there is limit of Rs.2,500 per person for levy of Profession Tax by the States. It was argued that this limit is per person in the State and hence induding all branches, the Profession Tax on one person cannot exceed more than Rs.2,500. The argument was that levy of Profession Tax @ 2,500 on its each branch is far in excess of statewise limit of Rs.2500 per person. In short, the argument was that tax is leviable on it at maximum Rs.2,500. Therefore, the specific provision under AP. Profession Tax Act viz. definition of ‘person’ which sought to define each branch as person was challenged as un-constitutional. The short gist of the Supreme Court judgment is as under:
The Supreme Court observed that the definition of the word ‘person’ in the Explanation to S. 2(j) of the Andhra Pradesh Tax on Professions, Trades, Callings and Employments Act, 1987, and also Explanation No. 1 of the First Schedule to the Act is not intended to tax a person at a rate higher than Rs.2,SOOper annum, per person, but to treat even a branch of a firm, company, corporation or other corporate body, any society, club or association as a separate person, and therefore, a separate assessee within the meaning of S. 2(b) of the Act and the Andhra Pradesh State Legislature has undoubtedly the competency to adopt such a devise of taxation. The Andhra Pradesh State Legislature did not violate the mandate of Article 276(2) of the Constitution of India in so defining the word ‘person’. It is further observed that the definition of ‘person’ in General Clauses Act, would not restrict the power of the State Legislature to define a ‘person’ and adopt a meaning different from or in excess of the ordinary acceptance of the word as is defined in the General Clauses Act.
On the aspect of constitutional validity, the Supreme Court observed that there is always a presumption in favour of constitutionality, and a law will not be declared unconstitutional unless the case is so clear as to be free from doubt; lito doubt the constitutionality of a law, is to resolve it in favour of its validity. II Where the validity of a statute is questioned, and there are two interpretations, one of which would make the law valid and the other void, the former must be preferred and the validity of law upheld, observed the Supreme Court. It is further observed that in pronouncing on the constitutional validity of a statute, the Court is not concerned with the wisdom or un-wisdom, the justice or injustice of the law. If that which is passed into law is within the scope of the power conferred on a Legislature and violates no restrictions on that power, the law must be upheld whatever a Court may think of it, held the Supreme Court.
In respect of argument on unconstitutionality in the light of Article 14, the Supreme Court held that no legislation can be declared to be illegal, much less unconstitutional on the ground of being unreasonable or harsh on the anvil of Article 14 of the Constitution, except, of course, when it fails to clear the test of arbitrariness and discrimination which would render it violative of Article 14 of the Constitution.
In respect of tax levy provisions, the Supreme Court held that the State Legislature undoubtedly is competent to make a law relating to taxes for the benefit of the State or other local authorities therein in respect of professions, trades, callings or employments. It is traceable to Entry 60 of List of the Seventh Schedule, but that power of the Legislature to make such a law to levy and collect the profession tax is made subject to the restrictions as provided for under Article 276(2) of the Constitution. The purpose of Article 276 is not to amend the State’s power to tax profession founded on Entry 60 but is to provide that such tax is not invalid on the ground that it relates to a tax on income.
It is well settled that a tax on profession is not necessarily connected with income. A tax on income can be imposed if a person carries on a profession, trade, calling, etc. Such a tax on profession is irrespective of the question of income. There is no other restriction imposed upon a State Legislature in making law relating to tax on profession, trade, calling and employment. There can be no doubt whatsoever that a State Legislature cannot make any law to levy and collect profession tax at the rate of more than Rs.2,500 per person, per annum, in view of the restriction in Article 276(2) of the Constitution.
The Legislature is competent in its wisdom to define ‘person’ separately for the purposes of each of the enactments and different from the one in the General Clauses Act and create an artificial unit. The definition of ‘person’ in the General Clauses Act would not operate as any fetter or restriction upon the powers of the State Legislature to define ‘person’ and adopt a meaning different from that defined in the General Clauses Act.
The Supreme Court thus upheld the levy on different branches of same person at Rs.2,500 each.
(A) The Union Finance
Minister, through the Finance Bill, 2010, has proposed certain amendments to the
Central Sales Tax Act, 1956. The important aspects of the said amendments may be
noted as under :
1.
S. 6A :
This Section refers to
branch transfers and production of ‘F’ forms.
In this sub-section two
amendments are proposed.
(i)
Ss.(2) of S. 6A :
As per the present position,
if the assessing authority is satisfied that the particulars mentioned in ‘F’
forms are correct, he can allow the transfers as other than interstate sale
i.e., branch transfer.
By amendment, it is proposed
that the authority should satisfy that the particulars are true and also that
there is no interstate sale and then he should pass the order that the transfers
are other than interstate sale. It is further provided that this allowance will
be subject to Ss.(3), which is newly inserted.
This amendment now provides
more powers to the sales tax authorities. The authorities will now be entitled
to examine whether the transfers are inter- state sales, in spite of the fact
that the particulars in the ‘F’ forms are true. This appears to be with a view
to counter the observations in certain cases, where courts have held that once
the particulars are not disputed by the authorities, the claim has to be
allowed. Even if the transaction might have been interstate sale, because the
particulars in ‘F’ form would be correct, the branch transfer claim would have
been required to be allowed. The amendment is now proposed to correct the above
position.
(ii) By another amendment in
S. 6A, Ss.(3) is proposed to be inserted. By this sub-section, the powers of
reassessment/revision are proposed to be given to the sales tax authorities. As
per this new sub-section, the respective reassessing/revision authorities will
be entitled to modify the order passed u/s.6A(2), if new facts are discovered or
that the findings of the lower authorities were contrary to law. This amendment
appears to reverse the ratio of judgment of the Supreme Court in case of Ashok
Leyland Ltd. (134 STC 473) (SC). In this case, the Supreme Court has held that
once the ‘F’ forms are allowed, it cannot be reversed through reassessment or
revision, unless the same were found to be produced fraudulently. The
interpretation put by the Supreme Court was certainly appreciable as it can save
dealer from unending fishing inquiries, in spite of completion of assessments.
This judgment, in Ashok Leyland Ltd., has been followed in many other judgments
like in the case of Steel Authority of India Ltd. (10 VST 451) (CSTAA), etc.
Now, as per proposed amendment even if the ‘F’ forms are genuine and particulars
are true, the authorities will be entitled to reassess/revise, if the order
u/s.6A(2) was contrary to law. The dealers will now be required to be prepared
for long-drawn battles in spite of initial completion of assessments.
In Maharashtra there will be
one more issue.
Under the MVAT Act, 2002
there is no provision for reassessment/revision, but there is provision for
review. The terms used in newly inserted Ss.(3) are ‘reassessment/revision’,
thus an issue may arise whether it will take into account a ‘review’. Though,
the review is in the nature of revision, its legality is certainly debatable.
2.
Chapter VA :
By another amendment,
Chapter VA is proposed to be inserted in the CST Act, 1956. This Chapter
contains S. 18A, which has (5) sub-sections. The intention of this provision is
to provide appeal against the order passed u/s.6A(2) or (3) to the highest
appellate authority of the State. This appears to avoid first appeal stage. As
per the provisions of Chapter VI, the order passed by the highest appellate
authority of the State in relation to S. 6A is appealable to the Central Sales
Tax Appellate Authority (CSTAA). Normally, the original order is passed by
assessing authorities and against the same the first appeal is provided, before
going in appeal to the highest appellate authority of the State. The amendment
appears to cut down the first appeal stage. As per this amendment, the appeal
against the original order (assessment order) u/s.6A(2) and (3) will lie to the
highest appellate authority. It is also provided that if the appeal is filed
before the highest appellate authority, involving S. 6A(2) or (3), the dealer
will be entitled to take other incidental issues like rate of tax, computation,
penalty, etc. in the same order before the said highest appellate authority.
From such order of the highest appellate authority the further appeal will lie
to CSTAA.
This S. 18A is a
self-contained code giving procedural provisions also like time limit for filing
appeal, grant of stay, time limit for deciding appeal, etc. The
proposed S. 18A can be analysed as under :
S. 18(1)
: It provides that irrespective of any provisions under the General Sales Tax
Law of the State, the appeal against the order passed by the assessing authority
u/s.6A(2) or (3) of the CST Act should lie to the highest appellate authority of
the State. By explanation at the end of S. 18A, the meaning of the highest
appellate authority is provided. As per said Explanation, the highest appellate
authority means the Appellate Authority or Tribunal constituted under the
General Sales Tax Law except the High Court.
In other words, in Maharashtra, the highest appellate authority will be the Maharashtra Sales Tax Tribunal. Thus, from order of the assessing authority u/s.6A (2)/(3) appeal will be required to be filed directly before the Tribunal.
S. 18(2) : The time limit for filing appeal is prescribed by this sub-section, which is 60 days from service of impugned order. There appears to be no speaking power for condonation of delay in filing appeal.
By proviso to the said sub-section, it is provided that where the appeal is forwarded to the first appellate authority by the highest appellate authority as per proviso to S. 25(2), such pending appeal on appointed day should get transferred to the highest appellate authority. The appointed day will be notified in the official Gazette. So this will take place in future on a day as may be notified.
S. 18(3) : The highest appellate authority will pass appropriate order, after giving opportunity of hearing to both the parties.
S. 18(4) : Time limit for passing the order — As far as possible, the highest appellate authority should pass the order within six months from filing of appeal.
S. 18(5) : Powers of granting stay against the demand— It is stated that on making application to the highest appellate authority, it can grant stay after considering the tax already paid on the subjected goods in the said State or in other State. However, it is also provided that the highest appellate authority may ask to deposit certain amount as pre condition for admission of appeal.
3. S.20:
Amendment is also proposed in S. 20 of the CST Act, 1956, which relates to appeals to CSTAA. The Ss.(1) is proposed to be substituted. The substituted Ss.(1) provides that the appeal against the order of the highest appellate authority of the State, determining issues relating to stock transfer or consignment of goods, insofar as they involve dispute of inter-state nature, will lie to CSTAA. The present Ss.(1) is narrow in scope, as it mentions order u/s.6A r/w S. 9. The substitution appears to correct a technical flaw in existing sub-section. Since the appeal to CSTAA is from the order of the highest appellate authority, it may be passed under particular appeal provisions and hence references to S. 6A may not be necessary here. This amendment appears to be for correcting the above position.
4. S.22:
An amendment is also proposed in S. 22 to replace the words ‘pre-deposit’ as ‘deposit’. The amend-ment is procedural in nature.
By another amendment in S. 22, Ss.(1B) is proposed to be inserted. This appears to fill up the lacuna in present provision. There is no speaking provision for directing refund of tax to the dealer or to other State. This insertion is to give power to CSTAA to direct a particular State to refund the tax which is not due to it or to transfer the same to other State to whom CST belongs, based on appeal findings. The direction to refund will not be exceeding the amount which will be payable as CST.
Though the amendment is welcome, it has not tak-en care of all the issues, particularly arising under the Local Act. For example, in transferee State the dealer has paid Local tax and CSTAA considers it as inter-state sale from moving State, disallowing branch transfer claim. Now CSTAA can ask the transferee State to refund the amount equal to CST to moving State. However the purchasing dealer in transferee state will be at loss. He might have claimed set-off considering it as local purchase which is now considered as intersate purchase which will result in denial of his set-off claim. Remedial provisions are required to be provided to tackle such a situation.
5. S.25:
By one more amendment, the proviso to Ss.(2) of S. 25 is proposed to be omitted. This proviso provides for availment of first appeal by the dealer. However, now, since the said first appeal is sought to be avoided, the omission of this proviso is consequential.
B) Recent amendments in MVAT Act, 2002 :
The Government of Maharashtra has issued Ordinance No. II of 2010, dated 18-2-2010, by which S. 9(1) of the MVAT Act has been amended. By this amendment the proviso to S. 9(1) is deleted from the statute book. This proviso puts a limitation on the Government that it cannot amend schedules to increase the rate after two years from 1-4-2005. However, due to removal of the said proviso, now the Government can change the rates after two years also. Thus, the Government has assumed wide powers about increasing the rate of tax in VAT schedules.
By using the expanded powers, the Government of Maharashtra has issued Notification u/s. 9(1), dated 10-3-2010. By the said Notification changes are ef-fected in Schedule A and C. On most of the goods contained in Schedule C, the rate of tax is increased from 4% to 5% from 1-4-2010. The rate of tax on declared goods contained in Schedule C is retained at 4%, whereas on all other goods contained in Schedule C, the rate is increased to 5%.
On about 101 non-declared items contained in Schedule-C, the rate is increased from 4% to 5% from 1-4-2010. The same is done just before the Budget presentation.
[This is also against the accepted principle of uniformity of rate of tax in VAT regime.]
Amongst others, the changes will affect the necessities of common person like wheat and cereals/pulses, etc. The changes can be said to be of far-reaching effect. It will also affect the prices of goods, which are already high due to inflation and other reasons.
In fact, the Government of Maharashtra proposed to levy tax even on fabrics and sugar. However, by Circular 11T of 2010, dated 17-3-2010, it is clarified that the tax position in relation to sugar and fabrics will continue as it is at present and no change will take place from 1-4-2010. We hope that the Government will reconsider this mass increase in other items also, keeping into account the common good.
“S. 6A. Burden of proof, etc., in case of transfer of goods claimed otherwise than by way of sale :
(1) Where any dealer claims that he is not liable to pay tax under this Act, in respect of any goods, on the ground that the movement of such goods from one State to another was occasioned by reason of transfer of such goods by him to any other place of his business or to his agent or principal, as the case may be and not by reason of sale, the burden of proving that the movement of those goods was so occasioned shall be on that dealer and for this purpose he may furnish to the assessing authority, within the prescribed time or within such further time as that authority may, for sufficient cause, permit, a declaration, duly filled and signed by the principal officer of the other place of business, or his agent or principal, as the case may be, containing the prescribed particulars in the prescribed form obtained from the prescribed authority, along with the evidence of dispatch of such goods [1] and if the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed for all purposes of this Act to have been occasioned as a result of sale.
(2) If the assessing authority is satisfied after making such inquiry as he may deem necessary that the particulars contained in the declaration furnished by a dealer U/ss.(1) are true, he may, at the time of, or at any time before, the assessment of the tax payable by the dealer under this Act, make an order to that effect and thereupon the movement of goods to which the declaration relates shall be deemed for the purpose of this Act to have been occasioned otherwise than as a result of sale.
Explanation : In this Section, ‘assessing authority’, in relation to a dealer, means the authority for the time being competent to assess the tax payable by the dealer under this Act.”
As seen from the Section, the burden is cast upon the moving dealer to prove that the movement to branch/agent or principal, as the case may be, is not in pursuance of any sale. Prior to 11-5-2002, the moving dealer can produce satisfactory evidence about dispatch, etc. It was also optional on his part to produce ‘F form’ to support his claim, but it was not mandatory. After amendment on 11-5-2002 in the CST Act the production of F form to establish the claim of branch transfer/transfer to agent, etc. has become compulsory. Therefore the production of F form has got importance and it is also sometime a cause of litigation. In this brief note the requirement of production of F form has been discussed in light of certain circulars/judgments.
As is clear from S. 6A of the CST Act, the F form is required when the goods are transferred to branch or agent. The concept of branch as well as agent is well known in the commercial world. Branch is a part of the transferor entity. Agent relationship will be created based on terms of the parties. As known, an agent is a separate entity than the transferor, but he represents the transferor and acts on his behalf. It is said that agent steps in the shoes of principal. There may be written agreement for the same or may be inferred from the relevant circumstances or documents. Generally agents work on commission basis. Thus the relationship created is of principal and agent and when the principal transfers the goods to agent he has to obtain F form from the agent.
The other situation is that the dealer may be sending goods to a party in other State for job work. Here the job worker will charge his job work charges to his customer i.e., the transferor. It can be seen that here the relationship is principal to principal. In other words the relationship between transferor and job worker is not of principal and agent or transfer to branch, etc. Therefore the provisions of S. 6A are not applicable in such cases and F forms are not required to be exchanged. However the situation was confusing and many dealers exchanged the F forms or asked for the said forms from respective parties. The Commissioner of Sales Tax, Maharashtra State realising the situation rightly issued circular bearing No. 16T of 2007, dated 20-22007. By this Circular the Commissioner of Sales Tax explained the nature of relationship as agent. In the circular it was further clarified that when the dealer sends the goods to job worker, the relationship is as principal to principal and F form is not required to be obtained from such job worker outside the State. The implication was also that the job worker in Maharashtra was not required to issue F form to his other State customer. Thus the situation became very clear and beyond doubt.
However, thereafter there came a judgment from the Allahabad High Court reported in the case of Mis. Ambica Steel Ltd. v. State of Uttar Pradesh, (12 VST 216). In this case the issue was out of a writ petition. The petitioner in that case had sent iron and steel ingots to various companies situated outside the State of Uttar Pradesh for the purpose of converting them into iron and steel rounds, bars and flats. The converted material was to be sent back to the petitioner in Uttar Pradesh. The petitioner company also received iron and scrap from various firms outside the State of Uttar Pradesh for the purpose of converting the same into iron and steel billets and ingots with a direction to return the converted goods to those firms. The issue before the Court was whether the petitioner is required to submit the declaration in Form F in respect of the transaction of job work performed by it or got done by others. The Department authorities were relying upon Cir-cular issued by Commissioner of Trade Tax, U.P. to insist on such forms.
In the Circular dated November 28, 2005 issued by the Commissioner of Trade Tax, Uttar Pradesh, it was mentioned that ul s.6A of the Central Sales Tax Act, 1956 form F is required to be filed in respect of all transfers of goods which are otherwise than by way of sale including goods sent or received for job work or goods returned.
Allahabad High Court observed that S. 6 of the Central Sales Tax Act, 1956 is the charging Section creating liability to tax on inter-State sales and by reason of S. 6A(2) a legal fiction has been created for the purpose of the Act that transaction has occasioned otherwise than as a result of sale. S. 6A puts the burden of proof on the person claiming transfer of goods otherwise than by way of sale and not liable to tax under the Central Act. The burden would be on dealer to show that movement of the goods had been occasioned not by reason of any transaction involving any sale of goods, but by reason of transfer of such goods to any other place of business or to the agent or principal, as the case may be, for which the dealer is required to furnish prescribed declaration form. If the dealer fails to furnish such declaration, by reason of legal fiction, such movement of goods would be deemed for all purposes of the Act to have been occasioned as a result of sale. The High Court held that if the petitioner claims that it is not liable to tax on transfer of goods from U.P. to a place outside State, then it would have to discharge the burden placed upon it ul s.6A by filing declaration in form F. It would be immaterial whether the person to whom the goods are sent for or received after job work is a bailee. The requirement to file declaration in form F is applicable in cases of goods returned also, held High Court. Thus Hon. High Court dismissed the Writ Petition.
Thus the Allahabad High Court held that F form is required even in case of job work transactions and goods return transaction. It can be respectfully said that the said judgment requires reconsideration in light of above-discussed facts and legal position about agent and principal. However it is also a law that till the binding judgment is not unsettled by proper higher forum, etc., it has to be followed. It is also required to be noted that the judgment of any High Court under the Central Act is binding on all the lower authorities in all the States of India unless the Jurisdictional High Court of the particular state has laid down anything different. This principle of law is clear from judgment in case of Maniklal Chunilal & Sons Ltd. v. CIT, (24 ITR 375).
Therefore the situation that now arises is that for transfer of goods to job worker, the sender will be required to obtain F form from him even if he is in other than D. P. State. Similarly when the job worker sends goods back to his customer, he will be required to obtain F form from his principal (customer).
The other implication created by this judgment is that the authorities may insist on furnishing of F form even for sales return. For example, a dealer in Maharashtra has sold the goods to a dealer in V.P., the dealer in V.P. may be returning back the goods to the vendor in Maharashtra as sales returns. In such circumstances also it cannot be said that the goods are sent back by the V.P. dealer to Maharashtra dealer as agent, etc. The transaction is as principal to principal and requirement of F form cannot arise. However in the light of the above judgment the F forms may be insisted upon.
Thus it can be said that some unwarranted burden about exchange of F forms has now arisen. Fortunately, in Maharashtra the Commissioner of Sales Tax has again understood the problems faced by the dealers. Therefore he has come out with a fresh Circular bearing No. ST of 2009, dated 29-1-2009. In this Circular the Commissioner of Sales Tax has reconfirmed the position spelt out by him in his earlier Circular 16T of 2007. Therefore it can be said that the dealers in Maharashtra will not be required to obtain the F forms in case of job work transfers or in case of sales return in spite of the above judgment of Allahabad High Court. However this Circular will not have any effect in other States and the dealers in other States will be governed by the above judgment and may insist on F forms for their transactions with Maharashtra dealers. As clarified in Circular No. ST of 2009, dated 29-1-2009 the Maharashtra dealers will be entitled to issue the same to facilitate their parties in other states. Thus an appreciable practical way has been found out by the Commissioner of Sales Tax, Maharashtra.
Let’s hope that the correct legal position will be clarified by competent authority like Larger Bench of Allahabad High Court or Supreme Court or High Court/s of other State/s by which the dealers will be saved from such unproductive work of issuing forms.
Software — Whether Sales Tax (VAT) or Service Tax :
Recently by budget amendments (Finance Bill 2008), Service
Tax is contemplated on software services. Software is also considered as taxable
goods under the Sales Tax (VAT) laws. Thus a question arises as to whether
software will be taxable to Service Tax or Sales Tax (VAT). The issues related
to the above dilemma can be discussed briefly as under :
To initiate, it will be necessary to refer to legal
background of the subject. Under the Maharashtra Value Added Tax Act, 2002 (MVAT
Act, 2002) sale of goods is liable to tax. In entry C-39, intangible goods are
covered as liable to tax @ 4%. For purpose of entry C-39, intangible goods means
those goods which are specified in the Notification under the said entry.
The said entry and the notification thereunder reads as
under :
“39. Goods of intangible or
incorporeal nature as may
be notified from time to
time by the State Govt. 4% 1-4-2005
in the Official Gazette. to till date”
The Notification issued under C-39 is as under :
Notification
Finance Department, Mantralaya, Mumbai-400032
Date : 1-6-2006
Maharashtra Value Added Tax Act, 2002.
No. VAT-1505/CR-114/Taxation 1 — In exercise of the powers
conferred by entry 39 of Schedule ‘C’ appended to the Maharashtra Value Added
Tax Act, 2002 (Mah. IX of 2005) and in supersession of Government Notification,
Finance Department, No. VAT-1505/CR-114/Taxation-1, dated the 1st April 2005,
the Government of Maharashtra hereby specifies the following goods of intangible
or incorporeal nature for the purposes of the said entry, namely :
Sr. No. |
Name of the goods of intangible or incorporeal nature |
(1) |
Patents |
(2) |
Trademarks |
(3) |
Import licences including exim scrips, special import licences and duty-free advance licences. |
(4) |
Export permit or licence or quota |
(5) |
Software packages |
(6) |
Credit of duty entitlement Passbook |
(7) |
Technical know-how |
(8) |
Goodwill |
(9) |
Copyright |
(10) |
Designs registered under the Designs Act, 1911. |
(11) |
SIM cards used in mobile phones |
(12) |
Franchise, |
(13) |
Credits of duty-free replenishment certificate |
(14) |
Credit of duty-free Import Authorisation (DFIA) |
It can be seen that software packages are included in the
above Notification under entry C-39 and hence, as such, software packages are
liable to Sales Tax @ 4%. Therefore it is necessary to find out whether software
is sold as ‘goods’ so as to be liable under MVAT Act 2002 or software services
are provided so as to be liable to Service Tax, but not Sales Tax.
The next issue therefore will be the nature of development of software. Software development can be of two types. Software can be developed which is meant for free marketing. These are known as off-the-shelf or branded softwares. In case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), the Hon. Supreme Court has held that such ‘off-the-shelf’ softwares are liable to sale tax as sale of goods. The Supreme Court observed as under:
“In our view, the term ‘goods’ as used in article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (2001) 4 SCC 593; (2001) 124 STC 59. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to Sales Tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become ‘goods’. We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is just of the media, which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films, the buyer is purchasing the intellectual property and not the media, i.e., the paper or cassette or disc or CD. Thus a transaction of sale of computer software is clearly a sale of ‘goods’ within the meaning of the term as defined in the said Act. The term ‘all materials, articles and commodities’ includes both tangible and intangible / incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes.
At this stage it must be mentioned that Mr. Sorabjee had pointed out that the High Court has, in the impugned judgment, held as follows :
“……..In our view, a correct statement would be that all intellectual properties may not be ‘goods’ and therefore branded software with which we are concerned here cannot be said to fall outside the purview of ‘goods’ merely because it is intellectual property; so far as ‘un-branded software’ is concerned, it is undoubtedly intellectual property, but may perhaps be outside the ambit of ‘goods’.”
Mr. Sorabjee submitted that the High Court correctly held that unbranded software was ‘un-doubtedly intellectual property’. Mr. Sorabjee submitted that the High Court fell in error in making a distinction between branded and un-branded software and erred in holding that branded software was ‘goods’. We are in agreement with Mr. Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed and used. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbranded software, when it is marketed/ sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/ or whether the contract is a service contract may arise.”
In view of above observations, once the softwares are held to be sold, liable to Sales Tax, the question of attracting Service Tax cannot arise. Normally, branded softwares (off-the-shelf) will be liable to Sales Tax.
The other kind of softwares are customised softwares.
In case of customised software, there can be two situations. A developer can develop the software as per specification of customer as his property.
For example, the developer of software can develop the software as per customer’s specification, but copyright in the software remains with the developer. Subsequently, the developer will transfer the said software to the customer against agreed price. In this case though it is customised software, still it can be said to be sale of the goods. Though the Supreme Court has not directly resolved the above issue in case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), there are observations which go to suggest that customised software can also be liable to Sales Tax. The relevant observations are already reproduced above.
Accordingly, the above type of customised software can be liable to Sales Tax. In this respect, reference can also be made to the determination order passed by the Commissioner of Sales Tax, Maharashtra State in case of Mastek Ltd. (DDQ 11-2001/ Adm-5/83/B-7 dated 31-8-2004).
In this case, it was held that though the software was a customised software, since the property in the software belonged to the developer, which was transferred against price, it was a taxable transaction under Sales Tax.
The other way by which customised software can be developed is that the software is developed as a property of the customer. In other words, in this kind of development, the copyright in the software remains with customer right from inception. The customised software is developed as property of the customer and copyright belongs to such customer. In such case, there is no question that the software first belongs to the developer and subsequently transferred to the customer against price. In this case, since the software belonged to the customer itself, there is nothing which the developer can transfer to him. Under above circumstances, the transaction will be that of rendering of software development services. It cannot be liable to Sales Tax and thus it may be liable to Service Tax.
However, the issue about the nature of transaction of software as to sale or service is very delicate. The above is a broad thinking on the subject. There may be various other possibilities. For example, a case may arise about modifying or improving the existing software. The developer in such a case may be providing further modules to already existing software. The module itself may be a kind of software. Under such circumstances, the issue will be whether the charges received by the developer are for sale of software or for rendering of services.
If above situation is tested in the light of earlier discussion, it has to be concluded that providing modules for improving the software is nothing but rendering of services. The module, though prepared separately, has to be merged into existing software to improve it. The existing software is belonging to the customer. Thus by providing module the developer is in effect improving the existing software. There is no question of independent existence of module prepared by developer so as to become ‘goods’ by itself. The charges will be for providing service and not sale of any goods. Thus there can be various kinds of situations. The nature of transaction is required to be ascertained by finding out the copyright status in the software so developed. It is expected that the discussion above will be useful for further deliberations on the issue.
Recent Amendments to Maharashtra VAT Rules
The Government of Maharashtra, vide Notification dated 14th March 2008, has made certain amendments to the Maharashtra VAT Rules, 2005 particularly in Rules 17, 18 and 81, pertaining to filing of returns by the dealers. The Commissioner of Sales Tax has also issued a Notification dated 14th March 2008, whereby certain dealers shall now file e_return for the periods commencing from 1st February 2008 onwards.
The existing return forms have been replaced by new return forms. The Commissioner of Sales Tax has issued a Trade Circular No. 8T of 2008, dated 19th March 2008, explaining above amendments and the procedure to be followed by dealers in respect of payment of taxes and filing of returns. Relevant portion of the Trade Circular is reproduced below for the benefit of our readers:
“(3) Introduction:
The Government, by Notification No. VAT/1507 / CR-94/Taxation-1, dated 14th March 2008, has carried out certain amendments to Rule 17 and Rule 18 of Maharashtra Value Added Tax Rules, 2005 pertaining to filing of return. The amendment also provides for filing of e-return by certain categories of dealers. The rule authorised the Commissioner of Sales Tax to notify the date for mandatory filing of e-return by certain categories of dealers. In pursuance of this delegation the Commissioner of Sales Tax has issued the Notification dated 14th March 2008. It has now been made mandatory for registered dealers whose tax liability in the previous year was Rs.1 crore or more to file returns electronically for the periods starting on or after 1st February 2008.
(4) Electronic filing of returns:
Sub-rule (5) of Rule 17 is substituted. The substituted sub-rule provides for filing of returns electronically. The registered dealer liable to file return electronically should first make the payment of tax along with interest, if any, in chalan 210 in the designated banks. As per the Notification, the registered dealers whose tax liability during the previous year was Rs. one crore or more, shall make payment and file electronic returns as provided in the said sub-rule (5). For the purposes of the Notification, the expression ‘tax liability’ has the same meaning as assigned to it in the Explanation-I to sub-rule (4) of the said Rule 17.
(4.1) These dealers shall file the return electronically in the respective form applicable to them. The templates of new return form are provided on the new website of the Sales Tax Department www.mahavat.gov.in. Every dealer to whom the above Notification applies shall download the relevant template of the form and after making data entry in the relevant field, upload it using his digital signature. The uploading shall be done on or before the due date prescribed for filing of the returns. The system shall generate an acknowledgement in duplicate.
(4.2) However, if the dealer does not have or has not used digital signature, then he shall submit a copy of the acknowledgement duly signed by an authorised person within 10 days from the uploading of the return to the respective authority specified in sub-rule (2). For the time being, if a dealer is with LTU, a copy of the acknowledgement may be submitted to their respective officer of the Large Taxpayers Unit (LTU),who is regularly in liaison with the dealer.
(4.3) To facilitate filing of e-return, detailed guidance note explaining the procedure to file of e- return is placed on the website www.mahavat.gov.in. If any dealer requires further assistance for filing of e-return, he may contact the respective liaison officer who has been assigned for this job. If the dealer requires further assistance in filing e-return, he or his authorised representative may visit respective Sales Tax authorities, wherein he will be guided regarding the e-filing of return. A dedicated help desk is also created in Mazgaon Office to answer the queries pertaining to e-returns. The dealer may contact the help desk at 022-23735621/022-23735816.
(4.4) Since this is the first month for filing of e-return, the dealers may face some difficulties in preparing and uploading the electronic return. Considering the likely difficulties faced by the dealers, a concession is provided only for this month to upload the e-return even after the due date i.e., 21st March 2008, but on or before 31st March 2008. The e-return uploaded up to 31st March 2008 shall not be treated as late, provided the payment of tax as per return is made on or before due date. This concession is applicable only for the first month and for the subsequent period the dealers will remain required to upload the return on or before the due date.
(5) Change in return Forms:
The earlier return Forms 221, 222, 223, 224 and 225 have been replaced with the new returns Forms-231, 232, 233, 234 and 235, respectively. These Forms are made available on the website of the Department (www.mahavat.gov.in and www.vat.maharashtra.gov.in). The dealer can download these Forms from the menu download section of the website. All the returns, including the returns for the earlier period, should now be filed in the aforesaid new return Forms.
(5.1) The new return Forms are applicable to all dealers including those who are not required to file electronic returns. The efforts are being made to make these Forms available at all the locations in the State. However, the dealers except the dealers required to file e-return may file returns in the old Forms 221 to 225. This facility will be available only in the respect of returns which are to be filed before 31st March 2008. Thus, all the returns filed after 1st April 2008 (including the returns for the earlier period, if any) should invariably be in the new return Forms.
(5.2) Another amendment is made to sub-rule (1) and sub-rule (3) of Rule (5) of the Central Sales Tax (Bombay) Rules, 1957 to provide for electronic return. The old return Form IIIB is now replaced by new Form IIIE. Therefore, dealers filing returns on or after 1st February 2008 shall file return in the new Form.
(6) Filing of returns by oil companies:
The first amendment to sub-rule (2) provides that notified oil companies shall file a copy of their return in Form 235 with the Joint Commissioner of Sales Tax (LTU), Mumbai within 3 days of filing of the return in Form 235.
7) Returns of dealers covered by Package Scheme of Incentives:
By this amendment a new procedure is prescribed for certain dealers under Package Scheme of Incentives. The amendment provides that if the dealer holds a certificate of entitlement under any Package Scheme of Incentives except the Power Generation Promotion Policy, 1998, then the dealer shall file return to the registering authority having jurisdiction over the respective place of business of the dealer, in respect of which he holds the certificates of entitlement.
The proviso appended to this clause states that if the deale, ‘has two or more entitlement certificates issued to him, then he shall file the required return with that registering authority which has jurisdiction over the place of business pertaining to the entitlement certificate whose period of entitlement ends later. This return should show aggregate figures of all sales and purchases pertaining to all the eligible units of the dealer. A complimentary amendment is also carried out in Rule 81.
(8) No separate return :
Earlier by clause (c) of sub-rule (2) of Rule 17 certain dealers were permitted to file separate returns for their respective places or constituents of the business. The said Rule is now deleted. Therefore, the permissions granted earlier, if any, stands automatically cancelled.
(9) Yearly return by deemed dealers:
The Explanation to clause (8) of S. 2 defines certain persons and authorities to be deemed dealers. These dealers were required to file return as per the regular periodicity applicable to dealers. By this amendment, it is provided that every dealer to whom the Explanation to clause (8) of S. 2 applies shall file annual return if his tax liability during the previous year is Rs.1 crore or less. The annual return is to be filed within 21 days from the end of the year. However, the facility to file annual return is not automatic. The dealer covered by the Explanation to clause (8) of S. 2 will have to apply to the Joint Commissioner of Sales Tax (Returns) in Mumbai and to the respective Joint Commissioner of Sales Tax (VAT Administration) in the rest of the State to be entitled to file annual return. There is no prescribed format of the application. The annual return can be filed only after the Joint Commissioner of Sales Tax concerned grants the required permission.
10. Change in periodicity for newly registered dealers:
Sub-rule (1) of Rule 18 has been amended. So far newly registered dealers were required to file quarterly returns. It is now provided that these dealers shall file six-monthly returns for the period starting from 1st April 2008.”
The respondents filed refund claims for unutilised CENVAT credit of duty paid on inputs and capital goods used in the manufacture of export goods vide Notification No.5/2006-CE (NT) dated 14/03/2006 read with Rule 5 of the CENVAT Credit Rules, 2004. The claims were rejected as timebarred.
The revenue contended that though section 11B of the Central Excise Act, 1944 was applicable only in respect of duty and interest and not in respect of CENVAT credit, section 11B of the Central Excise Act, 1944 was made applicable to refund of CENVAT credit through clause 6 of the Notification No.5/2006-CE (NT) dated 14/03/2006 read with Rule 5 of the CENVAT Credit Rules, 2004 providing for refund of CENVAT credit. However, CESTAT passed the order in favour of the respondents and held that as per Rule 5 of the CENVAT Credit Rules, 2004, no notification was issued with respect to “relevant date” as defined u/s. 11B(5)(B) of the Central Excise Act, 1944 and therefore, no period of limitation was prescribed.
Held:
It was undisputed fact that section 11B of the Central Excise Act, 1944 was applicable only in case of duty and not with respect to CENVAT credit. However, on analysing the relevant provisions, specifically, Rule 5 of the CENVAT Credit Rules, 2004, it was observed that though there is no specific “relevant date” prescribed in the notification, the relevant date should be the date on which final products were cleared for exports. The Hon’ble High Court distinguished the decision of Hon’ble Gujarat High Court’s in case of Commissioner of Central Excise and Customs vs. Swagat Synthetics 2008 (232) ELT 413 (Guj.) and departed from Madhya Pradesh High Court’s decision in case of STI India Ltd. vs. Commissioner of Customs and Central Excise, Indore 2009 (236) ELT 248 (MP) and held that the refund claims filed by respondents were time-barred. Note: In 2012 (281) ELT 227 (Mad.) Dorcas Market Makers P. Ltd. vs. CCE, Single Member Bench decided that rebate cannot be rejected on the ground of limitation. However, the said decision was considered inapplicable by the Bombay High Court in Everest Flavours Ltd. vs. UOI 2012 (282) ELT 481 (Bom.) which also ruled that limitation prescribed in section 11B applied to rebate claim as well.
Section 66B is the new charging provision governing the levy under the new system of taxation of services. The Section reads as under:
“66B. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed”.
(Emphasis Provided) It will, therefore, be observed that the services specified in the ‘Negative List’ are excluded from the scope of levy through the charging provision of section 66B itself. The term ‘Negative List’ is defined vide clause (34) of section 65B of the Act as under:
“65B(34) “negative list” means the services which are listed in section 66D”.
Thus, the list of services specified u/s. 66D constitutes the ‘Negative List’ and remains outside the purview of levy of service tax. Section 66D contains 17 entries covering a gamut of services which have been kept outside the tax net. Further, most of the entries have in-built sub-entries which significantly expand the number of services that remain outside the scope of levy. The services specified by 17 Clauses of the Section are briefly outlined below:
• Services by Government or local authority excluding specified services [Clause (a)];
• Services by the Reserve Bank of India [Clause (b)];
• Services by a foreign diplomatic mission located in India [Clause (c)];
• Specified services relating to agriculture or agriculture produce [Clause (d)];
• Trading of goods [Clause (e)];
• Any process amounting to manufacture or production of goods [Clause (f)];
• Selling of space or time slots for advertisements other than advertisements broadcast by radio or television [Clause (g)];
• Access to a road or a bridge on payment of toll charges [Clause (h)];
• Betting, gambling or lottery [Clause (i)];
• Admission to entertainment events or access to amusement facilities [Clause (j)];
• Transmission or distribution of electricity by an electricity transmission or distribution utility [Clause (k)];
• Specified Education related services [Clause (l)];
• Renting for residential purpose [Clause (m)];
• Extending loans, advances or deposits on interest or discount [Clause (n)];
• Sale/ Purchase of foreign currency amongst banks or authorised dealers [Clause (n)];
• Specified services of transportation of passengers [Clause (o)];
• Services of transportation of goods by road other than those excluded [Clause (p)];
• Services of funeral, burial, etc. [Clause (q)].
Conceptual Difference Between ‘Non-Taxable Services’ Covered By ‘Negative List’ & ‘Exempted Services’:
It is essential to understand the conceptual difference between ‘non-taxability’ of services covered by the ‘Negative List’ and ‘non-taxability’ arising in respect of ‘exempted services’. At first glance, whether the service is covered by the ‘Negative List‘ or by an exemption notification, both appear to be sitting at par in as much as service tax is not payable in either case. However, dig deeper, and the distinction becomes clear. The services specified in the ‘Negative List’ (section 66D) are excluded from the scope of levy through charging section 66B itself. Hence, such services are ‘non-taxable’ per se. This ‘nontaxability’ is akin to ‘non-excisability’ that arises in the context of Central Excise when, in a given case, the twin-tests of ‘manufacture’ and ‘marketability’ are not satisfied. On the other hand, a service which is exempted by an exemption notification does not become ‘non-taxable’, that is, it does not go outside the purview of levy of tax. It remains ‘taxable’ (just like an ‘excisable but exempted product’) but is freed from the burden of service tax for the time being in view of the exemption notification. It may be remembered that ‘exemption follows the levy but it does not determine nor precede the levy’. Whereas an exemption notification can be withdrawn or amended by the Central Government under its delegated powers at any time so as to subject the exempted service to the payment of service tax, the amendment to ‘Negative List’ would require legislative sanction which generally happens only through the Finance Act.
Here, it would be advantageous to refer to a few judicial pronouncements in the context of Central Excise and the principles of law laid down therein which apply equally in the context of Service Tax.
• Hico Products vs. CCE – 1994 (71) ELT 339 (SC) – It was held that exemption by a notification does not take away the levy or has the effect of erasing the levy of duty. The object of exemption notification is to forgo the duty and confer certain benefits upon the manufacturer or buyer or consumer through manufacturer, as the case may be.
• Peekay Re-Rolling Mills vs. Assistant Commissioner – 2007 (219) ELT 3 (SC) – In this case, the court observed:
“In our opinion, exemption can only operate when there has been a valid levy, for if there is no levy at all, there would be nothing to exempt. exemption does not negate a levy of tax altogether.”
“Despite an exemption, the liability to tax remains unaffected, only the subsequent requirement of payment of tax to fulfill the liability is done away with.”
(para 35 & 39 of the judgment) The Hon’ble Apex Court quoted with approval the following observations of the Hon’ble Court in ACC Ltd. vs. State of Bihar – (2004) 7 SCC 642 rendered in the context of an exemption notification issued by the State Government reducing the liability of tax under the Bihar Finance Act to the extent of tax paid under an earlier Ordinance in respect of entry of goods:
“Crucial question, therefore, is whether the appellant had any “liability” under the Act…. The question of exemption arises only when there is a liability. Exigibility to tax is not the same as liability to pay tax.
The former depends on charge created by the Statute and latter on computation in accordance with the provisions of the Statute and rules framed thereunder if any. It is to be noted that liability to pay tax chargeable under Section 3 of the Act is different from quantification of tax payable on assessment. Liability to pay tax and actual payment of tax are conceptually different. But for the exemption the dealer would be required to pay tax in terms of Section 3. In other words, exemption presupposes a liability. Unless there is liability question of exemption does not arise. Liability arises in term of Section 3 and tax becomes payable at the rate as provided in Section 12. Section 11 deals with the point of levy and rate and concessional rate.”
• Kiran Spinning Mills vs. CCE – 1984 (17) ELT 396 (Tribunal) – It was observed as under:
“Such a notification issued under Rule 8(1) can only grant exemption — full or partial — vis-a-vis the duty leviable under the Tariff. An exemption notification clearly is not a charging provision and it cannot be interpreted so as to create a duty liability where none existed under the Tariff entry.”
• The judgment in Kiran Spinning Mills’ case (supra) was followed by the Larger Bench of the Hon’ble Tribunal in New Shorock Mills vs. CCE – 2006 (202) ELT 192 (Tri-LB), wherein it was held that mention of an item in an exemption Notification is not determinative of its excisability.
• Golden Paper Udyog vs. CCE – 1983 (13) ELT 1123 (Tribunal) In this case it was held:
“Exemption Notification No. 184/76 in respect of bituminised water-proof paper or paper board cannot be construed to imply a levy under Tariff Item 17(2). Where there is no levy, an exemption from levy is meaningless nor can a levy be interred from an exemption from such levy when in fact, there was none.”
• State of Haryana vs. Mahabir Vegetable Oils P. Ltd. – (2011) 3 SCC 778 SC. It was held that exemption is a concession. It can be withdrawn under the very power in exercise of which exemption was granted.
‘Negative List’, ‘Exempted Services’ & 13th Finance Commission’s Report:
As stated above, the coverage of ‘Negative List of Services’ by section 66D is substantially wide. Here, one may also refer to the Mega Exemption Notification No. 25/2012-ST dated 20.06.2012 (effective from 1st July, 2012) as well as other independent service-specific exemption Notifications granting exemption from payment of service tax in respect of various taxable services.
If the services covered by the ‘Negative List’ and the existing exemption Notifications are taken into account, then it can easily be said that a fairly large number of services are presently not facing the ‘axe of tax’. It will be interesting to note that the 13th Finance Commission headed by Dr. Vijay Kelkar has, in its Report presented on 25th February, 2010 recommended that only a handful of activities/sectors be kept outside the purview of ‘Goods & Service Tax’. The relevant abstract from para 5.29 of the Report is reproduced below:
“No exemptions should be allowed other than a common list applicable to all states as well as the Centre, which should only comprise: (i) unprocessed food items; (ii) public services provided by all governments excluding railways, communications and public sector enterprises and (iii) service transactions between an employer and employee (iv) health and education services.”
It will, however, be seen that the number of activities or sectors kept outside the tax net is quite large. This does not augur well for the impending GST regime. Though the introduction of GST may not materialise any time soon (in the author’s view, at least, not before F.Y. 2016-17), keeping such a large number of services outside the tax net during the intervening period will only create hurdles and roadblocks in the path of a smooth introduction of GST.
After all, the GST (or VAT), operating through ‘tax credit or invoice method’ (i.e. the subtractive/indirect method) is expected or ought to be an all encompassing, comprehensive system of taxation of goods and services. Under this system, the sectors or activities kept outside the levy (through exemption or otherwise) should ideally be bare minimum, keeping socio-economic or practical considerations in mind. There is no gain-saying that exemption creates distortions in the tax system; breaks the input-stage tax credit chain and hinders the smooth flow of credit across the supply chain of goods or services. In hindsight, one may even say that instead of solving or mitigating the problem of cascading effect of ‘tax on tax’, exemption indirectly aggravates the problem.
This idiosyncrasy of GST is best captured in the following words of a distinguished author on the subject:
“The VAT is a paradox: (using the credit method) the VAT is a tax in which those who believe themselves exempt are taxed, and those who believe themselves taxed, are generally exempt. This is not valid at the retail level; a retailer who is believed exempt is nevertheless taxed, and indeed taxed, when subject to taxation. Whoever grasps the meaning of this, will not have any trouble under-standing VAT”.
[J. Reugebrink/M.E. van Hilten, Omzetbelasting, Deventer 1997, p.40]
‘Negative List of Services’ & its implications under the Cenvat Credit Rules, 2004:
In the preceding paragraphs, we have seen that there is a significant conceptual difference between the services covered by the Negative List and the ‘exempted services’. We have also seen that the policy of keeping large number of services outside the tax net may render the task of smooth and comprehensive introduction of GST extremely difficult. Not only this, if persisted, this policy may create distortions in the system and disturb the uninterrupted flow of credit across the supply chain.
But then, one may not be required to wait till GST is introduced to understand these implications of ‘non-taxability of services’, whether through Negative List or Exemption Notifications. The implications are quite evident in the context of the existing Cenvat Credit Rules, 2004 (the CCR) as explained below.
Rule 2 (e) of the CCR defines the term ‘exempted service’ as under:
“R.2(e )- ‘exempted service’ means a –
(1) taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) service, on which no service tax is leviable under Section 66B of the Finance Act; or
(3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken;
but shall not include a service which is exported in terms of Rule 6A of the Service Tax Rules, 1994.”
The moot question here is whether the ‘non-taxable services’ i.e. the services covered by the ‘Negative List’ prescribed vide section 66D can be considered as ‘exempted services’ within the meaning of the term as defined vide Rule 2(e) of the CCR?. The answer is an unequivocal ‘yes’. As explained above, the services specified in the ‘Negative List’ are excluded from the purview of service tax vide the charging section 66B and hence, no service tax is leviable thereon at all. As a consequence, these services would be covered by clause (2) of Rule 2(e) of the CCR and considered as ‘exempted services’ as defined in the said Rule.
It may be noticed that there is a stark difference between the definition of ‘exempted goods’ given vide Rule 2(d) of the CCR and that of ‘exempted service’ given vide Rule 2(e) ibid. The definition of ‘exempted goods’ does not include ‘non-excisable goods’ i.e. the goods which are outside the purview of levy of the excise duty. The definition of ‘exempted service’, on the other hand, is quite expansive and includes even ‘non-taxable services’ i.e. the services which are outside the scope of levy of service tax.
Therefore, a manufacturer of excisable and dutiable goods or a service provider engaged in providing a taxable service, if, also simultaneously carries on any activity which is covered by the Negative List u/s. 66D, then he would be considered as being engaged in both, dutiable/taxable activity and provision of ‘exempted service’. Consequently, the provisions of Rule 6 of the CCR would stand attracted in case of such an assessee if he uses common inputs or input services for carrying on both the types of activities i.e. dutiable/taxable activity and the non-taxable activity i.e. activity covered by the Negative List and considered as ‘exempted service’. The assessee, in such a situation, will have to comply with the rigours of Rule 6 of the CCR. The course of action available to the assessee can be briefly explained below:
(a) The assessee can avail full Cenvat Credit on the inputs or input services exclusively used for carrying on the manufacture of dutiable product or for provision of taxable service [Rule 3 (1)];
(b) In respect of inputs or input services exclusively used for providing the ‘exempted service’ i.e. the activity covered by the Negative List, the Assessee will have to forgo the entire Cenvat Credit attribut-able to such input or input services [Rule 6 (1)];
(c) So far as the common inputs or input services used for carrying on the dutiable/taxable activity and the exempted activity are concerned, the assessee can:
(i) Maintain separate records and avail the Cenvat credit only on inputs or input services attributable to dutiable/taxable activity [Rule 6 (2) ]; or
(ii) pay an amount equal to 6% of the value of the exempted goods or exempted services [Rule 6 (3)(i)]; or
(iii) pay an amount i.e. equal to proportionate credit as determined under sub-rule (3A) of Rule 6 [Rule 6 (3)(ii)]; or
(iv) maintain separate accounts for inputs and avail Cenvat credit on inputs attributable to dutiable/taxable activity and pay an amount i.e. proportionate credit as determined under sub-rule (3A) in respect of input services [Rule 6 (3)(iii) refers].
Thus, even though there is a conceptual and legal difference between the ‘non-taxable service’ (i.e. service covered by the Negative List and outside the purview of the tax) and ‘exempted service’, for the purposes of Cenvat Credit, the two have been treated at par by the legislature. Needless to say, this is a highly dangerous provision and the implications for the Assessees can be quite severe if they are engaged in both types of activities i.e. dutiable/taxable activity and activity covered by the Negative List and are availing the benefit of Cenvat Credit on input/input services. Such assessees may be caught unaware and are well advised to be on their guard. If Rule 6 is found attracted in a given case, then the assessee will have to carefully select from the options available to him under sub-rule (2) or (3) of Rule 6. It shall be noted that it is not uncommon for the department to raise huge demand in terms of Rule 6 (3)(i) i.e. demand of an amount equal to specified percentage of the value of exempted goods or exempted service even if a negligible credit is availed on the common input or input services used for both the types of activities.
Placing the ‘non-taxable services’ on the equal footing as ‘exempted services’ is rather unfortunate. The only justification can be that the Board might be apprehensive of the assessee availing the Cenvat Credit on all inputs or input services, regardless of whether the same are exclusively used or are common for the dutiable/taxable activity and exempted activity. However, whatever may be the reason or logic behind this provision, the fact remains that it will only lead to ‘compliance nightmare’ and more seriously, the cascading effect of tax inasmuch as non-admissibility of Cenvat Credit on input or input services may result in the increased cost of the final activity. Whether the assessee opts to maintain separate records in terms of Rule 6 (2) or to pay an amount equal to proportionate credit in terms of Rule 6 (3)(ii) or 6(3) (iii), the task of maintaining the separate records and/or determining the quantum of proportionate credit is not an easy one. On the other hand, with the bar on availing of input-stage credit due to the final activity covered by the Negative List not attracting the service tax, the cascading effect of tax will only be aggravated.
Conclusion:
The shift to ‘comprehensive approach’ or ‘Negative List-based levy of Service Tax’ was inevitable considering the fact that the GST regime is knocking at the door of the Indian economy. Besides this, the ‘selective approach’, though, served its purpose well in the initial years, with the passage of time, it was turning out to be a burden, both, for the departmental authorities and the tax payers. The advantage of ‘definitiveness’ or ‘certainty of taxation’ associated with ‘selective approach’ disappeared once more and more services were brought under the tax net. With the overlapping of services, the spectre of classification disputes had started raising its ugly head and the interpretation- related issues were arising more as a rule, than as an exception. Under these circumstances, the shift to ‘comprehensive approach’ is only to be welcomed. No doubt, the coverage of the activities vide the Negative List as also the Mega Exemption Notification No. 25/2012-ST is sufficiently large which may create complications at the time of introduction of GST. Moreover, the implications of the ‘Negative List’ in the context of Cenvat Credit Rules are also quite serious as discussed above. One can only hope that the steps would be taken to ensure, on one hand, the comprehensive coverage of services under the tax net, barring a bare minimum exceptions and on the other hand uninterrupted and unrestricted availment of input-stage Cenvat Credit to the assessees.
“Death and taxes and childbirth – There’s never any convenient time for any of them!” (Margaret Mitchell)
The facts are that the appellant was engaged in plate making activity. Hon’ble High Court recorded facts as under:
“c) In the job work of plate making the customers of the respondent-assessees supplies to the respondent-assessees duly grained zinc or aluminum plates. On receipt, plates are coated by dipping in water wherein gun bio chromate is dissolved. Thereafter positives are exposed on the treated plates by halogen lamps. The image is formed by the positives on the plates and the same is developed in the solution of calcium, lactic acid ferric chloride, cupric chloride and hydrochloride. The plates are thereafter washed in industrial solvent, as a result of which all the chemicals are washed out and only the images remain on the plates. Thereafter, lacquer and ink are applied on the plates. On a specific query, we were informed that lacquer and ink are applied on the plates so as to ensure that the images on the plates do not get disturbed/smudged by constant use. After the above process, the plates are dried and again washed with water and returned to the customers.”
On above facts, the arguments of Department were as under:
(i) there is a deemed sale by way of transfer of property in ink and lacquer as contemplated u/s. 2(l) of the Works Contract Act;
(ii) this is particularly so as the lacquer and ink are used by the respondent-assessee in the process of plate making, so as to ensure that images formed on the plates are not disturbed/smudged due to constant use. The lacquer and ink in plate so used get settled on the plate so as to become a part of the plate;
(iii) the Tribunal applied an incorrect test to hold that there is no transfer of property of lacquer and ink viz. the thickness of the plates continue to remain the same both before and after the process; and
(iv) in any case the issued raised in this reference stands concluded in favour of the applicant-revenue by the decision of this court in the matter of Commissioner of Sales Tax v. Matushree Textiles Limited reported in 132 Sales Tax Cases Page 539.
The arguments on behalf of dealer were as under:
(i) there has been no deemed sale by way of transfer of property in ink & lacquer while executing the job of plate making as held by the Tribunal.
(ii) the decision of this court in the matter of Matushree Textiles Ltd (Supra) will not apply in view of the subsequent decision of the Apex Court in the matter of Bharat Sanchar Nigam Ltd. v. UOI reported in 145 STC 19 which holds that there must be a transfer of goods as goods for the work Contract Act to be applicable. Similarly, the dominant intention of the transfer viz. whether to provide services or transfer of goods will be determinative of there being transfer of goods or not as held by the Apex Court in the matter of Idea Mobile Communication Ltd. v. Commissioner of Central Excise reported in 43 VST. Page 1. In this case, there is no transfer of goods as goods nor was there any intent to transfer the ink and lacquer to its customers; and
(iii) the order of the Tribunal is unexceptionable and the Court should affirm the view of the Tribunal.
The High Court, in relation to argument about dominant object, held that the understanding on the part of the dealer is not correct. The High Court referred to following part in the judgment in the case of Bharat Sanchar Nigam Ltd. (145 STC 19)(SC).
“47. In Rainbow Colour Lab v. State of M.P. (2000) 2 SCC 385, the question involved was whether the job rendered by the photographer in taking photographs, developing and printing films would amount to a “work contract” as contemplated under article 366 (29A)(b) of the Constitution read with section 2(n) of the M.P. General Sales Tax Act for the purpose of levy of sales tax on the business turnover of the photographers.
48. The court answered the questions in the negative because, according to the court:
“Prior to the amendment of article 366, in view of the judgment of this Court in State of Madras v. Gannon Dunerley & Co. (Madras) ltd. (1958) 9 STC 353; AIR 1958 SC 560, the states could not levy sales tax on sale of goods involved in a works contract because the contract was indivisible. All that has happened in law after the 46th Amendment and the judgment of this Court in Builders’ case (1989) 2 SCC 645 is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction: i) contract for sale of goods involved in the said works contract, and (ii) for supply of labour and service. This division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer in property takes place as an incident of contract of service. What is pertinent to ascertain in this connection is what was the dominant intention of the contract. On facts as we have noticed that the work done by the photographer which, as held by this Court in Assistant Sales Tax officer v. B.C.Kame (1977) 1 SCC 634 is only in the nature of a service contract not involving any sale of goods, we are of the opinion that the stand taken by the respondent-State cannot be sustained.”
49. This conclusion was doubted in Associated Cement Companies Ltd. v. Commissioner of Customs (2001) 4 SCC 593 saying :
“The conclusion arrived at in Rainbow Colour Lab case (2000) 2 SCC 385, in our opinion, runs counter to the express provision contained in article 366(29A) as also of the Constitution Bench decision of this Court in Builders’ Association of India v. Union of India (1989) 2 SCC 645.
50. We agree. After the 46th Amendment, the sale elements of those contracts which are covered by the six sub-clauses of clause (29A) of article 366 are separable and may be subjected to sales tax by the States under entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C.K. Jidheesh v. Union of India (2005) 8 Scale 784 held that the aforesaid observations in Associated Cement were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct. It is necessary to note that Associated Cement (2001) 4 SCC 593 did not say that in all cases of composite transaction the 46th Amendment would apply.”
Dealer also referred to the judgment of Idea Mobile Communication (43 VST 1)(SC), to substantiate its point of service nature of transaction. The High court rejected the same on the ground that it is under Service Tax and not relevant to works contract.
In relation to other argument about transfer of property in goods as goods, the High Court relied extensively upon the judgment in case of Matushree Textiles Ltd. (132 STC 539)(Bom) and reversed the judgment of the Tribunal and held the transaction as liable to tax.
Implications
The above judgment decides one of the important aspects about works contract vis-à-vis service transaction. In Bharat Sanchar Nigam Ltd. (145 STC 91). Hon. Supreme Court amongst others, in para 44, 45 has observed as under:
45. Of all the different kinds of composite transactions, the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in clauses (b) and (f) of clause (29A) of article 366, there is no other service which has been permitted to be so split. For example, the clauses of article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which it can be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.”
Therefore, once again, a controversy was arising as to dominant intention. In case of transaction involving very small value of goods and where skill was more important, there was a feeling that the transaction should not be a works contract but a service contract. However, the above judgment of Hon. Bombay High Court has dispelled any doubt about the nature of transaction and it appears that the ratio of Matushree Textiles Ltd. (132 STC 539)(Bom) will prevail for all purposes for interpretation of nature of works contract transaction.
Subsequent to the introduction of Negative List based Taxation of Services wef 1/7/12, no amendments were made in Section 67 of the Finance Act, 1994 (Act) and Rule 5 of Service Tax (Determination of Value) Rules, 2006 [Valuation Rules] framed thereunder relating to the taxability of reimbursements. However, significant amendments were made, in regard to valuation relating to Works Contract Services (Rule 2A) and Valuation relating to Supply of Food/Outdoor Catering Services (Rule 2C).
In the meantime, in a significant recent judicial development, Rule 5 of Valuation Rules has been held to be ultra vires. Hence, considering its significant repercussions, the same is analysed and discussed in detail here. Provisions of Rules 2A and 2C of the Valuation Rules will be discussed in this feature in due course.
Delhi high court ruling in Inter Continental Consultants and Technocrats Pvt Ltd. (2012 TIOL – 966 HC – Del – ST)
In this case, the Delhi High Court was concerned with the question of law wherein it was decisively ruled that Rule 5(1) of the Valuation Rules providing inclusion of the expenditure or costs incurred by the service provider during the course of providing taxable service, to be part of the value for the purpose of charging Service tax is ultra vires Sections 66 and 67 of the Act, as the said rule travels beyond the scope and mandate of the said section 67.
Background:
In the case of Intercontinental Consultants and Technocrats Pvt. Ltd. (2012-TIOL-966-HC-DEL-ST), writ petition was filed. The petitioner company was providing consulting engineering services to National Highway Authority of India (NHAI) and charged service tax thereon and paid the same. However, during the course of providing the said service, the petitioner had incurred certain out of pocket expense like traveling, boarding and lodging, office rent, office supplies and utilities testing charges etc. These expenses were separately indicated in the invoice for recovering the same. This according to the revenue were essential expenses for providing taxable services of consulting engineers and therefore they directed the company to pay service tax on the same. While proposing the demand of service tax, the Show Cause Notice made Rule 5(1) of the Valuation Rules as its basis. Challenging the Show Cause Notice and the said Rule 5(1) of the Valuation Rules, the petitioner filed writ petition in 2008 with three prayers viz.
• quashing Rule 5 of Valuation Rules to the extent that it included reimbursable expenses in the taxable value for charging service tax;
• declaring the said rule to be unconstitutional and ultra vires section 66 and 67 of the Act;
• quashing the Show cause Notice holding it illegal, without jurisdiction and unconstitutional. In the interim order, the High Court had directed not to take coercive steps against the petitioner [reported at 2008 (12) STR 689 (Del)]. The final order dated 30th November, 2012 is reported at the above citation.
Discussion: Provisions of law:
Section 94 of the Act empowers the Central Government to make rules by issuing notifications. The rules are framed to carry out the provisions of Chapter V of the Act providing for the levy and collection of service tax. Valuation Rules were accordingly notified to come into effect from 19th April, 2006. Almost simultaneously, i.e. w.e.f. 18th April, 2006 section 67 dealing with ‘valuation’ of any taxable service also was amended to read as follows:
Section 67 (as introduced from 18/04/2006):
1. Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, –
2 Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
3 The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
4 Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.
It is interesting to note that the above section 67 as amended and as it stood prior to 18/04/2006 authorised determination of the value of taxable service as, the gross amount charged by the service provider for such service provided or to be provided by him in a case where the consideration is in money. The highlighted words, “for such service” are key words in the above section read with the charging section 66 which reads as “there shall be levied a tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses …………. of section 65 and collected in such manner as may be prescribed”. Thus, the charge of the service tax as per section 66 is on the value of taxable services. In turn, the taxable services are listed in section 65(105) and the relevant sub-clause under which the consulting engineering service is covered is sub-clause (g). Therefore, the only value which can be subjected to service tax is the value of the service provided by the petitioner to NHAI which is that of consulting engineer and nothing more. In other words, the quantified value can never exceed the gross amount charged by the service provider for such service provided by him. The petitioner thus contended that though section 94 of the Act enables the Central Government to prescribe rules, such rules can only be made to carry out the provisions of Chapter V of the Act. The power conferred cannot exceed or go beyond the section providing for them the charge or collection of the levy.
In the scenario, it is necessary to understand the subject matter of the controversy i.e. what does the said Rule 5 intend to include in the value of any taxable service. Rule 5 of the Valuation Rules reads as follows:
“(1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.”
Sub-clause (2) of the said section contains an exception to the above rule, that the expenditure or costs incurred shall be excluded from the value of taxable value when the service provider acts as a pure agent of the recipient of service subject to the conditions contained in the said sub-section. These conditions are required to be satisfied cumulatively and it is extremely hard to do so.
Further, Explanation 2 to the said Rule 5 reads as follows, followed by four illustrations:
“Explanation 2. – For the removal of doubts, it is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice.
Illustration 1. – X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent on behalf of X when obtaining the television advertisement, even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent.
Illustration 2. – In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service, but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.
Illustration 3. – A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.
Illustration 4. – Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as park-ing fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the Company X.”
Perusing the above, the Court observed that the above illustration 3 amplifies what is meant by sub-rule
(1). In the illustration given, the architect who renders the service incurs expenses such as telephone charges, air travel tickets, hotel accommodation etc. to enable him to effectively perform his services. Through the illustration, the Rule clearly breaches the boundaries of section 67. In addition to traveling beyond the mandate and the scope of the section, it may also result in double taxation. For instance, air travel attracts service tax and by including it in the value of the invoice and to charge service tax thereon would be certainly paying tax twice. In this frame of reference, the Court recognised that there could be double taxation provided it is clearly intended and cannot be enforced by implication. Citing Supreme Court in Jain Brothers vs. UOI (1970) 77 ITR 107, a part of the extract of the Court’s observation reads as follows:
“It is not disputed that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax (vide Channell J. in Stevens v. Durban-Roodepoort Gold Mining Co. Ltd.). The Constitution does not contain any prohibition against double taxation even if it be assumed that such a taxation is involved in the case of a firm and its partners after the amendment of section 23(5) by the Act of 1956. Nor is there any other enactment which interdicts such taxation. If any double taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over.”
While the Hon. Court found adequate authority for the contention that the rules cannot overreach the provisions of the main enactment, it cited the following:
“In Central Bank of India vs. Their Workmen, AIR 1960 SC 12 the observation was, “We do not say that a statutory rule can enlarge the meaning of Section 10; if a rule goes beyond what the Section contemplates, the rule must yield to the statute. We have, however, pointed out earlier that Section 10 itself uses the word “remuneration” in the widest sense, and R.5 and Form-I are to that extent in consonance with the Section.”
Similarly, In Babaji Kondaji Garad vs. Nasik Merchants Co-operative Bank Ltd., (1984) 2 SCC 50, the Supreme Court observed “Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and the bye-law, if not in conformity with the statute in order to give effect to the statutory provision, the Rule or bye-law has to be ignored. The statutory provision has precedence and must be complied with.”
In the light of the above observations, the Court found that the expressions “consideration in money” or “the gross amount charged” used in section 67 in widest sense are not suggestive of including the amount collected for travel, hotel stay, transportation and other out of pocket expenses, but these words are defined in the Explanation below the section. Significantly, out of pocket expenses such as travel, hotel stay, transportation etc. are not included in those expressions.
The Court also relied on the observation in Devi Datt vs. Union of India, AIR 1985 Delhi 195 “but obviously the said rule has to be construed in the light of the parent section and it cannot be construed as enlarging the scope of Section 19 itself. It is a well settled canon of construction that the Rules made under a statute must be treated exactly as if they were in the Act and are of the same effect as if contained in the Act. There is another principle equally fundamental to the rules of construction, namely, that the Rules shall be consistent with the provisions of the Act. Hence, Rule 102 has to be construed in conformity with the scope and ambit of Section 19 and it must be ignored to the extent it appears to be inconsistent with provisions of Section 19”. Similarly in CIT vs. S. Chenniappa Mudaliar, (1969) 74 ITR 41 it was held that “if a rule clearly comes into conflict with the main enactment or if there is any repugnancy between the substantive provisions of the Act and the Rules made therein, it is the rule which must give way to the provisions of the Act.” Also in Bimal Chandra Banerjee vs. State of M.P. and Ors. (1971) 81 ITR 105, the Court observed:
“No tax can be imposed by any bye-law or rule or regulation unless the statute under which the sub-ordinate legislation is made specially authorises the imposition even if it is assumed that the power to tax can be delegated to the executive. The basis of the statutory power conferred by the statute cannot be transgressed by the rule making authority. A rule making authority has no plenary power. It has to act within the limits of the power granted to it”.
The Court further relied on CIT, Andhra Pradesh vs. Taj Mahal Hotel, (1971) 82 ITR 44 and Commissioners of Customs and Excise vs. Cure and Deeley Ltd., (1961) 3 WLR 788 (QB) and made similar observation as to the canon that a rule has to be framed remaining within the scope and ambit of the Act.
For the case under examination, the Court observed that reading section 66 and section 67(I)(i) of the Act together and harmoniously, it seems clear that while valuing a taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge. Sub-section (4) of the said section 67 enabling the determination of value of taxable service “in such manner as may be prescribed” is expressly made subject to the provisions of sub-section (1). The Court decisively ruled that sections 66, 67 and 94, which empower the Central Government to prescribe rules to carry out the provisions of Chapter V of the Act mean that only the service actually provided by the service provider can be valued and assessed to service tax and Rule 5(1) of the Valuation Rules runs counter and is repugnant to sections 66 and 67 of the Act and to that extent it is ultra vires. By including the expenditure and costs, it goes far beyond the charging provisions and cannot be upheld. Citing Hukam Chand vs. Union of India, AIR 1972 SC 2427, the Court concluded that simply because every rule framed by the Central Government is laid before both the Houses of the Parliament, does not confer validity on a rule if it is not made in conformity with the Act as it is a specie of a subordinate legislation.
Whether all reimbursable expenses would not attract service tax any more?
While the ruling of the Delhi High Court indeed is extremely welcome, little can be commented about its finality at this stage. A lot will depend whether the revenue chooses to file appeal against the above ruling in the Supreme Court and this is most likely to happen. The possibility of the Government bringing about retrospective amendment in section 67 itself cannot also be ruled out, considering the fact that a large number of assessees have already paid service tax on the reimbursable expenses and again a large number of them may have paid after recovering the same and of which, CENVAT credit is availed by the recipients of such services. Precedents of retrospective amendment have already been experienced in the service tax administration itself in case of renting of immovable property service and broadcasting service, besides the fact that Supreme Court struck down provisions relating to reverse charge made via subordinate legislation as ultra vires vis-à-vis services of clearing and forwarding agents and goods transport agencies. (Refer Laghu Udyog Bharti Anr. vs. UOI 1999 (112) ELT 365 (SC) and subsequent retrospective amendment made in section 68 of the Act by the Central Government to overcome the directives of the Court in the said case). Therefore, the relief or even the sense of ‘fairness’ felt on account of the above judgment may remain short-lived and plan of action on the basis of the above ruling may not be an act of prudence, as felt by many at this point in time. However, and not withstanding the outcome or the finality in the above context, it is relevant to analyse the rationale laid down by the Larger Bench of the Bangalore Tribunal in Shri Bhagawathy Traders vs. CCE, Cochin 2011 (24) STR 290 (Tri.-LB) which dealt with the issue of taxability of reimbursable expenses under the service tax law in the scenario when Rule 5(1) did not exist. In this case, issues relating to reimbursement of various expenses incurred by C. & F. Agents were discussed in detail, by the Larger Bench including various conflicting judicial views in the matter. Relevant extracts of the observations made by the Larger Bench are under.
Having analysed the various decisions cited on behalf of the assessee and on behalf of the department, it would be appropriate to consider the scope of the term “reimbursements” in the context of money realised by a service provider. ……The concept of reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the goods.
Similar is the situation in the transaction between a service provider and the service recipient. Only when the service recipient has an obligation, legal or contractual, to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. For example, when rent for premises is sought to be claimed as reimbursement, it has to be seen whether there is an agreement between the landlord of the premises and the service recipient and, therefore, the service recipient is under obligation for paying the rent to the landlord and that the service provider has paid the said amount on behalf of the recipient. The claim for reimbursement of salary to staff, similarly has to be considered as to whether the staff were actually employed by the service recipient at agreed wages and the service recipient was under obligation to pay the salary and it was out of expediency, the provider paid the same and sought reimbursement from the service recipient.
Various Circulars of the Board relied upon by the Learned Advocate for the assessee clearly referred to amounts payable on behalf of the service recipient. For example, the Customs House Agent (CHA) paying the Customs duty to the Customs Department, paying the charges levied by the Port Trust to the Port Trust, paying the fee for testing to the Testing Organisation are clearly on behalf of the importer/exporter and the same are recoverable by the CHA as reimbursement, that too on actual basis. These Circulars cannot be held to be in support of the claim of the assessee that they can split part of the amount as reimbursable expenses and the rest as towards service charges.
The claim for reimbursement towards rent for premises, telephone charges, stationery charges, etc. amounts to a claim by the service provider that they can render such services in vacuum. What are costs for inputs services and inputs used in rendering services cannot be treated as reimbursable costs. There is no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses.
Keeping in view this rationale, if a simple example of architect, consulting engineer or a chartered accountant is examined wherein when an architect visits site of the client outside his home city/town and so do the engineers of a consulting engineering firm or audit team of a CA firm, the travel expenses, lodging and boarding expenses incurred and reimbursed cannot certainly form part of the ‘value’ of taxable service as the service provider has incurred such expenses only to carry out the assignment of the recipient of service and such cost does not represent its own “professional fee” that is charged for using its proficiency expertise and/or knowledge of the subject. Yet in some cases for the sake of simplicity, sometimes allowances are fixed on a daily basis for employees to avoid cumbersome paper work or to overcome practical difficulties and this many a times acts as a deterrent to prove that the ‘reimbursement’ of the expense incurred is on “actual basis” in terms of the controversial Rule 5(2) of the Valuation Rules which provides that cost incurred as “pure agent” can be excluded from the value of taxable service, subject to satisfaction of all the conditions laid down in this respect. Taking another example of a CHA or a logistics service provider, it is found that when an expense like courier charge is specifically incurred for and on behalf of the recipient and under his specific instructions or a place is acquired on rental basis on behalf of client and is client-specific and for their limited purpose, it may not form part of the cost of providing such service and therefore, service tax may not be attracted in such cases. Nevertheless, the issue is subjective as observed by the Larger Bench in Shri Bhagawathy Traders (supra) wherein admittedly the subject is dealt with a well-balanced approach. The issue therefore may be debatable and therefore litigative in many complex situations as precise parameters are not available in law for the same otherwise than Rule 5 of the Valuation Rules.
Conclusion:
Nevertheless, the draconian Rule 5(1) of the Valuation Rules and the concept of “pure agent” as enshrined in the Rule sub-clause (2) of the said Rule 5 with rigidity certainly do not deserve to exist on the statute.
In the current scenario, when all services are brought within the sweep of the service tax except the Negative List and certain exempt services, if pragmatism is applied by the Government and Rule 5 is allowed to remain struck down, to a large extent dual taxation would be avoided and guidelines by revenue may be provided on the lines ruled by the Larger Bench in the case of Shri Bhagawathy Traders (supra). Service tax administration then would not be lopsided in favour of revenue on this aspect and may extend fairness to assessees at large on the issue of levying service tax on reimbursable costs and this may also possibly cover genuine concern of many business enterprises on the open issue of leviability or otherwise of service tax on shared costs among associate/group concerns.
(1) Every person who wishes to make a declaration under the Scheme shall take the registration, if not already registered;
(2) The declaration shall be made in respect of Tax Dues under the Scheme in Form VCES-1;
(3) Designated Authority shall issue an acknowledgment in Form VCES-2 within a period of seven working days;
(4) The tax dues shall be paid to the credit of Central Government. However, CENVAT Credit cannot be utilised for payment of service tax under this Scheme;
(5) Designated Authority shall issue an acknowledgment of discharge in Form VCES-3, within a period of seven days from the date of furnishing of details of payment of tax dues in full along with interest, if any.
(6) Beside interest and penalty, immunity would also be available from any other proceeding under the Finance Act, 1994 and Rules made thereunder.
(7) Tax dues in respect of which any show cause notice or order of determination u/s. 72, section 73 or section 73A has been issued or which pertains to the same issue for the subsequent period are excluded from the ambit of this Scheme.
VAT UPDATE
Furnishing Cloth exempted in the course of intere state sale :
CST Notification No. CST /1413/CR 48/Taxation -1 . Dated 30.03.2013
By this notification, sale of furnishing cloth notified under Schedule Entry C-101 of MVAT Act, 2002 , made exempt in the course of interstate sale from CST with effect from 01-04-2013.
By this Notification the existing Notification No. 26/2012 ST dated 20-06-2012 has been amended to remove the ambiguity prevailing on the rate of abatement of service tax on construction of residential units, to provide the rate of abatement in the case of construction of a complex, building, civil structure or a part thereof in the following manner:
(a) Service tax has to be paid on 25% value of a residential unit if the following two conditions are fulfilled cumulatively : (i) the carpet area of the unit is less than 2,000 sq. ft.; and (ii) the amount charged for the unit is less than Rs. 1 crore;
(b) In other cases, service tax will be paid on 30% of the value of a complex, building, or civil structure.
It is also reconfirmed that the above abatement would be available only if the (1) CENVAT credit on inputs used for providing the service has not been availed & (2) the value of land is included in the amount charged to the Service recipient.
The above referred date has been extended from 25th April, 2013 to 31st August, 2013.
To promote exports from India, the Government of India had announced certain schemes like Focus Market Scheme, Focus Product Scheme and Vishesh Krishi and Gram Udyog Yojana under the Foreign Trade Policy. Under these schemes, export incentives are allowed to eligible exporters in the form of duty credit scrip at prescribed percentage of the value of goods and services exported.
Vide these notifications, exemption has been provided to services provided or agreed to be provided against duty credit scrip by a person located in taxable territory to a scrip holder subject to certain conditions specified therein.
These duty credit scrips were earlier used only for procuring duty free goods from overseas or domestic market subject to available duty credit. However, now these duty credit scrips can be used for payment of service tax on procurement of services within the legal framework of the aforesaid service tax exemption notifications. Further, a holder of the scrip shall be entitled to avail of drawback or CENVAT credit of the service tax debited in the scrips as per the rules specified in the aforesaid notifications.
Introducer Who Signed on Application For Registration – Later Withdrawing – Duty of Department – To Inform Dealer – Failure to Inform – Refusal of Registration- Not Improper—S/s. 2(18), 18(1), 19(3) of The Tripura Value Added Tax Act, 2004 – R. 11(VII) of The Tripura Value Added Tax Rules, 2005.
Facts
The dealer company applied for registration under The Tripura Value Added Tax Act and CST Act. The Superintendent of Taxes rejected the applications for registration on the ground that the company failed to produce requisite Pollution Clearance Certificate, registered deed of lease and certificate of incorporation of change in address of the company and that the introducer of the dealer, in it’s application in form 1, had withdrawn on 31st December, 2010. The dealer company filed writ petition before the Gauhati High Court against the said order refusing to grant registration under the VAT and CST Act.
Held
The basic object behind the enactment of the Tripura Value Added Tax Act, 2004 and the Central Sales Tax Act, 1956 is to levy and collect tax. Registration of dealers enables the State authorities to keep track of assessable transactions and also of persons who indulge in such assessable transactions so that levy and collection of tax can be effectively ensured. If a dealer is not registered, it may be difficult for the State to know about, and/or keep track of, each of the assessable transactions, which the dealer may have entered into, and the value of the taxable goods, which the dealer sells. A dealer is not required to be compulsorily registered unless he becomes liable to pay tax.
A careful reading of section 19(3) of the 2004 Act shows that the enquiry which may be conducted by the authorities concerned, is such as is required to satisfy the authorities concerned that the application for registration is in order, meaning thereby that by such an enquiry, the authority concerned has to ascertain as to whether the particulars required to be furnished in an application for registration have or have not been furnished by the applicant. The enquiry cannot, however, be in the nature of a judicial enquiry. The enquiry, thus, must be confined to the ascertainment of the fact as to whether the information given, and/or particulars furnished, by a dealer, seeking registration are correct or not. The satisfaction, to be arrived at by the authorities concerned, has to be relevant to the objects sought to be achieved by means of such registration.
The satisfaction to be reached by the authority concerned has to be, therefore, based on such materials, which are required under the relevant Acts and the Rules framed thereunder, and only those materials can be regarded as relevant, which have nexus with the objects sought to be achieved by way of registration of dealer. Material which has no nexus whatsoever with the objects sought to be achieved by way of registration would be irrelevant and the dealer applying for registration cannot be refused registration on the ground of failure on the part of the dealer, to furnish such irrelevant information/particulars. If the authority seeks to obtain any information which is not relevant within the ambit of the 2004 Act read with the 2005 Rules, and/or the 1956 Act, read with the 1957 Rules, the refusal to grant registration to the petitioner, as a dealer, would not be sustainable in law.
The failure to produce the pollution clearance certificate was a totally irrelevant consideration and ought not to have been taken into account by the Superintendent of Taxes for the purpose of reaching his satisfaction as contemplated by section 19(3). Rejection of the petitioner’s application for registration, on such a ground, was not sustainable.
The sales tax authorities had nothing to do with whether a lease deed was or was not registered, when the place of the business of the petitioner had been disclosed and the petitioner, being a company, had its principal place of business at its registered office. The Superintendent of Taxes could not have rejected the application seeking registration for the purpose of trading in coal in as much as the petitioner had submitted a registered lease deed of its stockyard enabling it to trade in coal.
The rejection of the petitioner’s applications seeking certificate of registration under the 2004 Act and the 1956 Act, on the ground of failure to furnish the certificate of incorporation of change of address of the petitioner-company was bad in law in as much as there was, admittedly, only one Registrar of Companies at Shillong for the North Eastern States, therefore section 17A of the Companies Act, 1956, had no application.
Form A of the Rules of 1957 relating to the grant of registration under the 1956 Act does not require any introducer for obtaining registration as a dealer and, hence, the application seeking registration under the 1956 Act, could not have been rejected on the ground that its introducer had withdrawn.
As far as the VAT Rules were concerned, form 1 thereof requires signature of a registered dealer or a responsible person as an introducer. This requirement was complied with by the petitionercompany on 27th November, 2010, at the time of submission of the application seeking registration. The application having been acted upon by the authorities, the need of the introducer’s signature became irrelevant. This apart, even if the signature of the introducer ought to have remained present all through it was the bounden duty of the authorities to inform the petitioner-company about the withdrawal of the signature by the introducer so that the petitioner could remove the defect.
In any case, the certificate of incorporation ought to have been treated as a conclusive evidence of all the requirements of the Companies Act, 1956, having been complied with by the petitionercompany. The requirement, therefore, of an introducer, in the case of an incorporated body does not arise at all. The requirement of a registered dealer or a responsible person introducing a person for being registered under the 2004 Act is a requirement meant for persons other than an incorporated body.
It would, thus, be transparent that the Superintendent of Taxes had taken into account an extraneous and irrelevant factor into consideration for rejecting the petitioner’s application for registration. The action disclosed malice in law. This was a fit case for a direction for payment of reasonable costs to the petitioner. Accordingly the High Court allowed the writ petition filed by the company with cost of Rs. 10,000. The Department was directed to grant registration certificate in accordance with law without any further delay.
Goods – Exposed Photographic Film Rolls and Negatives –
No Marketable Value – Not Goods – S/s. 2(15), (33), (38)(Iv), 8(1)(E) ;
Sch. VI, Entry 24 of The Assam General Sales Tax Act, 1993— Art.
366(12), (29A) of the Constitution of India.
Facts
The
dealer carried on the business of developing exposed photographic film
rolls into negatives and then processing the negatives into positive
photographs. They also processed negatives received from customers into
positive photographs. The developing and processing was done on a
job-work basis. Demands for sales tax under the Assam General Sales Tax
Act, 1993 were raised against the appellants and were affirmed in
appeals. The appellants filed writ petitions which were dismissed by the
single judge. The dealer filed appeal before the division bench of the
High Court against the judgment of the single judge.
Held
The
question that required to be answered was whether the transactions
entered into by the appellants are works contracts (that is composite
contracts having both a service element and a sale element) with deemed
sales or mutant sales of goods for the purposes of liability to sales
tax.
If there is an agreement both for transfer of property in
goods and for processing or otherwise treating or adapting any goods,
then the agreement is a works contract involving a sale, otherwise not.
Therefore, three ingredients are necessary:
(i) the existence of goods,
(ii) the transfer of property in those goods,
(iii) the processing or treating or adapting of those goods.
To
qualify as “goods” as defined in section 2(15) of the Act an item must
have some utility and must be marketable. Exposed photographic film
rolls and negatives are not goods per se they have absolutely no utility
for anyone—not even for the owner. It is only when they are developed
or processed that they have some personal value for the owner of the
photographs.
Therefore, if exposed photographic film rolls and
negatives are not “goods” they cannot be the subject-matter of a works
contract which concerns itself with the processing or otherwise treating
or adapting any goods as defined in section 2(38)(iv) of the Act.
Alternatively, if the transactions entered into between the appellants
and their customers are not works contracts, would the utilisation of
chemicals in developing exposed photographic film rolls into negatives
and then processing the negatives into positive photographs be a “sale”
of such chemicals?
To be a sale, there must be a transfer of
property in goods involved in the execution of a works contract.
Assuming that the chemicals used in developing exposed photographic film
rolls into negatives and then processing the negatives into positive
photographs are “goods”, these chemicals are not used in the execution
of a works contract. Therefore, there was no “sale” of chemicals within
the meaning of section 2(33) of the Act.
Since exposed
photographic film rolls and negatives are not “goods” the provisions of
sections 7, 8 of the Act and Schedule VI thereto do not come into play
at all. When a customer goes to the appellants to have his exposed
photographic film rolls developed or negatives processed, there may be
an agreement for the transfer of property in the chemicals used in the
processing or otherwise treating or adapting the exposed photographic
film rolls and negatives. But since they are not “goods” within the
meaning of the Act, the question of taxing the “sale” of the chemicals
does not at all arise. The conversion of exposed photographic film rolls
into negatives and then into positive photographs or the conversion of
negatives into positive photographs is nothing but a rendering of
service specific to a customer and was a matter of skill and expertise
of the developer – it was not a works contract.
The High Court
further held that the case of the appellants is fully covered in their
favour by the law laid down by the Supreme Court in Bharat Sanchar Nigam
Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 3 SCC 1.
Accordingly, the High Court allowed appeals and the judgment and order
of the learned single judge was set aside.
Even on the ground of limitation, Appellant’s case is strong as the department was aware of the issue during the audit and initially the department had agreed upon the contention of the Appellant and the tax paid under the head lead manager’s service was reflected in the ST3 returns also.
Further, the services relating to FCCB were provided prior to 18-04-2006. The department’s appeal for levy of tax on services prior to 18-04-2006 would not survive in view of the ratio laid down in 2008-TIOL-633-HC-Mum-ST Indian National Shipowners Association vs. UOI which was affirmed by the Supreme Court.
(i) Case of 2012-TIOL-1877-CESTAT-Del, Paul Merchants Ltd vs. CCE, Chandigarh, wherein it was held that the recipient of service was Western Union and not the persons receiving the money facts of the said case being similar to that of the appellant.
(ii) Circular no.111/5/2009-ST dated 24-02-2009 for the clarification of the expression service provided from India and used outside India and contended that it provided services outside India as the service recipient was located outside India and the benefit of the services provided accrued outside India.
(iii) UK VAT Circular VATPOSS15100, wherein it is stated that place of supply of telecommunication services is where they are used and enjoyed when supplied and when they are provided by a non-EC provider to a UK customer the effective use and enjoyment takes place in UK (such element being subject to UK VAT Act).
The Respondent relied on the Circular No.141/10/2011- TRU dated 13-05-2011 and contended that the accrual of benefit is to be determined on the basis of use and enjoyment of services.
Held:
It was held that the benefit of services accrues to the foreign telecom service provider who is located outside India in view of the Circular No.111/2009-ST dated 24-02-2009. The Hon’ble CESTAT also explained that when an Indian subscriber of MTNL/BSNL goes abroad and uses roaming facility, it is MTNL/BSNL who invoices the subscriber even though the services are provided by foreign telecom service provider. Further, the Hon’ble CESTAT also relied on the decision of Paul Merchants (supra) wherein it was held that the service recipient is the foreign company and not the service recipient. Thus, the services provided by the appellant to foreign telecom services are considered as export of services and no service tax is payable.
The appellant contended that their sales were on FOR basis and, as such, place of removal gets extended to the buyer’s premises. They produced on record the purchase order as also the invoices along with a Chartered Accountant’s certificate in support of their claim and relied upon Ambuja Cements Ltd. vs. Union of India reported at [2009 (236) ELT 431 (P & H)] where the Board’s Circular of 2007 was examined and it was held that they were entitled to the benefit of CENVAT credit of service tax paid on the GTA services.
Held:
There was no justifiable reason to uphold the finding of the lower authorities where the Chartered Accountant’s certificate stated to the effect that sale was on FOR basis and all the expenses incurred up to the buyer’s premises formed part of the cost of final product. Further, the appellant were the owners of the goods up to the place of delivery i.e. the buyers’ premises and as such the GTA services so availed by them, were to be treated as input service and, thus, they were entitled to the credit.
Facts:
The appellants were manufacturers of vitrified tiles and availed CENVAT credit of duty paid on inputs, capital goods and input services in accordance with the CENVAT Credit Rules, 2004. The appellants also availed CENVAT of service tax paid of Rs. 1,11,240/- on the rent charged at the premises used for facilitating display of the appellants’ goods. The department disallowed the credit and levied interest and penalties. The Commissioner (Appeals) upheld the order. The appellants contended that, the property taken on rent for the purpose of displaying its vitrified tiles were in line of its business and relied on Bharat Fritz Werner Ltd. 2011 (22) STR 429 (Tri.- Bang) and Micro Labs Ltd. 2012 (26) STR 383 (Kar.) = 2011 (270) ELT 156 (Kar.).
The ld. Respondent contended that, in the present case, the appellants failed to demonstrate that the amount of service tax paid by them was included in the final value of the products manufactured and cleared by them which has to be satisfied by the Appellant.
Held:
It was undisputed that the properties were taken on rent by the appellants for display of vitrified tiles and that the service provider had discharged the service tax under the category of renting of immovable property services. Further, the appellants also produced the chartered accountant’s certificate and thus, the services were utilised by the appellants for the purpose of enhancement of their business. Also, since the services were directly or indirectly used for the purpose of their business, credit could not be denied.
Facts:
The appellant imported textile machinery form Japan, Italy etc. under a contract with the foreign exporter and discharged duty thereon. The agreement also included installation and erection to be done by the foreign supplier who would send his technical persons to do the job.
Revenue initiated the proceedings on the installation and erections done by foreign technical personnel and confirmed the demand of Rs. 37,35,730/- for the period post 18-04-2006 on the basis of the valuation done with recourse to Notification No. 19/2003-ST dated 21-08-2003 and Notification No. 1/2006-ST dated 01-03-2006 along with imposition of penalties u/s. 76 and 78. The appellant contended that the foreign exporter had office in India in which case service tax liability would not fall upon the recipient of services. Also, they had discharged customs duty on the entire value of the textile machinery and that the notifications referred to by the Commissioner were optional granting abatement to the persons who are otherwise liable to pay the service tax. The revenue stated that payment of customs duty on the value of the goods has got nothing to do with the payment of service tax. The said duties were separate duties and the appellant was liable to pay service tax on that part of the value of contract which related to the services provided by the foreign persons. They further contended that the adjudicating authority was correct in arriving at the value of services in terms of said notifications.
Held:
The Hon. Tribunal, granting stay unconditionally, held that, there being only one contract between the appellant and the foreign supplier, such supply of textile machinery included the work of installation, erection and commissioning. Further, customs duty was paid on the entire value in the agreement and as such, it was not proper to artificially segregate it into two parts i.e. value of the machinery and value of services. Further, the adoption of notification for arriving at the artificial deemed value of the services was also not proper inasmuch as the said notification provided option to the assessee to seek abatement of 67% in the value of services for payment of service tax and the same have no applicability to the facts of the present case.
Held:
The Hon. Tribunal relying on the Supreme Court’s decision in Ind-Swift Laboratories Ltd. 2011 (265) ELT 3 (SC) held that that there was no difference between the expression “credit taken” and “credit utilised” for the purpose of recovery of wrongly availed credit in terms of Rule 14 of the CENVAT Credit Rules, 2004 and accordingly ordered deposit of Rs. 15 lakh.
Facts:
The appellant was engaged in renting of earthmoving equipment such as caterpillar, excavators, etc. to various customers and discharged VAT liability on the same. The department contended that the effective possession and control was with the appellant as emerging from the agreement with one of their customer and thus, the transaction was one of “Supply of Tangible Goods” service liable to service tax. The appellant contended that the activity undertaken by them was one of leasing on which VAT liability was to be discharged as per the Maharashtra Value Added Tax Act, 2002. They also relied on Circular MF (DR) 224/1/2008-TRU dated 29/02/2008 and on the case of G. S. Lamba & Sons vs. State of A.P. 2012-TIOL-49-HC-AP-CT in support of their claim.
Held:
On perusal of the agreement entered into by the appellant and applying the ratio in the decision of G. S. Lamba & Sons (supra), it was held that the transaction prima facie was for “transfer of right to use” which was deemed to be ‘sale’ and not “supply of tangible goods for use service” and as such, full waiver of pre-deposit was granted.
[Note: This decision did not consider and is opposed to the decision in case of M. N. Dastur & Co. Ltd. vs. UOI 2006 (4) ST R 3 (Cal)]
Facts:
Service tax was demanded from the Appellant as Rent-a-cab operator. The scope of contract with the client stipulated that vehicles were required for transportation of personnel of client under their instructions/directions and vehicles would move on official duty to outstation, depending upon exigencies of client work for which no other extra charge was to be paid. Further, vehicles were provided normally on the basis of 12 hours of duty in a day.
Hiring charges were calculated for actual number of working days on pro rata basis and maintenance etc. was responsibility of the assessee and no extra charge was to be paid. Assessee was assured minimum fixed charges per vehicle per month yet was required to maintain log book and invoices had to be based on the usage.
Held:
Vehicles were not rented to client-had it been otherwise, client would have to ensure maintenance, repairing, proper running and fuelling of the vehicle. Possession and ownership of vehicle remained with assessee and he was only required to provide service for 12 hours in a day. In case of rent, owner of property is de-possessed and possession passes on to person who has taken it out for usage. It was immaterial whether hiring of vehicle is for a day or a month. The fact that payment had to be made after verification of log book showed that monthly payment may vary from vehicle to vehicle based on kilometres run and not on monthly rent basis.
Payment of minimum fixed charges per vehicle per month was only a safety measure to ensure some minimum payment to avoid nil payment, if client did not use the vehicle at all, and could not lead to conclusion that vehicle was let out on rent and liable to service tax u/s. 65(91) of the Finance Act, 1994- Section 65(105)(o).
Facts:
The appellant was a manufacturer exporter. The appellant sent certain documents, samples and goods via courier to their foreign client and claimed refund of service tax under Notification No.41/2007-ST. Courier services is specifically mentioned as one of the services under the said notification. The said claim was rejected only on the ground that the sending of documents, samples did not yield into realisation of forex. The appellant submitted that the realisation of forex was not one of the conditions to claim refund under the said notification. The refund is awarded to exporters with the intention to neutralise all taxes and duties borne by the exporter in the course of exports.
Held:
The appellant vide documentary evidence proved that the courier services were used for export of goods and thus the appellant was entitled to claim the refund of the service tax paid on courier services.
Facts:
The respondent was in the business of procuring orders for the company located in Germany for machineries supplied to persons in India and also installed and maintained the machinery during the warranty period. The respondent’s employees went to Germany for the training. Revenue demanded service tax on expenditure captured in forex alleging that it was towards the training fees paid to the parent company while the respondent submitted that it was reimbursement of expenses of the employees who went for training to Germany. The first appellate authority in the order recorded the finding that the respondent had produced evidence that no training fees were paid and it was supported by the certificates of the parent company. Further sample invoices were submitted by the respondent to support his contention that the payments were only reimbursement of expenses namely, travel, accommodation, etc. incurred during their stay in Germany and thus it cannot be contended that the balance amount pertained to training fees.
The demand was confirmed by invoking Rule 3(ii) of the Services (Provided from outside India and Received in India) Rules, 2006, whereby the service was held taxable if it was partly performed in India. The adjudicating authority had not recorded that the services were partly performed in India and hence the contention of the respondent was accepted. The first appellate authority also held that as the respondent filed returns for the relevant period, thus the department was aware of the activities of the respondent and hence the extended period was not invokable.
The Tribunal held that not finding any infirmity in the order and upheld the order and dismissed the appeal of the revenue.
Facts:
Service tax erroneously paid by assessee club on entry fee received from non members by working backwards from the gross fee as the same was not collected. The invoices evidenced this fact. Both lower authorities held that the assessee club was not liable to service tax. The refund claim for the mistakenly paid tax was rejected by the department. However, the revisionary authority held that the respondent was eligible for refund. Relying on the case of V. S. Infrastructure Ltd. 2012 (25) STR 170 (Tri–Del) containing identical fact, it was pleaded that there was no unjust enrichment. Revenue filed an appeal on the grounds that the charges collected from both members and non-members were inclusive of service tax. Thus, service tax was said to be collected from the client. Thus, the amount so collected as representing service tax was required to be paid u/s. 73A(2) which was rightly done. Thus, subsequent refund of such amount did not arise as it would tantamount to unjust enrichment. According to the Respondent, the adjudicating authority, in his order specifically recorded the finding “copy of the invoice reflects that there is no service tax and consequently receipt of non-membership income is without service tax.”
Held:
The Respondent paid service tax on the income received from the non-members, working backwards to determine service tax liability. Adjudicating authority recorded a factual finding that the respondent did not charge service tax on any amount which had been charged to the nonmembers and the provisions of section 73A of the Finance Act, 1994 are not attracted. The facts of the case V. S. Infrastructure (supra) being similar to the facts herein, it is settled that the question of unjust enrichment does not arise.
Facts:
The appellants engaged in construction of residential complexes sold the same to the prospective buyers. During the period October, 2005 to July, 2006 they did not pay any service tax for advances received during the said period for such activity. A Show Cause Notice was issued in this regard and adjudicated confirming a demand for tax amount of Rs. 14,50,311/- along with interest and penalty as revenue’s view was that service tax was payable on such activity u/s. 65(105)(zzzh) of the Finance Act, 1994 read with section 65(30a) of the Finance Act, 1994 during the stated period. The lower appellate authority set aside the adjudication order on the ground that the appellant had engaged their own labour and constructing buildings on lands owned by themselves and thus there was no service provided by the appellant to the prospective buyers and placed reliance on the clarificatory letter issued by CBEC vide F. No. 332/35/2006-TRU, dated 01-08-2006. The Revenue contending that the Respondent received advances from the prospective buyers for the flats and therefore there was a service rendered in terms of the explanation inserted u/s. 65(105)(zzzh) by the Finance Act, 2010. Revenue relied on the decision of the Punjab & Haryana High Court in the case of G.S. Promoters vs. UOI, 2011 (21) S.T.R. 100 (P&H).
Held:
The explanation added at the Finance Act, 2010 was not effective retrospective and this issue was already decided by the Tribunal vide Final Order No. ST/A/190-197/2012 of 13-03-2012 in Appeal No. S.T./463/2008 (Delhi) and Others in the case of CCE, Chandigarh vs. M/s. Skynet Builders, Developers, Colonizer and others – 2012 (27) STR 388 (T). It was held that the decision of Punjab & Haryana High Court in G S Promoters (supra) did not examine service tax liability for the period prior to the date of the explanation, therefore not applicable in the instant case. Appeal by the department was dismissed accordingly.
Facts:
The appellant engaged in the rendering of IT- enabled services such as technical support services, back office services, customer care services etc. to its clients situated outside India were taxable services under the Act.
Rule 5 of the said Export Rules provided for “Rebate of Service Tax” which, interalia, provided that where any taxable service was exported, the rebate of service tax paid or duty paid on input services or inputs would be available subject to conditions or limitations as specified in the notification issued for the purpose. Accordingly, Notification No. 12/2005-ST dated 19-04-2005 provided that, rebate of the duty on inputs or service tax and cess paid on all taxable input services used in providing taxable service exported out of India will be granted subject to conditions and procedures specified. The appellant lodged two claims for rebate in respect of service tax paid on input services like night transportation, recruitment, training, bank charges etc. However, the declaration required to be filed in terms of the Notification was filed after the date of export of taxable service. The rebate claims were rejected on the ground of late filing of the declaration beyond the date of export.
Held:
The very bedrock of the business of Call Centre relates to attending of calls on a continuous basis. It is difficult to conceive of any possibility as to how the appellant could not only determine the date of export but also anticipate the call so that the declaration could be filed prior to the date of export. Further, filing of declaration after date of export of services is not such a non-compliance as to disentitle exporter from rebate. Nature of service is such that they are rendered seamlessly, on continuous basis without any commencement or terminal points, and it is difficult to comply with requirement ‘prior’ to the date for export, except for description of services. Estimation is ruled out because of the words “actually required”. However, if particulars in declaration are furnished to Service Tax authorities, within a reasonable time after export, along with necessary documentary evidence, and are found to be correct and authenticated, object/purpose of filing declaration would be satisfied and appeal, thus, was allowed.
Facts: The appellants were running chit business in the State of Kerala and contended that they are not covered by the Kerala Chitties Act, 1975 as the Chit Funds Act, 1982 was not notified within the State of Kerala. Appellants also contended that service tax can be imposed only vide positive incorporation of the particular service and not by way of deletion vide a circular by invoking powers u/s. 37 of the Central Excise Act, 1984 read with section 83 of the Finance Act, 1994. According to the Appellants, Chit fund was a systematic and periodic contribution of fixed measure of funds deposited with a trustee. It was disbursed to needy persons through draw of lots (Chit/Kuri/Kurip). Trustee/ Foreman had his share as well as commission. It was not a money lending business and there was no debtor-creditor relationship between subscriber and foreman. It essentially was management of cash/fund generated and distributed without much time gap.
Held:
High Court held that liability to service tax of chit fund was sustainable as it was based on statutory provisions, and not on CBEC circular ibid. Plea that tax liability could not be imposed by deletion from existing provisions, rejected as power to tax includes amendment either by incorporation or by deletion. If statute grants power to tax particular instance, but gives some exclusion, and when the exclusion is deleted by amendment, it comes within the taxable net. After the amendment, all forms of cash management were liable for service tax, and it was not necessary to enumerate each of them. Reference to section 45(1) of RBI Act, 1934 was only made in the CBEC circular to show that financial institutions carried out the chit business as well. The plea that despite its existence since enactment of Finance Act, 1994 till the amendment in the year 2007, chit business was not made taxable does not provide any estoppel against the provisions of law. It was held that procurement of funds from different subscribers, putting it together, sharing dividend, disbursement of amount to prized subscriber after commission payable to foreman etc. was a service liable to service tax in the hands of a financial institution and power of exemption is inclusive of power to modify or withdraw it.
Under Maharashtra Tax on the Entry of Goods into Local Areas Act, 2002, tax is attracted on tiles imported from outside the State of Maharashtra for consumption, use or sale. The charging section 3 of the said Act provides as under:
“3 (1) There shall be levied and collected a tax on the entry of the goods specified in column (2) of the Schedule, into any local area for consumption, use or sale therein, at the rates respectively specified against each of them in column (3) thereof and different rates may be specified in respect of different goods or different classes of goods or different categories of persons in the local area. The tax shall be levied on the value of the goods as defined in clause (n) of sub-section (1) of section 2. The State Government may, by notification in the Official Gazette, from time to time, add, modify or delete the entries in the said Schedule and on such notification being issued, the Schedule shall stand amended accordingly;
Provided that, the rate of tax to be specified by the Government in respect of any commodity shall not exceed the rate specified for that commodity under the [the Value Added Tax Act] or, as the case may be, the Maharashtra Purchase Tax on Sugarcane Act, 1962:
Provided further that, the tax payable by the importer under this Act shall be reduced by the amount of tax paid, if any, under the law relating to General Sales Tax in force in the Union Territory or the State, in which the goods are purchased, by the importer:
Provided also that no tax shall be levied and collected on specified goods entering into a local area for the purpose of such process as may be specified, and, if such processed goods are sent out of the State.
Explanation – No tax shall be levied under this Act on entry of any fuel or other consumables contained in the fuel tank fitted to the vehicle for its own consumption while entering into any local area.
(2) Notwithstanding anything contained in sub-section (1), there shall also be levied a tax in addition to the tax leviable in accordance with sub-section (1) on the entry of Petrol and High Speed Diesel Oil in any local area for consumption use or sale therein at the rate of one rupee per litre.
(3) …
(4) …
(5) Notwithstanding anything contained in subsection (1) and (2), no tax shall be levied on the specified goods, imported by a dealer registered under the [the Value Added Tax Act], who brings goods into any local area for the purpose of resale in the State or sale in the course of inter-State trade or commerce or export out of the territory of India:
Provided that, if any such dealer, after importing the specified goods for the purpose of resale in the State or sale in the course of inter-State trade or commerce or export out of the territory of India, consumes such goods in any form or deals with such goods in any other manner except reselling the same, he shall inform the assessing authority before the 25th day of the month, succeeding the month in which such goods are so consumed or dealt with and pay the tax, which would have been otherwise leviable under sub section (1) or (2).
(6) If any dealer having imported the specified goods for the ostensible purpose of resale or, as the case may be, sale, deals with such goods in any other manner or consumes the same and does not inform the assessing authority as provided in sub-section (5) or does not pay the tax as required under sub-section (5) within the specified period, the assessing authority shall assess the amount of tax which the dealer is liable to pay under subsection (1) or (2) and also levy penalty equal to the amount of tax due. ….”
It may be noted that section 3(5) exempts from levy, the specified goods, which are for resale.
Thus, if the tiles are held to be imported for resale, no Entry Tax can be attracted. The issue will be whether use of tiles in works contract will be considered to be ‘resale’, so as not to attract any liability under Entry Tax Act?
Section 2(2) of Entry Tax Act, 2002 provides as under:
“2 (2) Words and expressions used but not defined in this Act but defined in the [the Value Added Tax Act, or the Maharashtra Value Added Tax Rules, 2005] shall have the meanings respectively assigned to them under that Act or the Rules.”
Therefore the terms not defined in Entry Tax Act will carry the meaning as given in MVAT Act, 2002.
The term ‘resale’ is defined in section 2(22) of MVAT Act, 2002 as under:
“(22) ‘resale’ means a sale of purchased goods-
(i) in the same form in which they were purchased, or
(ii) without doing anything to them which amounts to, or results in, a manufacture, and the word ‘resell’ shall be construed accordingly;”
As per facts, as stated above, the tiles are used by contractor in construction activity and they will be used in the same form as they are ready tiles for fitting. It is also a fact that works contract is a ‘sale’ transaction. This position is clear from definition of ‘sale’ in section 2(24) of MVAT Act, 2002, which defines ‘sale’ as under:
““(24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;
Explanation,-—For the purposes of this clause,—
(a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the Central Sales Tax Act, 1956;
(b) (i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;
(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property…”
In works contract, tax is levied on the basis that there is sale of individual items used in the contract. It is due to the above position, the contractor is liable to pay tax under MVAT Act, 2002 as per goods involved and transferred during the execution of works contract. The net result is that there is sale of tiles by use in works contract and it is ‘resale’ within the meanings of section 2(22) of MVAT Act, 2002. Under the above circumstances, no Entry Tax is attracted on the contractor. This will be the position whether the contractor is discharging liability by statutory method of Rule 58 of MVAT Rules or under Composition method.
This position will apply to all notified goods which are used as it is in ‘works contract’ and on which tax liability under MVAT Act is discharged.
“Software—Computer programs; instructions that make hardware work. Two main types of software are system software (operating systems), which controls the workings of the computer, and applications, such as word processing programs, spreadsheets, and databases, which perform the tasks for which people use computers. Two additional categories, which are neither system nor application software but contain elements of both, are network software, which enables groups of computers to communicate, and language software, which provides programmers with the tools they need to write programs. In addition to these task-based categories, several types of software are described based on their method of distribution. These include packaged software (canned programs), sold primarily through retail outlets; freeware and public domain software, which are distributed free of charge; shareware, which is also distributed free of charge; although users are requested to pay a small registration fee for continued use of the program; and vaporware, software that is announced by a company or individuals but either never makes it to market or is very late. See also application, canned software, freeware, network software, operating system, shareware, system software, vaporware, Compare firmware, hardware, liveware.”
Software under the description Information Technology Software (IT Software) was brought into the net of service tax with effect from 16th May, 2008 by defining the term “Information Technology Software” and introducing clause (zzzze) in section 65(105) of the Finance Act, 1994 (the Act) wherein various items were listed as taxable services in relation to IT software. From 1st July, 2012, under the new regime of negative list based taxation of services, “Development, design programming, customization, adaptation, upgradation, enhancement, implementation of information technology software” is specified in section 66E of the Act as one of the 9 declared services. In turn, the definition of ‘service’ includes a declared service in its purview. Service tax levied on IT software has been a matter of debate as it has been subject to multiple taxes. Under the VAT laws of the States, all types of software are treated as goods. This is because in a landmark ruling of the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh’ (2004) 178 ELT 22 (SC) [TCS] where the question before the Court was whether Packaged Software was goods, the proposition argued before the Court was that software was intangible, and therefore not goods. The Court held as under :
“A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. Thus, a transaction of sale of computer software is clearly a sale of “goods” within the meaning of the term as defined in the said Act. The term “all materials, articles and commodities” includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.”
The Central Government under the service tax law treats software as service except packaged or canned software. Section 65B(28) of the Act defines IT software as under:
“information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment”.
Chargeability to Central Excise Duty
Introduction of levy on Packaged Software
• Extracts from Finance Minister’s Budget Speech on 28.2.2006 :
Para 138 “I propose to impose an 8 per cent excise duty on packaged software sold over the counter. Customized software and software packages downloaded from the internet will be exempt from this levy”.
• Entry 27 – General Exemption Notification 6/06 – CE
“Any customised software (that is to say any custom designed software developed for a specific user or client) other than packaged software or canned software.”
Explanation: For the purpose of this entry packaged software or canned software means software developed to meet the needs of variety of users and it is intended for sale or capable of being sold off the shelf.”
In the TCS case, the Supreme Court has observed as under:
Para 26
“…….. We are in agreement with Mr. Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed etc. Thus even unbranded software, when it is marketed/sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise”
For the purpose of Central excise, so long as software does not fit within the ambit of Packaged Software, which is capable of being sold off the shelf, there would be no question of excise duty.
Can the Concept of “manufacture” apply to Software at all?
Interestingly, even assuming software is considered as goods and packaged software is considered as excisable goods, excise duty can be imposed only if there is an “activity of manufacture” in terms of Section 2(f) of CEA.
The Supreme Court in the case of Seelan Raj and Other vs. Presiding Officer, First Additional Labour Court, Chennai – 2001 AIR SC 1127 was considering the issue under the Industrial Disputes Act. It was the contention of company that it was rendering computer services and developing customised soft-ware application. Dispute arose which was referred to the Labour Court and it was contended by the Company that it was a manufacturer of software and therefore it is not an establishment under the Industrial Disputes Act and much less a factory under the Factories Act and therefore the dispute should not be referred to Labour Court as it is not an industrial dispute under the Industrial Disputes Act. The Labour Court overruled the objection and held that legislation covers the establishment of the company and directed the reinstatement of the workmen back with wages. It was also held that the company was factory and had to comply with the Industrial Disputes Act. After various rounds of litigation, the matter landed before the Supreme Court. The Supreme Court observed that there is a distinction between packaged software and custom-built software. Standard Packaged Software is marketed as a standard product, to meet the requirements of a large number of users whereas customised software is meant to meet the particular requirement of the user. The hybrid form of software also exists whereby the standard package is altered so that it fits the customised needs more clearly adopting a basis of customisation. The Supreme Court, taking into account the debate on various aspects and the questions with reference to software, referred the dispute to the Larger Bench of the Supreme Court.
In the case of CCE vs. Acer India Ltd. (2004) 172 ELT 289 (SC) the following was observed by the Supreme Court:
We, however, place on record that we have not applied our mind as regards the larger question as to whether the information contained in a software would be a tangible personal property or whether preparation of such software would amount to manufacture under different statutes.”
CETA is aligned to the Customs Tariff and software is identically classified under entry 8523 80 20 as (Information Technology Software) under Chapter Heading 8523. Again, the CETA is only set out for tangible goods, and the software and the media cannot be split. Attention is drawn to Chapter Note 10 to Chapter 85 of CETA which states as under:
“For the purposes of heading 8523 ‘recording’ of sound or other phenomena shall amount to manufacture”.
In other words, the recording of software on a medium could be an activity of manufacture which would attract a charge of Central Excise duty.
CETA Classification for “Software” is entry 8523 80 20 (Information Technology Software). Information Technology software is then carved up into customised software (defined as custom designed software developed for a specific user or client) and packaged or canned software (defined as software designed to meet the need of variety of users and is intended for sale or capable of being sold off the shelf), and separate notifications set out the effec-tive rates of duty in respect of these two.
By Notification No. 6/2006-CE dated 1.3.2006, the effective rate for Customised Software is nil. Ac-cordingly, CVD on imports of Customised Software is also nil.
In this regard, attention is invited to the decision in Steag Encotec India Pvt. Ltd. vs. Commissioner of Customs (2010) 250 ELT 287 (Tri – Mumbai). In the facts of the case, the software, which was imported for use in coal based plants, required to be modified according to the needs to each of the plants on the basis of design and operating conditions which varied from one plant to another. The question before the CESTAT was whether such modification of the software would suffice to give it the character of customised software so as to qualify it for the aforesaid exemption. The CESTAT held that the exemption notification would not apply, as only software which “has to be developed from the basic building blocks, whereby a new software product should emerge as per the specific requirement of the client” would qualify as CS, and that software which has just been modified from PS would not.
Chargeability to Customs Duties
Section 12 of the Customs Act, 1962 [‘CA ’62] provides that customs duty shall be levied on goods imported into India. Section 2(22) of ‘CA ’62 defines goods to include “(a) vessels, aircrafts and vehicles; (b) stores, (c) baggage; (d) currency and negotiable instruments; (e) any other kind of movable property”. Therefore, for customs duties to apply on an import of software, it must answer to this definition of goods.
In Associated Cement Companies Ltd. vs. Commissioner of Customs (2001) 128 ELT 21 (SC), the Supreme Court had occasion to examine the scope of this definition. In the context of import of designs and drawings on paper, it was contended before the Court that the transactions were for a transfer of technology which was intangible, and that the medium was only a vehicle of transmission and incidental to the main transaction. It was accordingly contended that even though the technology was put onto a medium, it would not get converted from an intangible to a tangible thing which could be subject to customs duties. The Court did not accept these contentions, and held that all tangible movable articles would fall within the ambit of the definition of goods u/s. 2(22) (e) of CA ‘62, and that it was immaterial as to what types of goods were imported or what is contained in them or recorded thereon. In other words, if there was an import of tangible movable articles, there would be a levy of customs duty on these articles without any exclusion for an intangible contained in the articles. The Court went on to say, on the related subject of valuation of the imported goods, that once the intellectual property had been incorporated on the medium, the value of the medium would get enhanced, and customs duties would apply on this enhanced value. In the words of the Court:
“It is misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. There is no scope for splitting the engineering drawing or the encyclopedia into intellectual input on the one hand and the paper on which it is scribed on the other.”
The Supreme Court ruling in ACC’s Case seem to imply that, though the definition of “goods” in CA ‘62 is set out in the same terms as the Constitution and various Sales tax/VAT provisions, the goods must be tangible for a levy of customs duty to apply. Such a position appears to be inconsistent with the view taken in TCS and BSNL that the ambit of the term “goods” extends to intangibles. Then, a question arises as to why, the import of intangibles does not attract a levy of customs duty.
A possible answer could be that though intangibles are goods, as the taxable event of import, i.e. crossing the customs barrier, cannot arise (given the intangible nature of the goods), there cannot be a charge to customs duty. This would be in line with the Geneva Ministerial Declaration on Global Electronic Commerce, 1998 WT/MIN (98)/ DEC/2, according to which member countries are to “continue their current practice of not imposing customs duties on electronic transmission”.
What follows from above is that only software recorded on a tangible medium is liable to customs duty. In this connection, it is relevant to note that software is classified under Tariff Entry 8523 80 20 (Information Technology software) under chapter heading 8523 (Discs, tapes, solid-state non–volatile storage devices, “smart cards” and other media for the recording of sound or of other phenomena, whether or not recorded, including matrices and masters for the production of discs, but excluding products of Chapter 37) of the Customs Tariff. This classification accords with the position set out in TCS that the software and medium cannot be split up, and the implication that follows in respect of valuation of the medium. The classification also provides yet another answer as to why intangibles (like software), though constituting goods, are not liable to customs duty, i.e. the fact that the Customs Tariff Act, 1975 (“CTA”) is only set out for tangible goods. The Customs Tariff rate for entry 8523 80 20 (IT Software) is “Free”
This means that a packaged or a canned software is goods and when it is capable of being used by a large number of users, it also amounts to manufacturing of goods whereas customised software is fully exempt goods. Board’s Instruction F, no.354/189/2009-TRU dated 04-11-2009 also clarified in this regard that so far as excise duty/CVD is concerned, packaged software attracts duty @ 8% while customised software is fully exempted.
The question therefore arises is that if both packaged or canned software and customised software are ‘goods’ for the purpose of CEA, CA, 62, one dutiable and the other ‘exempt’, whether customised software can simultaneously be considered service for the purpose of service tax law?
Packaged/canned software vs. customised software:
So far as packaged or canned software is concerned, time and again, CBEC provided indication that it is considered goods and not exigible to service tax. Education Guide dated 20-06-2012 released along with the introduction of negative list based tax on services at Guidance Note No.6.4.1 & 6.4.4 has referred to the judgment of the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh 2004 (178) ELT 22 (SC) and stated that sale of pre-packaged or canned software is in the nature of sale of goods and is not covered by the entry for declared service of development, design etc. of IT software. The Education Guide also states that the judgment of Tata Consultancy Services (supra) is applicable in case the pre-packaged software is put on a media before sale. “In such a case, the transaction will go out of the ambit of the definition of service as it would be an activity involving only a transfer of title in goods.” It is thus not a matter of doubt or debate that packaged or canned software is ‘goods’ both for the purpose of VAT laws of the States and the Central Excise law at least when canned/packaged software is made available on any tangible medium. The question however remains open in regard to customised software. In the Tata Consultancy’s case (supra) the Honourable Supreme Court did not decide as to whether unbranded software is considered ‘goods’ or not. This is mainly because whether uncanned software (unbranded software) were goods or not was not at all an issue before the Supreme Court in that case. However, the Court was in agreement with the submission made by the petitioner in the case that there was no distinction between branded and unbranded software. The majority opinion in the said judgment held that as they did not deal with the unbranded software when it is marketed or sold as goods and therefore did not express opinion on the same. In this regard however, the Supreme Court in Bharat Sanchar Nigam Ltd. & Another vs. UOI 2006 (2) STR 161 (SC) at Para 56 and 57 upheld that software whether customised or non-customised would become goods provided it satisfies the attributes of goods, namely (a) its utility (b) its capability of being bought and sold and (c) capability of being transmitted, transferred, delivered, stored or possessed.
Considering all the above, the issue that arises is:
When an item is specifically exempted under an exemption notification of the Central Excise Tariff Act, could it not mean that it is primarily ‘goods’ though exempted. Without having characteristic of goods, why would it find place as exempted item under the Central Excise law? Viewing this from another angle, we find similar inconsistencies in the service tax law also. For instance, process amounting to manufacture and trading in goods are listed along with other non-taxable services in section 66D when the activities per se do not have characteristic of a ‘service’, whether they can find place in the “negative list” of services. Under the earlier dispensation of law, notifying the value of goods and material sold by the service provider to the recipient of service as exempt under Notifica-tion No.12/2003-ST dated 20-06-2003 was also along the same lines. Nevertheless, this does not whittle down the fact that even customised software is more akin to being goods than a service as it can be utilised, transmitted, transferred, delivered and stored and possessed. As a matter of fact, it can be used only when it is stored on a tangible medium of the hardware. The Madras High Court in the case of Infosys Technologies Ltd. vs. Commissioner of Commercial Taxes 2009 (233) ELT 56 (Mad) relying on the decision in the case of TCS (supra) held that unbranded/customised software developed and sold by the petitioner, with or without obligation for system upgradation, repairs and maintenance or employee training, satisfies the Rules as ‘goods’, it will also be ‘goods’ for the purpose of sales tax. However amidst controversy, service tax is levied on customised software considering it as ‘service’.
Software: Can it be goods as well as service at the same time?
The question therefore arises is whether an activity or a transaction can be considered ‘goods’ as well as ‘service’ under different statutes and therefore exigible to tax more than once. Since the Central Excise law and Service Tax law are under a com-mon administration, dual levy generally here would not be attracted, yet by interpreting a transaction to be either ‘service’ or ‘goods’ and offering tax accordingly, one may have to face litigation from the administration of the other levy. In Yokogowa India Ltd. vs. Commissioner of Customs, Bangalore 2008 (226) ELT 474 (Tri.-Bang), the Indian company imported a software and claimed that it was a customised software, unique to only their usage and claimed exemption under Notification No. 6/2006-CE (referred above) for countervailing duty. The appellant in this case made a number of submissions in support of its claims that the software that it imported was not capable of being bought off the shelf and that this software was designed on the basis of their unique requirement. However, it was held that the software imported by the as-sessee consisted of several standard packages and only after further modification, it would acquire characteristic of custom designed software. What was imported was packaged software and therefore benefit of Notification No. 6/2006-CE was not available.
Later, however the Government issued Notification No. 53/2010-ST dated 21/12/2010 whereby packaged/ canned software was exempted subject to the condition that the value of such packaged/canned software had suffered excise duty when domestically produced or additional customs duty along with appropriate customs duty in case of imported packaged/canned and that the service provider made a declaration on the invoice that no amount in ex-cess of retail sale price declared on the said goods (packaged/canned software) is recovered from the customer. Similarly, the tug of war between the State law relating to VAT and service tax law of the Central Government being more intense, it makes tax compliant software businesses go through a rough bet of interpretation as to whether the transaction is of sale or of a service and have to bear consequent litigation cost for no fault of theirs. In the case of Sasken Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes (Appeals), Bangalore (2011) 16 taxmann.com 7 (Kar.), VAT was demanded from the assessee who entered into an agreement for development of software for a client as per client’s specification & expressly agreed that software when brought into existence would be absolute property of the client. The Court observed that the assessee gave up their rights before software was developed. The agreement did not have any indication for purchase of software. It was provided in the agreement that all ideas, inventions, patentable or otherwise, as a result of programming or other services would be exclusive property of the client as it would be considered as work made on hire. The deliverable was entirely related to development. In short, software prior to being embedded on a material object, belonged to the client and the entire work was done through capable employees of the assessee & no indication existed in the agreement as to purchase of software even from the market and improvement thereon by the assessee. The court, therefore, held that the contract was for a service simplicitor.
The principle that a transaction cannot simultaneously be both for goods and services is recognised at various levels. The Supreme Court in All India Federation of Tax Practitioners 2007 (7) STR 625 (SC) observed that the word ‘goods’ has to be understood in contradistinction to the word ‘services’. In BSNL’s case (supra) it was categorically held that a transaction cannot be both for goods and services. Nevertheless, there being a thin line of divide between the two or both intertwined in many situations, there lacks clarity on the subject until a common code by way of Goods and Services Tax (GST) is implemented.
Software downloaded electronically:
The following is extracted from the Finance Minister’s Budget Speech on 28-02-06:
“Para 138
I propose to impose an 8% excise duty on packaged software sold over the counter. Customised Software and Software Packages downloaded from the internet will be exempt from this levy.”
In cases where the software is made available only through the medium of internet there is no express exclusion in Entry 27 stated above. However, the Explanatory Notes, which forms part of the Budget Papers read as under:
“Excise duty of 8% is being imposed on packaged software, is also known canned software on electronic media (software downloaded from the internet and customised software will not attract duty). [Serial 27 of Notification No. 6/2006)”]
The Central Excise Rules, 2002 contemplate payment of excise duty at the time of removal of excisable goods from the factory and at the rates prevalent on the date of removal from the factory. Where a customised software solution is sold to the customer through the medium of internet, the transaction can be considered as an e-commerce transaction and there is no physical removal of goods in a tangible form from the factory gate which is the requirement of levy of excise duty. Further, the software is not available in any medium for it to be considered as goods as per the rationale of the Supreme Court in TCS case.
The following judicial considerations need to be noted:
The Supreme Court in the case of Associated Cement Company vs. CC (2001) 128 ELT 21 held that where any drawings or designs or technical materials are put in any media or paper, it becomes goods. Hence, only if an intellectual property is put in a media, it is to be regarded as an article or goods.
In Digital Equipment (India) Ltd. vs. CC (2001) 135 ELT 962 Tribunal held that information transmitted via e-mail cannot be akin to import of record media in 85.23. In an e-mail transfer, no media as a movable article is crossing the international boundaries and there is no movable property movement involved. Therefore, transfer of information or idea or knowledge on e-mail transfer would not be covered within the ambit of goods under the Customs Act. If they are not goods, then they cannot be subject to any duty.
In Multi Media Frontiers vs. CCE (2003) 156 ELT 272 the Tribunal has observed that a software cannot exist by itself and for it to be put to use it has to necessarily exist on some suitable media such has floppy disc, tape or CD.
In Pantex Geebee Fluid Power Ltd vs. CC (2003) 160 ELT 514 (Tri), it was held that, a transfer of intellectual property by intangible means like email would not be liable to customs duty.
The Geneva Ministerial Declaration on Global Electronic Commerce Document WT/MIN (98) DEC/2 dated 25-05-1998 which is a declaration of an intent by members of WTO that they would continue their current practice of not imposing customs duty on electronic declaration.
Annual maintenance contract for electronically downloaded software:
When a software is bought and sold, annual or ongoing maintenance service is important for the user. Generally, under an Annual Maintenance Contract (AMC), upgradation or updation is done by way of installation of upgraded version of the software already sold or available with the user. It is common to provide license to such versions electronically vide internet or through paper licenses. Since this is part of the obligation of the AMC along with other maintenance services like debugging, troubleshooting etc. agreed to be provided during the currency of the AMC, the value of the licensed updation is also contained in the AMC and because it is difficult to determine the said value at the time of signing of AMC, it remains inseparable. Therefore, liability under both the laws is attracted, viz., VAT law of the State and the Service Tax law’], as the sale of license to use software is goods under deemed sale concept and providing upgradation, enhancement etc. is a ‘service’ with effect from 16-05-2008 as well as “declared service” with effect from 01-07-2012. In this context, Education Guide comments at para 6.4.4 are extracted for easy reference:
“6.4.4 Would providing a license to use pre-packaged software be a taxable service?
• ‘Transfer of right to use goods’ is deemed to be a sale under Article 366(29A) of the Constitution of India and transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is a declared service under clause (f) of section 66E.
• A license to use software which does not involve the transfer of ‘right to use’ would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of ‘service’ and also in the declared service category specified in clause (f) of section 66E.
• Whether the license to use software is in the pa-per form or in electronic form makes no material difference to the transaction.
• However, the manner in which software is transferred makes material difference to the nature of transaction. If the software is put on the media like computer disks or even embedded on a computer before the sale the same would be treated as goods. If software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods as software as the judgment of the Supreme Court in Tata Consultancy Service case is applicable only in case the pre-packaged software is put on a media before sale.
• Delivery of content online would also not amount to a transaction in goods as the content has not been put on a media before sale. Delivery of content online for consideration would, therefore, amount to provision of service.” [emphasis supplied].
It is noted here that although in the Education Guide the Ministry of Finance has placed reliance on the TCS decision (supra), it has made it applicable in the manner it suits its own interpretation that mode of delivery of the software would determine whether it is ‘goods’ or the ‘service’. Thus, service tax is certainly made applicable as the license to use software is considered service. The ‘rationale’ as explained by the Education Guide that the manner of delivery of a software or a programme determines the character of the transaction is hard to digest.
Whether intangible nature of the ‘goods’ capable of being bought and sold, utilised, transmitted & transferred (electronically) and stored and possessed by the user ultimately loses its characteristic of being ‘goods’ and becomes ‘services’? The issue is certainly disputable. In practice, it can be observed that most of the AMCs entered into by IT sector carry both VAT and service tax at applicable rates.
Further, introduction of repairs and maintenance contracts in the execution of works contract vide Notification No. 24/2012-ST has added further confusion. Most contractors of AMCs treat AMCs as works contracts, given the fact that value of license or goods which is deemed sale as per VAT laws is inseparable. Accordingly, in many cases it is observed that persons entering into AMC charge and recover VAT at applicable rate (depending on whichever option under the VAT law is exercised) and service tax of 12.36% is charged and recovered on 70% value (effective rate of 8.652%) in terms of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 introduced with effect from 1st July, 2012. Whether this practice is correct in terms of discussion here is an issue by itself as the service tax administration considers license to use software acquired electronically as pure service. In this sce-nario, would service tax be not demanded on full value of AMC considering it a service contract?
Applicability of VAT indeed would not be influenced by this interpretation as it independently treats the subject matter as sale of goods and therefore VAT is attracted at applicable rate. Thus, uncertainty and diverse practices would continue to persist till the issue is settled judicially as tremendous litigation would be generated on account of overlap. One such attempt made in Infotech Software Dealers Association vs. UOI 2010 (20) STR 289 (Mad) hardly provided any definite direction. In this case, the petitioner challenged legislative competency of the Parliament to levy service tax under the relevant clause section 65(105)(zzzze). The High Court in this case considered the incidental question that the transaction of the software in all cases amounted to sale or in some transactions, it could be considered ‘service’. The member of the Association in this case, supplied software to their customers pursuant to end user license agreements. To this, the High Court held that it is not sale of software but only the contents of the data stored in the software were provided and this amounted to service. It was further observed that to bring the “deemed sale” concept, there must be transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale does not arise and in that sense, transaction would be of service and not a sale.
The High Court further observed that the challenge to the amended provisions was only on the ground that software is goods and all transactions would amount to sale whereas the transactions may not amount to sale in all cases and it may vary depending upon the end user license agreement Therefore, competence of Parliament to levy service tax cannot be challenged so long as the residuary power is available under Entry 97 of the List-I and finally held “the question as to whether a transaction would amount to sale or service depends upon the individual transaction and on that ground, the vires of provision cannot be questioned”. The issue therefore remains open for interpretation when a dealer in software merely passes on license to the end user without any value addition to the license, whether it would still be treated as service.
Paradoxically, in spite of the fact that software sold electronically is notified as service, in case of Microworld Software Services P. Ltd. vs. CCE, MUM-I 2012-TIOL-1044-CESTAT-MUM, the company engaged into manufacturing software cleared packaged soft-ware on payment of appropriate duty. They also effected sale of software through internet. Central Excise authorities demanded and confirmed the duty and imposed penalties. At the lower appellate stage, 25% pre-deposit on duty and penalty was directed to be paid to hear the appeal. The pre-deposit of duty was paid and for the pre-deposit on the penalty portion, modification application was filed. Both modification application and appeal were dismissed for non-compliance of the order.
Appellant’s plea to CESTAT was that from F. Y. 2008-09, they had started paying service tax considering software cleared in tangible form attracted excise duty whereas Board’s Circular dated 29- 02-2008 clarified that service tax was payable on electronically supplied software. Further, they had informed revenue that they claimed exemption under Notification No. 6/06-CE for electronic supply of software. The revenue argued that Tariff heading 8524 covers software on floppy, disc/media/ CD Rom and also covers software on other media and the term “other media” covers electronically supplied internet. Based on the above submissions of the Appellant and considering their service tax payment and letter informing revenue about claim of the exemption under Notification No. 06/2006, the Bench found 25% pre-deposit of duty amount sufficient to hear the appeal and also found the case arguable and directed the Commissioner (Appeals) to hear the appeal on merits as the same was dismissed for non-compliance of section 35F without going into merits.
Considering the above process undergone by the Appellant, the following extract of TRU letter F. No. 334/1/2008 dated 29-02-2008 may be noted:
“4.1.3 Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8%. In this budget, it has been increased from 8% to 12% vide notification No. 12/2008-CE dated 01-03 -2008. Number of IT services and IT enabled services (ITES) are already leviable to service tax under various taxable services.
4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.”
Relying on the above and taking action thereon and given the fact that both excise duty and service tax are administered by CBEC, it can be observed that litigation cannot be avoided by law-compliant assesses as well.
Conclusion:
Given various contradictions in interpretations by different agencies of the Government machineryas regards software, IT sector as a whole and consequently the economy is imparted by not only multiplicity of taxation but also by increasing frivolous and lengthy litigation process. This could be minimised if single Government agency deals with the concept of deemed sale, intangible goods and services for implementing fair tax system in the matter at different levels and avoid hardship of the tax payers considering that the tax payer is an important part of the system of revenue collection.
